3 Top Things to Watch for June 4 By Investing.com

© Reuters.

By Liz Moyer 

Investing.com — U.S. stocks staged a rally Wednesday after better-than-expected economic data suggested the worst of the economic hit from the global health pandemic may be over.

The surged more than 500 points and the broader is up 2% for the first three days of June, a sharp about-face from its recent decline. Businesses have begun to reopen and restrictions on individuals have loosened as states and cities try to restart their economies.

Among the items to watch for Thursday are additional jobs data, corporate earnings, and another stock debut.

Here are three things that could move the markets tomorrow.

1. Weekly Unemployment Claims Seen Continuing Multiweek Trend

Weekly are expected to come in at 1.8 million when the Labor Department reports on Thursday. That is lower than 2.1 million reported last week and a solid sign of continued improvement. On Wednesday, ADP’s (NASDAQ:) monthly payroll report beat expectations.

While joblessness spiked sharply after business shutdowns forced tens of millions out of their jobs amid the Covid-19 pandemic, the trend has been heading lower since the worst week at the end of March, when a record 6.9 million workers filed initial jobless claims. So far, more than 40 million Americans have filed unemployment claims.

Jobless claims arrive at 8:30 AM ET (12:30 GMT).

2. Earnings Reports Due From Broadcom and Gap

Chipmaker Broadcom (NASDAQ:) and casual apparel retailer Gap (NYSE:) are scheduled to report quarterly profit tomorrow.

Broadcom shares have rallied strongly since March and have gotten attention this week from a couple of positive analyst reports ahead of earnings. Analysts are forecasting per-share of $5.14, on revenue of $5.7 billion.

Gap is reporting fiscal first-quarter earnings after the closing bell. The Covid-19 shutdowns across the globe are expected to weigh on its numbers, with analysts estimating a 59 cent-per-share loss on sales of $2.3 billion after a strong prior quarter.

3. Another IPO Set to Begin Trading

Zoominfo, a maker of software that aids companies in sales and marketing – and not to be confused with the popular videoconferencing service of a similar name – continues this week’s streak of public stock debuts.

The company is set to begin trading under the ticker “ZI” after raising nearly $1 billion in an initial public offering this week. Also this week, Warner Music launched its $1.8 billion IPO.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Original source link

New U.S. restrictions on 33 Chinese firms and institutions take effect June 5 By Reuters

© Reuters. FILE PHOTO: Chinese and U.S. flags flutter near The Bund in Shanghai

By David Shepardson and Karen Freifeld

WASHINGTON/NEW YORK (Reuters) – The U.S Commerce Department said on Wednesday that new restrictions on 33 Chinese firms and institutions it announced last month will take effect Friday.

The agency has added the companies and institutions to an economic blacklist, accusing them of helping China spy on its minority Muslim Uighur population in Xinjiang or because of alleged ties to weapons of mass destruction and China’s military.

China’s foreign ministry said last month it deplored and firmly opposed U.S. sanctions over Xinjiang, calling it a purely internal affair for China.

The move will restrict the sales of U.S. goods to the companies and institutions on the list, as well as certain items made abroad with U.S. content or technology. Companies can apply for licenses to make the sales, but they must overcome a presumption of denial.

Seven companies and two institutions were listed for being “complicit in human rights violations and abuses committed in China’s campaign of repression, mass arbitrary detention, forced labor and high-technology surveillance against Uighurs” and others, the Commerce Department said.

Two dozen other companies, government institutions and commercial organizations were added over Washington allegations that they supported procurement of items for use by the Chinese military.

The blacklisted companies focus on artificial intelligence and facial recognition, markets in which U.S. chip companies such as Nvidia Corp (O:) and Intel Corp (O:) have been heavily investing.

The new listings follow a similar October 2019 action, when the Department of Commerce added 28 Chinese public security bureaus and companies – including some of China’s top artificial intelligence startups and video surveillance company Hikvision (SZ:) – to a U.S. trade blacklist.

The actions follow the same blueprint used by Washington in its attempt to limit the influence of Huawei Technologies Co Ltd [HWT.UL] for what it says are national security reasons. Last month, the Department of Commerce took action to try to further cut off Huawei’s access to U.S. chipmakers.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Original source link

Risk Premia Forecasts: Major Asset Classes 2 June 2020

The long-term forecast for the Global Market Index’s (GMI) risk premia ticked higher in May, rising for a second month after a run of declines earlier in the year. The revised annualized total return estimate for GMI is currently 4.5%, which reflects the index’s long-run projection over the “risk-free” rate, based on a risk-centered model outlined by Professor Bill Sharpe (details below).

Tuesday’s update marks an increase from last month’s 4.3% estimate. Meanwhile, the current 4.5% forecast is unchanged from the year-ago projection.

GMI is an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash) and represents a benchmark of the theoretical, optimal portfolio for the average investor with an infinite time horizon. GMI, in short, is a starting point for asset allocation research and portfolio design.

Adjusting for short-term momentum and medium-term mean-reversion factors (defined below) trims GMI’s ex ante premium, slightly, to an annualized 4.4% forecast.

All forecasts are likely to be wrong in some degree, but GMI projections are expected to be somewhat more reliable vs. the estimates for the individual asset classes. Predictions for the market components are subject to greater uncertainty compared with aggregating forecasts, a process that may cancel out some of the errors through time.

For historical perspective, here’s a chart of rolling 10-year annualized risk premia for GMI, US stocks (Russell 3000), and US Bonds (Bloomberg Aggregate Bond) through last month. While GMI’s current 10-year performance (red line) rebounded last month to 6.4%, it remains well below the previous 8%-plus peak. Note, too, that the current long-run estimate for GMI’s performance remains moderately below the historical 10-year performance, which suggests that future results will fall short of recent history.

Now let’s turn to a summary of the methodology and rationale for the estimates above. The basic idea is to reverse engineer expected return, based on risk assumptions. Rather than trying to predict return directly, this approach relies on the moderately more reliable model of using risk metrics to estimate the performances of asset classes. The process is relatively robust in the sense that forecasting risk is slightly easier than projecting return. With the necessary data in hand, we can calculate the implied risk premia with the following inputs:

  • an estimate of GMI’s expected market price of risk, defined as the Sharpe ratio, which is the ratio of risk premia to volatility (standard deviation).
  • the expected volatility (standard deviation) of each asset
  • the expected correlation for each asset with the overall portfolio (GMI)

The estimates are drawn from the historical record since the close of 1997 and are presented as a first approximation for modeling the future. The projected premium for each asset class is calculated as the product of the three inputs above. GMI’s ex ante risk premia is computed as the market-value-weighted sum of the individual projections for the asset classes.

The framework for estimating equilibrium returns was initially outlined in a 1974 paper by Professor Bill Sharpe. For a more practical-minded summary, see Gary Brinson’s explanation of the process in Chap. 3 of The Portable MBA in Investment. I also review the model in my book Dynamic Asset Allocation. Here’s how Robert Litterman explains the concept of equilibrium risk premium estimates in Modern Investment Management: An Equilibrium Approach:

We need not assume that markets are always in equilibrium to find an equilibrium approach useful. Rather, we view the world as a complex, highly random system in which there is a constant barrage of new data and shocks to existing valuations that as often as not knock the system away from equilibrium. However, although we anticipate that these shocks constantly create deviations from equilibrium in financial markets, and we recognize that frictions prevent those deviations from disappearing immediately, we also assume that these deviations represent opportunities. Wise investors attempting to take advantage of these opportunities take actions that create the forces which continuously push the system back toward equilibrium. Thus, we view the financial markets as having a center of gravity that is defined by the equilibrium between supply and demand. Understanding the nature of that equilibrium helps us to understand financial markets as they constantly are shocked around and then pushed back toward that equilibrium.

The adjusted risk premia estimates in the table above reflect changes based on two factors: short-term momentum and long-term mean reversion. Momentum is defined here as the current price relative to the trailing 10-month moving average. The mean reversion factor is estimated as the current price relative to the trailing 36-month moving average. The raw risk premia estimates are adjusted based on current prices relative to the 10-month and 36-month moving averages. If current prices are above (below) the moving averages, the unadjusted risk premia estimates are decreased (increased). The formula for adjustment is simply taking the inverse of the average of the current price to the two moving averages as the signal for modifying the projections. For example: if an asset class’s current price is 10% above it’s 10-month moving average and 20% over its 36-month moving average, the unadjusted risk premium estimate is reduced by 15% (the average of 10% and 20%).

What can you do with the forecasts in the table above? You might start by considering if the expected risk premia are satisfactory… or not. If the estimates fall short of your required return, you might consider how to engineer a higher rate of performance by way of customizing asset allocation and rebalancing rules. Keep in mind that GMI’s raw implied risk premia are based on an unmanaged market-value weighted mix of the major asset classes. In theory, that’s the optimal asset allocation for the average investor with an infinite time horizon. Unless you’re a foundation or pension fund, this time-horizon assumption is impractical and so there’s a reasonable case for a) modifying Mr. Market’s asset allocation to suit your particular needs and risk budget; and b) adding a rebalancing component to your investment strategy.

You might also estimate risk premia with alternative methodologies for additional insight about the near-term future (an excellent resource on this subject: Antti Ilmanen’s Expected Returns). For instance, let’s say that you have confidence in the dividend-discount model (DDM) for predicting equity market performance over the next 3 to 5 years. After crunching the numbers, you find that DDM tells you that the stock market’s expected performance will differ by a considerable degree vs. the equilibrium-based estimate for the long run. In that case, you have some tactical information to consider.

Keep in mind, too, that combining forecasts via several models may provide a more reliable set of predictions vs. estimates from any one model. Indeed, a number of studies published through the years document that combined forecasts tend to be more robust vs. single-model projections.

What you can’t do is get blood out of a stone. No one really knows what risk premia will be in the months and years ahead, which is why relying on forecasting alone (particularly for the short-term future) is asking for trouble. In other words, you should deviate from Mr. Market’s asset allocation carefully, thoughtfully, and for reasons other than assuming that you’re smarter than everyone else (i.e., the market).

Original Post

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Original source link

June Market Outlook: Big Test Looms In New Month As States Navigate Reopenings

The stock rally accelerated in April and May amid reopening optimism even as the economy’s brakes slammed. June could help clarify whether the market anticipated things right or got a bit ahead of itself.

A big test for all the recent optimism looms as every state begins the month at least partly reopen. With the most drastic shutdowns over, how long will it take for people to feel comfortable going to a restaurant? What about flying on a plane? Getting a haircut? Economic recovery depends on these everyday decisions made by millions.

Judging from how things have gone thus far in May — when media reports indicated people were generally hesitant to do those things — it’s unclear how quickly life can get back to even a semblance of normalcy. Markets have come a long way on hope, but June could be where hope meets reality.

June could also tell us if the early reopening states started to see a spike in the number of coronavirus cases. With some states now three to four weeks into their reopenings, early June is possibly when new cases would begin to percolate if the virus spiked as more people got out and about.

Any sign of rising caseloads in states like Florida or Texas might get a fisheye from investors who’ve been bidding up stocks in part on hopes that reopenings can occur without illness increasing. That’s probably why you’ve seen some airline and cruise stocks getting a bid lately. However, if cases spike in early states, it could get people worried about governments closing doors to prevent more spread. That would be a big disappointment to the market and might generate some selling.

It’s also possible that once the numbers from early states get sifted, they might tell a more positive story. Whatever they end up showing, those data could be more important than any other numbers in determining how June plays out for stocks.

Washington Looms Large as Second Fiscal Package Debated

Another thing we could learn in June is whether fiscal assistance from Washington, which arguably has played a big role since February in propping up the economy, gets augmented or starts to dry up.

For example, the $670 billion Paycheck Protection Program expires June 30. This initiative from Congress has helped small- and medium-sized businesses muddle through. A bipartisan bill is in the works to extend it, The Wall Street Journal recently reported. However, if that effort breaks down, it might be bad news for small business owners and employees who’ve been depending on these funds. Ultimately that could have an impact on consumer demand, a potential problem for the market considering consumers are 70% of the economy.

As May wounds down, the House passed another bill providing fiscal assistance, while the Senate appeared far from eager to follow suit. While this isn’t a political column, it’s possible investors might react unfavorably to Congress denying more aid to states.

Then there’s the worsening war of words between the U.S. and China. Does this accelerate next month, perhaps putting pressure on the high-flying Information Technology sector that’s helped lead the market back from its March lows? Long before coronavirus, the market took a big left hook from the trade war. The war quieted down but didn’t necessarily go away, and some analysts think it could get worse in the months leading up to November’s election. Consider keeping an eye on this in June and beyond.

Monetary policy comes into play June 9-10 when the Fed holds its next meeting. At that point, Fed officials might have to respond directly to questions about rates potentially going negative in the next few months, as the futures market began to indicate in May.

Speaking of the Fed, results from its annual stress tests of the major banks are expected to come out the last day of June. The Fed has already said it plans to conduct additional “sensitivity analyses” that reflect the ongoing turmoil caused by the virus, Reuters reported. In past years, banks that passed the stress tests typically celebrated by rewarding their shareholders with dividend increases or share buybacks. That seems very unlikely this year.

As Pathogen Rules Roost, Investor Sentiment Seems Shaky

Those are just some of the external things the market might have to deal with in the weeks ahead. Internally, it’s also arguably a good idea to consider investors’ mood going in.

The booming rally that brought the S&P 500 Index (SPX) back more than 35% from its March lows by late May and raised the Nasdaq (COMP) above water for the year hasn’t been completely convincing. There remain a lot of “weak longs” who might be ready to jump overboard if the boat starts to leak. Data from some banks and market research firms show bearish sentiment remains strong in late May.

Though recent news about progress on a vaccine got an enthusiastic greeting, the market quickly gave up a lot of those gains a day later when a single news article featured some experts casting doubt on the vaccine’s potential. It’s a news-driven market, and any news story can send us down very quickly in a bad way, sometimes without rhyme or reason, due to shaky longs.

The pathogen still rules the roost, so to speak. The economy is in bad shape, and economic data have been horrible. This quarter’s gross domestic product (GDP) might show the worst performance since the Great Depression, according to many economists.

Meanwhile, new unemployment claims stayed above 2 million per week throughout May. That was down from the peak, but still probably means a terrible number on May payrolls report in early June.

To some extent, the market’s been able to rally despite these awful numbers because investors are looking more to the future than the past. However, if new claims keep mounting in June, it could contradict the narrative that reopenings automatically help the jobs market.

The June jobs number might get written off by some investors because it only looks at data from May that came in before reopenings really got traction. Some analysts argue that it’s the June data out in early July that could be more meaningful. Stay tuned.

Earnings season is long over by the time June begins. However, there might be a few scattered company results worth waiting for during the month. Some companies that are expected to report include Zoom (ZM), Broadcom (AVGO), Lululemon (LULU), Oracle (ORCL), and Kroger (KR).

Generally, the “stay at home” stocks — including the big tech and comms companies of the world — performed very well in April and May. If travel and outdoor-related stocks do better in June, that might signal more optimism that normalcy could return.

Can Green Shoots Keep Growing in June?

Volatility eased pretty drastically in May, with the Cboe Volatility Index (VIX) sinking below 30 by late in the month after topping 80 at the height of the crisis. As VIX gave ground, crude oil prices steadily climbed, hitting nearly three-month highs in the mid-$30s per barrel by late May.

Crude prices are now higher than VIX — a pretty welcome situation if you’re a bullish investor (see figure 1 below). Higher crude can reflect increased demand for the commodity that arguably makes the world go around, while lower volatility indicates less concern about the market returning to the gut-churning ups and downs of March.

FIGURE 1: RISK CROSSOVER. As the coronavirus shuttered the economy and crude oil stockpiles outran available storage space, futures prices (/CL—candlestick) collapsed. Meanwhile, the Cboe Volatility Index (VIX — purple line) soared. Both reversed course in recent days. Image sources: CME Group, Cboe Global Markets. Chart source: The thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

That’s a relationship worth watching as June continues. In fact, if you traveled somewhere without the internet or a phone for the next 30 days and then came back knowing nothing about what happened while you were away, a quick glance at VIX and crude could probably tell you a lot of what you need to know.

Another thing that could help you figure out how things went is the price of gold and the level of the 10-year Treasury yield. Both reflected plenty of investor caution by late May as gold hit five-week highs above $1,750 an ounce and the 10-year yield had a lot of trouble holding the incredibly low 0.7% level. There is a lot of optimism out there, but it’s a cautious kind of optimism, which is easy to see when you look at gold and yields.

As an Investor, Consider a Midyear Review

All this is a lot to absorb for long-term investors already reeling from the market’s huge plunge in March and sharp comeback after that. If you’re feeling confused, you’re far from alone. No one has any answers about what’s next.

The end of June marks the year’s midway point, and that’s a good time as an investor to dust off the plan you made at the end of last year and see if it still works in this new and unprecedented time.

It’s understandable if you feel like a deer in the headlights. It’s normal to freeze up when you face events beyond your control, but the challenge as a long-term investor is to approach your midyear checkup without letting fear get the best of you. It’s important not to trade out of emotions and also not to let uncertainty and overthinking throw you off your game.

Sticking to your goals and staying invested may seem more challenging in times like these, but they’re arguably more important than ever.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Original source link

Hulbert: My stock market forecast for June is likely wrong — but watch out for August

Over the next three weeks at least, it’s unlikely that the stock market will break below its March 23 lows. In fact, the S&P 500

is more than 30% higher than where it stood at that bearish point, for example, and the NASDAQ Composite

is up more than 35%. A three-week decline that wipes out those gains would be extraordinary.

The reason I bring this up is because of renewed interest in a column I wrote in early April. In the report, I ascertained that, based on the average lag time between the VIX’s

peak and the bear market’s eventual end, that low would occur on June 14.

I’m not holding my breath, and I’m sure you’re not either.

Can we learn any lessons from this experience? One is to be reminded — yet again — that financial markets are never 100% predictable. Randomness (luck, in other words) plays a huge role in the market’s shorter-term gyrations, no matter how compelling an analysis might otherwise be. Overconfidence is a vice.

This episode reminds me of a famous saying from Josh Billings, a 19th century humorist: “The trouble with most folks isn’t their ignorance. It’s knowin’ so many things that ain’t so.”

In my defense, I plead “nolo contendere.”

Another lesson is that it’s never the case that the data all point to the same precise conclusion. For example, in that early-April column in which I suggested that the final bear market low could be June 14, based on the VIX, I presented another historical parallel that points to a final low on Aug. 7, based on the number of days between the end of the bear market’s first precipitous drop and its eventual end.

This other analysis was equally plausible and just as solidly based on historical data. The jury is still out on that forecast.

Still, the investment implication is that we should focus on the weight of the evidence rather than just one indicator, no matter how compelling.

Some of you have suggested that I draw another lesson: The reason the market bottomed out so soon after the VIX peaked was because of the U.S. government’s extraordinary stimulus that it enacted in mid-March. I’m not so sure that’s the correct lesson.

Consider each of the bear markets since 1990 in the calendar maintained by Ned Davis Research. As you can see from the accompanying chart, the VIX peak’s lead time in advance of the lows of those bear markets ranged from 0 days (in the case of the 1998 bear market that coincided with the collapse of Long Term Capital Management) to 171 days (in the case of the 2015-2016 bear market).

Try as I might, I can find no correlation between the length of this lead time and the speed and magnitude of the federal government’s response.

  • In the case of the 1998 bear market, no public money was used to bail out Long Term Capital Management (LTCM). At most there was an implicit Federal government guarantee, but that didn’t materialize until several weeks after the VIX peaked and the bear market came to an end. That’s when the Federal Reserve Bank of New York organized a bailout of LTCM in which the hedge fund’s biggest creditors extended $3.6 billion of credit. So even if you were to count this as an example of the Federal government stopping a bear market in its tracks, it can’t explain why the bear market and the VIX both peaked on the same day (Aug. 31).
  • Next consider the bear market that occurred in the wake of the 9-11 terrorist attacks, when the VIX hit its peak (Sep. 20) one day before the market hit its bottom (Sep. 21). The government did promise some stimulus on that occasion, but by today’s standards it was miniscule: $15 billion, versus nearly $5 trillion today (if you count both the stimulus package that passed Congress and the expansion of the Fed’s balance sheet).
  • Arguably the closest analogy to the current situation is the Great Financial Crisis (GFC) of 2008-2009, since it is the only other bear market in which the total amount of government stimulus comes anywhere close to what has been enacted in the current pandemic. But in that bear market the VIX hit its peak 109 days before the bear market hit its bottom.
  • Some of you have argued that the GFC isn’t analogous, since the worst of that bear market occurred during the transition from President George W. Bush’s administration to President Barack Obama’s, creating an extra level of uncertainty. I don’t buy that argument; there was little doubt that the government under either president was willing to throw huge sums at the economy. The Federal Reserve’s balance sheet, for example, which is one measure of the liquidity that was flooding the economy, more than doubled from September 2008 (when Lehman Brothers collapsed) to the end of that year — from $925 billion to more than $2.2 trillion. That was before President-Elect Obama took office. And yet the bear market didn’t end until March 2009.

The bottom line? The lessons of history are never easy or straightforward. My best guess is that U.S. stock prices will pull back in coming months, but the March 23 lows will hold. I gave reasons for this expectation in a column earlier this month. But I’m prepared to be wrong — again.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

Read: These 4 stocks are investment pros’ favorites — and not one is a ‘FAANG’ stock

More: Don’t even think of owning stocks unless you’re willing to buy and hold for at least 10 years

Original source link