Michael Gayed says he’s not trying to scare anyone, but you wouldn’t know it from his latest take.
Back in May, the fund manager warned of the possibility of two crashes: first bonds, then stocks. With his ATAC Rotation Fund ATACX, -0.06%
continuing to deliver the goods — it’s up almost 60% so far this year to rank among the best in its category — he’s still waving the yellow flag.
“It is a wild time in the markets,” said Gayed, who also runs the Lead-Lag Report. “Despite a crippling global pandemic, where the U.S. is failing miserably at a response with daily record after daily record cases being broken, and a U.S. economy that seems to be teetering on the edge of yet another Fed Monetary Policy response, stock markets have not seemed to blink when recovering.”
Yes, 2020 is certainly unique, considering, as he pointed out, that stocks crashed by more than 30% at one point, only to rally almost 50% from there. All that in less than eight months.
After having been bullish near the March bottom, Gayed now says that leading market indicators could very well be signalling a “severe collapse” in stocks.
The yield on the 10-year Treasury TMUBMUSD10Y, 0.534%
, for instance, is looking at around 0.5%, while the yield on the 30-year TMUBMUSD30Y, 1.197%
is under 1.5%., which he says is setting up for a potential reversion to the mean.
“It’s often said that bond-market investors are the smart money and tend to lead the stock market in anticipating economic activity,” Gayed explained. “The fact that yields have not risen meaningfully (quite the opposite) in the very short term is quite troubling as historically such short-term movement has tended to precede major periods of equity stress.”
Add to that, action in the utilities sector, which is seen as a recession-proof, safe-haven investment, could spell trouble for the broader market, he said, pointing to this chart showing how the defensive investments have managed to outperform the S&P 500 in the past month:
“That should raise some red flags as an equity investor, and frankly this alone gives me pause,” he said. “A similar movement occurred right before the COVID crash this year.”
Lastly, complacency could become a serious issue, with Gayed pointing to several factors, including the wild recent trading antics of Robinhood traders.
“The S&P 500 is now positive in a year that is expecting economic catastrophe. The Nasdaq is flying. And no one seems to think the market can ever go down,” he wrote in a recent note. “It sure feels like everyone forgot that investing in stocks carries risk — and the conditions are changing so rapidly right now, it looks like risk might come back into full force.”
No big crash Monday, with the Dow Jones Industrial Average DJIA, +0.43%
, S&P 500 SPX, +0.76%
and Nasdaq Composite COMP, +1.48%
all starting off the week in the green.
The ride from here could get a lot bumpier after the Dow registered its worst one-day loss since June 11 on Friday, knocking the blue-chip index to its lowest point since May 26, and at least momentarily knocking the wind out of equity investors who may be gradually losing their bullish thesis as U.S. COVID-19 infection rates climb higher.
Over the past week, the acceleration of the daily rate of new coronavirus cases in several American states has prompted investors to re-think the uptrend that has taken the Dow Jones Industrial Average DJIA, -2.83%
and S&P 500 index SPX, -2.42%
roughly 35% higher from their late-March lows and the technology-laden Nasdaq Composite COMP, -2.59%
more than 40% from its recent 2020 nadir.
The U.S. recorded more than 45,000 cases Friday, according to data compiled by Johns Hopkins University, far exceeding the record 39,972 cases reported Thursday and further injecting doubt into upbeat projections for a speedy economic recovery from pandemic that stalled business activity for nearly four months.
The rise in new coronavirus cases on Friday prompted Texas and Florida governors to reverse some business reopening measures, after those states were among the earliest to attempt to restart economies that had been facing severe social-distancing restrictions to curtail the spread of the contagion. Texas reported 6,426 new coronavirus cases Thursday and Florida reported over 8,900.
The resurgence of the pathogen appeared to be sufficient cause for the White House Coronavirus Task Force, consisting of Vice President Mike Pence and the U.S.’s top public-health experts, which had gone quiet since April 27, to hold its first briefing since then on Friday.
For many investors who MarketWatch spoke with, the outlook for the market starts and ends with the epidemic subsiding or at least the discovery of credible treatments and vaccines.
However, there are a number of factors that also have the potential to exacerbate volatility in financial markets next week and into July.
Of course, those factors include the lingering effects of the pandemic but also a spate of issues that could create additional angst for equity investors:
Rising infections and hospitalizations of COVID-19 cases
Economic surprises from the U.S. Labor Department’s monthly jobs report due Thursday
Quarter-end and month-end rebalancing of portfolios by pensions and mutual funds
Stalled plans for further economic stimulus from Congress
Joe Biden’s lead in presidential polls
Market technicals used by some investors as decision making tools
Low stock market volumes in a holiday-shortened week ahead of the July Fourth to be observed on Friday
Asked how he would rank the numerous problems Jamie Cox, managing partner for Harris Financial Group, told MarketWatch that the epidemic is first and foremost.
He said “everything starts and stops with the virus. All other effects are predicated on the outcome of the first.”
Indeed, the hopes for a sustained economic recovery rest on the U.S.’s ability to effectively beat back the coronavirus epidemic though the lack of a uniform nationwide strategy makes public health outcomes uncertain, experts say.
MarketWatch’s Jaimy Lee reports that a COVID-19 vaccine would change the trajectory of the pandemic, which has killed nearly 500,000 world-wide, allowing economies to fully reopen and people to return to work and school. However, a vaccine may not immediately be a panacea according to analysts at Bernstein in a June 5 report: “While we’re optimistic in the eventual development of SARS-CoV-2 vaccines, we would not expect the initial crop of vaccines to be silver bullets that solve the pandemic.”
Investors are awaiting the Labor Department’s monthly jobs report, which will be released on Thursday, due to the July 4 holiday being observed this year on Friday. The report for May showed a surprising 2.5 million jobs added, confounding expectations for another big decline and, perhaps, raising the expectations for a big bounce next week. The average estimate of economists surveyed by MarketWatch is for 3 million jobs to be added in June and the unemployment rate to fall again to 12% from 13.3%. A disappointment on Thursday could shock investors and flatten the market to the same degree that May’s report helped to spark a powerful uptrend.
Moreover, many have warned that a full recovery in jobs, which now sees some 30 million Americans collecting unemployment benefits, could take years to return to pre-coronavirus levels.
“As good as the recent economic data has been, we want to make it clear, it could still take years for the economy to fully come back,” wrote Ryan Detrick, senior market strategist at LPL Financial, in a Friday research note.
He notes that during the 10 recessions since 1950, it took an average of 30 months for lost jobs to recover, and none of those recessions saw labor-market declines of the magnitude and celerity of this recession (see attached chart):
Market participants are predicting that billions of dollars of stocks and bonds could be shifted in investment portfolios, as investors aim to maintain specific allocations of stocks and fixed-income investments at quarter or month end. Those allocations are traditionally about 60% stocks and 40% bonds but the massive run-up in equities over the quarter may compel a sizable rebalancing.
“Given the significant rally in global equities that we’ve seen in the second quarter, it is natural to believe that there will be some quarter-end rebalancing out of stocks and into bonds,” Brian Price, head of investments for Commonwealth Financial Network, told MarketWatch.
He said that he’s seen estimates for pension funds moving upward of $75 billion out of stocks in the next week. CNBC reported that rebalancing could range $35 billion to $76 billion.
“The volatility that we’re seeing in the market today could absolutely persist as we approach the end of the quarter next week,” Price said. However, he cautioned against timing the market in anticipation of the pension fund moves.
Further government stimulus spending to help small-businesses and individuals has been discussed in Congress and analysts have been predicting that another bipartisan relief measure is likely to come by late July. Treasury Secretary Steven Mnuchin earlier this month signaled the Trump administration was open to providing another round of aid but there are worries that there isn’t sufficient consensus to move forward with additional assistance.
Biden has said he would raise the corporate tax rate to 28%, rolling back Trump’s 2017 corporate tax reforms. A report from Goldman Sachs estimates that such an outcome would shift 2021 earnings per share for the S&P 500 to $150 from a current estimate of $170.
MarketWatch’s Tomi Kilgore notes that a break in a trendline for 10-year Treasury note could also bode ill for the stock market’s uptrend.
He notes that the yield on the benchmark 10-year TMUBMUSD10Y, 0.647%
broke below a rising trend line, catching a flight-to-safety bid, to push it 3.8 basis points (0.038) percentage points lower to a yield of 0.636%, marking its lowest yield close since May 14, according to Dow Jones Market Data based on a 3 p.m. Eastern Time close.
That move to Dan Wantrobski, technical analyst at Janney Montgomery Scott, suggests that the uptrend off the COVID-19 low in early March has ended.
“The break here suggests that the pattern of higher lows since April has been blocked, and we may see lower yields in sessions ahead combined with a bigger retracement in equities that experienced since the March crash,” the analyst wrote.
A holiday-shortened week of trade, with the market’s closed in the U.S. in observance of the Fourth of July holiday on Friday could exacerbate price swings, as traders tend to head out early on holidays.
The coronavirus death toll continues to rise across the U.S., as do the number of job losses, with an increasing number of companies reporting on the deep damage the pandemic has already inflicted. Yet the stock market, despite its volatile stretches, continues to hold up relatively well.
Doug Ramsey, the chief investment officer of The Leuthold Group, warned clients that the day is coming when the dire state of the economy catches up with equity investors. “The stock market punishment doesn’t fit the economic crime,” he said. “We expect it eventually will.”
Ramsey explained that buy-and-hold investors have mostly dodged serious damage even though we’ve seen a “cataclysmic” hit, considering those who own only the S&P and reinvest dividends have seen no more than a peak-to-trough loss of 19.6%.
“The depth and duration of this economic calamity are unknowable, but values don’t yet reflect it,” he told clients in a recent note. “S&P 500 valuations are 30-40% higher than seen at even the comparatively-shallow market low of 2002.”
Ramsey went on to show that the median S&P 500 stock is still historically pricy based on several metrics, including price-to-sales and price-to-earnings.
“If the median S&P 500 stock traded down to the average valuation seen at the last three bear market bottoms, it would have to decline another 46% from April 30th levels” he said. “If we play along and assume that valuations bottom at the ‘richest’ levels ever seen at a bear market low, there’s still 32% downside remaining in the median S&P 500 stock.”
He posted this chart and said that the “eventual retribution for a full decade of negative real interest rates” will be “much more severe” than the downturn earlier this year.
“Not only does the setback look rather mild, it has so far been insufficient to drive VLT Momentum even close to its oversold zone!” Ramsey wrote. “And that follows an entire decade in which VLT spent only five months in negative territory.”
Yet the market keeps holding up nicely, with the Dow Jones Industrial Average DJIA, +1.90%
closing up 455 points in Friday’s trading session. The S&P 500 SPX, +1.68%
and tech-heavy Nasdaq Composite COMP, +1.57%
also staged strong rallies.
The notion that coronavirus is “just a cold” or “no worse than the flu” for young people is proving to be untrue.
“The COVID-19 virus is capable of causing infection and severe disease in all people of all ages,” said Dr. Maria Van Kerkhove, head of World Health Organization’s emerging diseases and zoonosis unit, on Friday. “The data that we’ve seen from a number of countries is that the majority of children that are infected are experiencing mild disease,” she said, adding that there a handful of cases of children dying from coronavirus.
While there’s no question that the elderly and those with underlying conditions have been affected much more than other age group, younger people are not immune: 20% of deaths in Korea were people under the age of 60, and 15% of people in intensive care units in Italy were under 50 years of age, said Dr. Michael Ryan, WHO’s top emergencies expert.
In New York state, where there are now more confirmed coronavirus cases than in France or South Korea, nearly 54% of hospitalized coronavirus patients were between 18 and 49, Gov. Andrew Cuomo, a Democrat, said Saturday.
Among the latest fatalities: A 36-year-old public school principal from New York City — where there were more than 25,573 cases of coronavirus as of Friday morning — died from coronavirus complications on Monday, the New York Post reported. It was not known whether she had any preexisting conditions.
Only 8% of the cases of coronavirus in New York City are from people above 75, as of Friday morning, according to the city’s health department. However, 50% of the city’s 366 total deaths were people older than 75, and 97% of the deaths were people who had underlying conditions
Younger people are being hospitalized at unexpectedly high rates, particularly in New York State.
In the U.S., people under 44 make up 20% of hospitalized coronavirus patients, according to a report published by the Centers for Disease Control and Prevention last week. Patients under 65 accounted for nearly half of those admitted to hospital intensive-care units for COVID-19.
In Atlanta, a 12-year-old girl was placed on a ventilator and was fighting for her life after she was diagnosed with pneumonia brought on by a coronavirus infection. The girl, only known only as “Emma” due to privacy laws, had no preexisting conditions, her cousin, Justin Anthony, told CNN.
The CDC has not publicly reported the median age of coronavirus cases in the U.S. In California, the most populous state in the U.S., the median age is 47, the state’s health department reported last week: 42% of the state’s 1,733 cases of coronavirus are between ages 18 to 49.
The CDC’s report didn’t specify whether patients had underlying health conditions like obesity, diabetes and cancer which increase the likelihood of contracting COVID-19, the disease caused by coronavirus.
There have been cases among young people who were in peak physical health. Cameron van der Burgh, 31, an Olympic gold-medalist swimmer from South Africa, says he has been battling coronavirus for the past two weeks.
“Although the most severe symptoms(extreme fever) have eased, I am still struggling with serious fatigue and a residual cough that I can’t shake. Any physical activity like walking leaves me exhausted for hours,” he wrote on Twitter
Van der Burgh and other millennials were believed to be less prone to developing serious health complications from coronavirus. But as the virus continues to spread in countries outside of China, where it originated, younger people are being hospitalized at unexpectedly high rates.
COVID-19, the disease caused by SARS-CoV-2, the official name for this new coronavirus, had infected at least 92,932 people in the U.S. by Friday afternoon, exceeding the number of confirmed cases in both China and Italy, and killed at least 1,380, according to data aggregated by Johns Hopkins University.
What’s behind the number of young people with coronavirus?
So what’s the reason behind these cases? The fast-paced lifestyles of some young people, eating habits in the U.S. and the number of young adults not practicing social distancing may help explain why early data in China differs from the U.S. and Europe, experts suggest.
Data from China, where the pandemic originated, suggested that people in their 70s and 80s were most likely to die from the disease, and as the coronavirus arrived in the U.S, health officials warned older people to take extra precautions to avoid infection.
“Disease in children appears to be relatively rare and mild with approximately 2.4% of the total reported cases reported [1,342 people] amongst individuals aged under 19 years. A very small proportion of those aged under 19 years have developed severe (2.5%) or critical disease (0.2%),” the World Health Organization reported last month.
‘We do have an issue with younger people who are not complying.’
Those figures were reassuring to many parents and young people, but they may also have led more young adults to believe they were virtually immune from coming down with more severe symptoms and, as a result, less likely to change their lifestyles to prevent the virus spreading.
“We do have an issue with younger people who are not complying,” Cuomo said last week, referring to social distancing efforts. “So you’re not Superman, and you’re not Superwoman, you can get this virus and you can transfer the virus and you can wind up hurting someone who you love or hurting someone wholly inadvertently.”
In Italy, where the number of deaths has surpassed the number in China, the median age of those who have died is 80. But as the virus continues to spread in countries outside of China, younger people are being hospitalized at unexpectedly high rates.
But that does not explain many of the severe cases among the young. Indeed, while age may be one of the most convenient factors to study, it can be misleading, said Dr. Gregory Poland, an infectious-disease expert and director of the Mayo Clinic’s Vaccine Research Group in Rochester, Minnesota.
Another piece of the puzzle: In the U.S., 18.5% (13.7 million) people between the ages of two and 19 are obese according to the CDC. That figure rises to 42.7% for all adults. When an obese person has difficulty breathing, their lungs won’t expand as much as a healthy person’s lungs, Poland said.
“You take an extremely healthy 16-year-old boy from South Korea who plays soccer and has a vegetarian diet and doesn’t do any drugs, and compare that to a 16-year-old obese type-two diabetic kid in the U.S. and you’re talking about two different ages.”
“No one ever heard of this virus prior to 11 weeks ago so we’re really building the plane while flying it,” Poland said. To complicate matters further, China does not have a history of transparency, he added. “I wouldn’t be surprised if we find out about more severe deaths in kids.”
In China, 51 is the median age of coronavirus cases, according to February’s WHO report. In Wuhan, the epicenter of the pandemic, 39 of the 45 designated hospitals there were reserved for patients either in severe condition or older than 65 years old.
The numbers: Business in the U.S. posted the biggest contraction in March since the end of the Great Recession owing to massive disruptions caused by the coronavirus.
A “flash” reading by the forecasting firm IHS Markit showed a small decline in manufacturing and a steep dropoff in service-oriented companies that have been hardest hit by the pandemic.
The initial survey results only cover the early part of the month, however,m before many large segments of the economy were shut down, but it gives a bad taste of what is coming. Economists predict the U.S. economy could post the biggest contraction in history in the next several months if a worst-case scenario comes to pass.
The service side of the economy has suffered the deepest blow. Many retailers, hotels, sit-in restaurants and other companies that rely on foot traffic have either been forced to close or cut back hours. Entire industries such as airlines are barely operating.
The flash service index sank to 39.1 in March from 49.4, marking the lowest level recorded since similar data became available in October 2009, IHS said. And it’s only going to get worse.
What they are saying?: “The survey underscores how the U.S. is likely already in a recession that will inevitably deepen further,” said Chris Williamson, chief business economist at IHS Markit.
Big picture: Ugly. Unprecedented efforts to slow the spread of the coronavirus is sending the U.S. into the first recession in 11 years. How bad it gets and how long it lasts will depend on how quickly the government identifies all the people who’ve contracted the virus and isolates them. It could take awhile.
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