[Market Madness] Edition 0057
Reopening Booster Shot
Oh, happy monday
Well folks, the U.S. indices took the weekend to relax and prepare for the trading day today. Their hopes of extending the rally were granted as indices opened the day with a boost, following continued reopening optimism. The green carried through the day and into the close with another day of solid market gains across the U.S. indices.
We also saw the ‘Mad Money’ man himself, Jim Cramer, share some concerns about the markets getting too far ahead of the economy. You can google ‘investor optimism’ and find many articles discussing the euphoria over reopening. The sentiment is obviously strong, moving markets positive for an extended series of days now. A lot of big names are listening hard for any signs of continued music, or if the party on Wall Street is soon to end. It is very likely too early to judge yet, but investors and asset managers alike have made big bets on a ‘V-rebound' and are seeing early signs of that coming true.
A vast majority of analyst estimates are predicting that the Fed will leave the base interest rate (the Federal Funds Rate) at its current position, 0.25%, but more importantly, the press conference following the release of the rate will be where the excitement will come from. The rate announcement will be on Wednesday, June 10, at 2:00 PM EST and the press conference will commence at 2:30 PM EST. Of course, an analysis of the rate decision and results from the press conference will be covered off here on Market Madness and sent right to your inbox after market close!
Did you miss yesterdays’s piece? No worries! Get it right here and catch up on the madness.
Fundamentals
Monday Close:
Dow Jones Industrial Avg: +1.70%
S&P 500: +1.20%
NASDAQ: +1.13%
US 10 YR: 0.869% | 97 7 / 32
Crude OIL: $38.11
Market Madness Portfolio: +0.86%
COVID 19 Global Cases: 7,159,950
Indices Overseas:
FTSE 100: +0.17%
Nikkei: +1.37%
Hang Seng: +0.03%
Running with blinders, an editorial of sorts
‘Optimism’ is a growing buzzword in the financial and economic spaces over the past few months and into the future. On one end, there is reason to get behind optimism, given how many things have gone wrong so far here in 2020. The New York Fed released a report that indicated consumers are feeling more optimistic for the economic future ahead in the month of May. They cite improving economic indicators like unemployment, jobless claims, and estimated earnings growth as reasons to look on the bright side moving forward. This is the first time that an economic report is trending in-line with the excitement we are seeing on Wall Street. Mainly, we’ve seen bad but becoming ‘less bad’ economic numbers give rise to the markets. Now, this report suggests that consumers are feeling some relief from the COVID 19 blues as well.
That is not to discredit the conversation that we had yesterday regarding Fidelity International CEO’s warning. That is entirely real and will have tangible impact on Main Street workers just as well as Wall Street. With all the commotion and predictions flying left and right, one cannot help but become overwhelmed and confused.
To me, I look at two related but separate pieces - consumers and businesses. In the consumer picture, we are seeing improving (less bad) economic indicators telling us that there is light at the end of the tunnel. In addition, this NY Fed report suggests that consumers are seeing that light and are excited for it to come. This will likely come in the form of increased confidence regarding spending, home buying, and other large purchases, which will help revitalize the economy.
The other piece is businesses. Businesses also benefit from increased confidence by consumers as well as being able to revisit their payroll through assistance by the government. The challenge that is going to be hard for businesses is the process of recapitalization, thereby increasing their owned capital (equity) of the firm and decrease their growing debt burden. As we discussed yesterday, the asset management industry is not going to be capable of handling the entirety of the demand for capital.
This will require the injection of third-party capitalists (Private Equity, or Buffett-like investors to provide capital outside of the market functions) to bridge the gap. Risks increase as the leverage of a firm increases (the level of debt compared to equity of a firm). The increased risk, plus the higher potential of inability to service the growing debt load results in downgraded ratings for public companies and potentially bankruptcy filings for both public and private companies. When things get riskier, investors naturally demand a higher level of reward, or compensation, for their now riskier investment. If the risks become too much, investors won’t even touch the company with a ten-foot pole, and their capital falls out from under them.
So, it looks like we have a happy rainbow above the consumer picture, and a nasty thunderstorm above the business picture. The consumers will be fine, given they are truly prepared for higher levels of inflation after this current situation is handled. The businesses are still, for the most part, operating in the dark and running ahead with blinders. Not because they want to, but because they have to. The situation businesses are facing may be partially exacerbated because of prior corporate choices, but the majority comes as a result of systemic unraveling and unchecked uncertainty.
Those who are treading lightly, second guessing the status quo in the markets, and bracing for further future uncertainty would have my vote of support. Much more will be realized following major COVID 19 hotspots’ final reopening phases are done and the chains are released off of the public. Then, we should be able to make heads and tails of what more work needs to be done both on the consumer and business pictures.
Quick Takes
New Zealand reporting that the country is now COVID 19-free. (via AXIOS)
Lock down measures prevented nearly 5 million COVID 19 cases in the U.S. according to new study. (via CNBC)
BP announced it plans to cut 10,000 jobs. (via FT)
OPEC + group agrees to extend production cuts. (via FT)
Are the markets getting TOO far ahead of the economy? (via CNBC)
Dunkin’ plans to hire 25,000 additional employees as part of reopening plan. (via CNBC)
NASDAQ composite breaks all-time high at 9850.30. (via ATOM+)
National Bureau of Economic Research (NBER) panel reports the U.S. economy officially entered a recession in February, bringing a definitive end to the longest expansionary period in U.S. history. (via WSJ)
Reader’s Corner
The reader spent his free time over the weekend and today preparing for an interview. As a result, the reader will be back reading tomorrow.
Behind the Madness
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