Libratus

So... What is next? Shortest recession in play?

AMEX:SPY   SPDR S&P 500 ETF TRUST
Stock market- Against all odds, S&P index has risen almost 32% since hitting a low for the year on March 23. The fact that it happened after a ferocious plunge of 35% between Feb. 20 and March 23, the most devastating sell-off since the great depression, made the feat even more remarkable.

As a matter of fact, the market posted its best quarter since 1998, with Nasdaq leading the way by soaring 30.6% for the quarter, the most since 1999.

Some speculated that the fast recovery was due to the big outflow of money from the fixed-income market into the stock market as emerging market fails to meet its debt obligation.

Others credited young investors (medium age of 31) on Robinhood (3 millions user added 2020, 13 millions total) with stock market's spectacular rally.

I personally doubt that the combined purchasing power of all Robinhood users is strong enough to sway the stock market.

Nonetheless, the stock market performance is not representative of the entire economy as there are more than 30 millions small & mid-sized company not listed on major U.S stock exchanges

GDP- What is even more incredible about the stock market's recovery is that it all happened after various sources estimated the GDP contraction to be around 30% to 50% in second quarter

Recently, Fed and policymakers projected the economy to shrink 6.5% (medium projection) in 2020 and the unemployment rate to be 9.3% at the end of the year

Corporate earning- According to data from S&P Capital IQ , 40 percent of the S&P 500 , about 200 companies, have withdrawn their guidance and declined to make EPS estimate in 2020.

This lack of guidance has caused a lot of problem for the prediction of corporate earning.

A recent analysis by CNBC earnings editor Robert Hum showed enormous differences at historical level between the high and low estimates for the largest stocks in the S&P 500 .

According to numbers compiled by the data provider FactSet, second-quarter profits will fall more than 40 percent.

Refinitiv is projecting about a 43% drop in second-quarter earnings .

Expect to get a more clear picture of corporate earnings around mid-July as banks release their corporate earnings .

Even though the stock market is reflecting more of future sentiment than current economic condition, the speed of its recovery seems to indicate that most investors believe that not only will the market erase all the losses in 2020, but also it will quickly resume the long-term growth trend equals that of 2019, which seems highly unlikely to me.

Again, it is hard not to notice the massive distortion between the stock market's performance and corporate earning.

Unemployment- Initially, the hope is that most temporary layoffs would not turn into permanent job loss. However, as lockdown extends, many furloughed employees are at the risk of becoming unemployed as more and more small businesses going out of the business.

Roughly 20 million Americans are currently receiving unemployment benefits and the insured unemployment rate is still high at 13.4%.

BLS said that discrepancy in unemployment # due to "misclassification" has been adjusted accordingly. An alternative measure of unemployment that includes discouraged workers and the underemployed fell to 18% from 21.2%.

Overall, better than expected unemployment # and steadily declining initial claim and continuous claim # have painted a much better picture for the labor market.

However, unemployment remains at historic levels. Output and employment remain far below their pre-pandemic levels, according to Federal Reserve Chair Jerome Powell

Pandemic- WHO reported around 180,000 new coronavirus cases last Sunday, the single-largest increase since the pandemic began, with two thirds of new cases coming from the Americas. Around half of the 50 U.S. states were also reporting a rise in new coronavirus cases, most notable in southern states that were previously spared from the Covid-19 ravage.

On Tuesday, United States recorded the biggest single-day rise in new cases since the pandemic began.

According to Bloomberg report, most experts believe a vaccine won’t be ready until next year.

Other factors-

Trade war with China and upcoming election...

#1. Median existing-home price last month was $284,600, up 2.3% from May 2019.

#2. The 30-year fixed-rate mortgage averaged 3.13% for the week ending June 18. Mortgage rates have drop to another record low.

#3. The number of Americans applying for home mortgages has hit an 11-year high.

#4. An index measuring homes in contract to sell, or pending sales, jumped by a record 44% in May.

#5. A record spike in U.S. retail sales, though the recovery happened after a huge dive of retail sales a month earlier.

#6. PMI has surged sharply after a huge plunge since the pandemic started. It is possible that the # is skewed by the lack of small business participation and the effect of China re-opened its economy ahead of other major economy.

I believe most current home buyers are not heavily impacted during this economic downturn and their purchase decisions are probably not indicative of the economic recovery.

Shortest recession is made possible because this economic crash was driven by the uncertainty of pandemic rather than economic fundamentals? I don't know. But if you only look at real estate and stock market, it surely seems so.

Comments

The confluence of circumstances normally causing the USD to roll over has been postponed since March 2018 imho
+1 Reply
The party is not over yet imho. Looking from a highly technical point of view I recognise the same confluence of circumstances which requires USD to roll over. This process has stalled since late 2017, early 2018. In fact I witnessed all complying circumstances March 2018 but the roll over didn't happen and USD appreciated further. At the same time this era has all markup of a shift in world economic powers, which makes the world economy more fragile for high impact events like COVID-19. It adds another important circumstance to the total list making up the confluence and possibly triggering a larger scale event, a deeper recession. On the other hand I also strongly believe that people are getting smarter and more knowledgeable and we will not exactly repeat the Spanish flu in each very detail. Technology advanced and we have already proven to respond faster to the pandemic than ever before. The internet helps to reach out to people with the right information faster and a deeper recession can therefor be avoided. However, the world economy is fragile and with another circumstance added to the mix I am afraid too many people will panic..
+1 Reply
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