Stocks are resilient because investors have been braced for much worse COVID-19 news, says strategist
Critical information for the U.S. trading day
What’s going to get in the way of market gains? Clearly not bad news on COVID-19, as investors try to look on the bright side of these uncertain times.
Take this chart showing how Arizona cases have started to flatten, by Pantheon Macroeconomics, which expects as that state responded earlier than most to a renewed surge in cases, other hard-hit states will likely flatten in the next couple of weeks:
Our call of the day from Thomas Lee, head of Fundstrat Global Advisors, says resilience for stocks in the past week shows that investors have been “bracing for a more dire path regarding COVID-19.”
In a note to clients, Lee says “data shows how abruptly hedge funds switched to bearish positioning in June. And coupled with high levels of mutual fund cash, balanced funds have the highest cash balances (% of assets under management) since before 2009. Thus, the fact ‘it could have been worse’ = risk-on.”
That is not to say that there isn’t a “tragedy” unfolding across the U.S., he said. “But the good news is that every state facing an outbreak is indeed ‘course correcting,’” with bars closing across several states with serious outbreaks and reopenings paused elsewhere.
“In our view, the daily death statistics are the most important metric to watch. And as long as deaths remain trending flat/lower and now with states set to see a peak in the next 2-3 weeks, this surely feels like risk-on makes sense,” said Lee.
Bottom line, Lee says, is that a combination of stocks near their highs and cautious positioning means investors should stay overweight equities. And while earnings are about to get under way, and they will be “lousy,” with little guidance, that has all been well telegraphed, in his opinion.
Here are the drivers Lee thinks will keep stocks moving upward:
No sign of a shift away from that positive momentum, with Dow (YM00), S&P (ES00) and Nasdaq (NQ00) futures higher, alongside European stocks(XX:SXXP). In Asia, Chinese stocks (XX:000300) surged 3.4%, leading gains across the region on optimism ahead of second-quarter gross domestic product data due later this week.
BTIG’s chief strategist Julian Emanuel tells clients in a note that the coming earnings season could be a “potential catalyst for performance revision” on two groups of stocks.
These outperformers — Amazon (AMZN), eBay (EBAY) and mostly technology — up more than 40% more year-to-date, could fall on the view nothing they report or say will be “good enough” to sustain gains, says Emanuel.
Conversely, the reporting bar for these financial stocks and other underperformers — down 30% year to date — may be so low that the only way for those stocks is up, he says.
Shares of chip maker Maxim Integrated Products (MXIM) are climbing on news rival Analog Devices (ADI) will buy it in an all-stock deal, and shares of special purpose acquisition company Churchill Capital (CCXX) are surging on news of an $11 billion merger with health-care service provider Multiplan.
China is banning Senators Marco Rubio and Ted Cruz over their criticism of the government’s policies toward minority groups and religious people.
The country’s top testing official doesn’t quite agree with infectious disease specialist Dr. Anthony Fauci’s advice to pause reopenings in states where cases are surging. Disney (DIS) is taking heat for reopening theme parks in Florida, which broke U.S. records with 15,299 new cases on Sunday:
The Federal budget will be released later.