A stock market recovery despite a rebound in Covid-19
#Articles — 07.07.2020

A stock market recovery despite a rebound in Covid-19

Xavier Timmermans, Investment Advisor, Belgium

Between the fears of a peak in contamination in the Southern and Western states of the United States and the positive economic surprises, the markets appear to be focusing only on the latter. The S&P 500 index gained 4% over the week compared with 2% for the Stoxx Europe 600, which ha

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Amazing resilience

Surprisingly enough, US equities have been very resilient despite the worrying rise in Coronavirus infections.  The prevailing sentiment in the markets is that the US authorities will do everything they can to avoid further widespread lockdown measures in a bid to preserve economic growth as much as possible.

 

The increase in contaminations in the Southern and Western states is impressive, but so far, hospitals are not overstretched and the number of deaths is not rising by the same extent. Of course, this could still occur.  So the next two weeks will be crucial in this respect.  If the number of deaths does not rise by the same extent thanks to new treatments, it will be a great relief, and recent gains from positive economic surprises will be more likely to be preserved.

 

The evolution of the pandemic in the rest of the world, particularly in Latin America, India and Iran, also remains a concern.

 

Many good economic surprises

In June, 4.8 million jobs were created in the US, significantly more than the 3.2 million forecast by economists and the 2.7 million (revised upwards) created during the previous month. Unemployment fell from 13.6% in May to 11.1% in June (versus 12.5% forecast).

 

The Institute of Supply Management (ISM) purchasing managers' index for the Manufacturing sector rose from 43.1 to 52.6. Meanwhile, the new orders index jumped from 31.8 to 56.4, clearly above 50, thus indicating a return to growth.

 

In the eurozone, PMIs also surprised positively, but have not yet exceeded 50. In China, the Caixin/Markit PMI for Services hit a 10-year high of 58.6. It had fallen to 26.5 in February during lockdown.   

 

So what next?

On Monday, the focus will be on eurozone retail sales and the ISM Services in the US.

 

In addition to health developments, the next test will come with the publication of company results for the second quarter starting in just over a week. We know that they will be bad.  For S&P 500 companies, analysts expect a 44% decline following an 18% decline in the first quarter.

 

But investors will focus on the guidance companies will give.  That is, if they do communicate, because in the first quarter, 42% of S&P 500 companies refused to give any guidance for the following quarter. Encouragingly, the ratio of upward and downward revisions by financial analysts rose significantly in June.