Stocks may face turbulence and limited growth in the second half of the year as the Covid-19 pandemic continues to set the course for markets and economies.
The S & P 500 rose more than 20% in the second quarter to a 2.6% decline on Wednesday, as rising virus infections in Florida, Texas, and other states with a sun belt raised concerns that economic recovery could slow.
In the first half of the year, stocks rose to new highs amid optimism after the first phase of a trade deal with China, but then plummeted in March as the virus closed the economy. But a heavy and fast dose of fiscal and federal stimulus drove markets out of the downward spiral, and Nasdaq became the leader as the first index to set new highs. The S & P 500, at 3050, is still down 5.6% since the start of the year.
Only a week remained in the second quarter. The negative news about the virus is failure and a reminder that the health crisis may continue to weaken economic activity and create problems for health systems and local government budgets. Some strategists say market sentiment is changing, and with the spread of the virus, the focus may shift to whether and how quickly Congress will approve additional economic incentives.
“People who are looking for magic V [recovery] they’re crazy, ”said Julian Emanuel, BTIG’s head of stocks and derivatives. – The crazy part is that when you look at the Nasdaq, it becomes new all the time. This inspires public optimism and takes institutions out of the game. ”
Investors began to defend themselves by staying at home with stocks such as Netflix, Facebook, Amazon, and consumer products when the economy was first closed. But as they were optimistic about the economic recovery, they moved into hackneyed names like airlines or casinos and into cyclic cycles like finance and energy to bet on recovery. All of these stocks were eroded on Wednesday as the Dow Jones Industrial Average fell 710 points, losing 2.7%.
Emanuel said that the fact that institutions have been investing more in stocks lately means that they no longer invest and are not forced to buy. “This is different from what we saw in May and in the first few weeks of June,” he said.
“Now we are no longer thinking where the good news is likely to be interpreted as good news, and the bad news is likely to be ignored,” Emanuel said. “Bad news will be bad.”
Emanuel expects S&P to finish the year at 3,000, and the market should begin to set new highs next year. “The path will be extremely volatile. This is what VIX tells you above 30. Our target price is 3,000. We will mainly have more volatility on both sides of the tat number, and that will be more. ” volatile, however, as we get closer to the election. “VIX, the CBOE volatility index, reflects investment in put and call in the S & P 500. A higher VIX indicates greater volatility, and it jumped more than 7.8% on Wednesday up to 33.84.
Besides the uncertainty surrounding the virus, markets also face uncertainty as the presidential election approaches. Surveys currently show that former vice president Joe Biden is leading ahead of President Donald Trump. Some political strategists believe there is a chance that a strong display of Biden and Democrats could lead to a blue sector with Democrats in the White House and both houses of Congress.
Ed Keon, QMA’s chief investment strategist, said the market could only respond to the November election after the summer. “Four months is a life in politics,” he said. “If you really look at the party of the president, it does not correlate very much with the stock market, and if something says that the market under the Democrats is better than that of the Republicans. If Democrats take control, you go to see how some tax cuts are lifted, and this is likely to be perceived as negative. “
But at the same time, the focus is on the virus and its impact on the economy. In addition to news of a leap in affairs in the south and in California, the governors of New York, New Jersey and Connecticut have quarantined travelers from hot spots. This undermined airline stocks and raised concerns about a slow economic recovery.
“We were already downstairs, and it just took our legs,” said Keon. “For a while I was careful enough. We had some up and down movements, but we were pretty much away from S&P for a month plus. ”
Liz Ann Saunders, Charles Schwab’s chief investment strategist, said that despite a steady trend lately, Nasdaq has resisted it.
“Although the Nasdaq reached a new high and peaked, less than 50% of its components are trading above the 200-day moving average. This is the biggest discrepancy since 2001, ”she said. “There are 45% of Nasdaq trading above the 200-day moving average in an rally that was epic.”
A 200-day moving average is a technical measure of momentum. This is literally the average of the last 200 stock or index closing prices, and moving above this level is seen as a positive momentum.
“It’s hard to paint a rainbow picture when this is your classic story about the advancement of generals and the backlog of soldiers. “I think you are adding viral materials to the greater emphasis on stretching technical differences and moods, and you have a recipe for rollback,” she said.
Saunders said the virus will manage inventory until the end of the year, and even after reopening, the virus can still affect consumer and corporate behavior.
“The virus has affected the market in both directions,” she said. She pointed out that in just four sessions, when there was positive news about drugs or vaccines, Dow scored 2,700 points for those sessions only.
“What bothers me is that the market has become quite frothy,” she said, noting that the positive point is that small restrictions return some profit.
“Investors are positioned very optimistic,” she said, adding that some of the mood polls do not reflect the level of optimism that manifests itself in investor behavior. “When you get to extremes of mood in any direction, it often takes less catalyst to ignite the naturally opposite movement in the market. This is what happened in February. “I am glad to see that in the last or two weeks some ethers came out of more risky stocks of small capitalization.”