El-Erian: Stocks are unlikely to revisit March lows
New York (CNN Business)The late spring and summer is supposed to be a sleepy time for the stock market. But this is shaping up to be an atypical summer in a year that has been anything but normal.
Sell in May? That didn’t work as the S&P 500 rose about 4.5% following a nearly 13% surge in April. June swoon? Not so much either. The Dow and S&P 500 are flat this month — despite the market plunge on June 11 and a lot more volatility.
Stocks fell sharply Friday following weak results from Dow component Nike (NKE), concerns about the latest bank stress tests and growing fears of a second wave of Covid-19 cases.
But the tech-heavy Nasdaq has still gained more than 3% in June. And for the full second quarter, the S&P 500 has surged 17%, making this the best three-month performance for the stock market since the fourth quarter of 1998.
Still, how much longer can the rebound last? Companies are expected to report next month that second-quarter earnings plummeted. The economy will probably post a massive contraction too as the recession drags on.
“There are some potential things that are worrisome. In many ways we are going to be living from earnings season to earnings season,” said David Russell, vice president of market intelligence with TradeStation.
Earnings stink and risky stocks pop, but don’t fight the Fed
“There will be a lot lot of difficulty predicting what earnings are going to be like with a disruption of this magnitude,” Russell said.
There are also signs of speculative froth in the market. Bankrupt stocks have inexplicably soared as of late. So have IPOs and blank check special purpose acquisition companies like Virgin Galactic (SPCE), DraftKings and electric truck maker Nikola.
But stimulus from the Federal Reserve isn’t going away anytime soon. The central bank will almost certainly keep rates at zero for years and it is pumping out trillions of dollars into the economy through various lending programs.
“Don’t fight the Fed” is a popular saying on Wall Street. Is it really that simple? It just might be.
“Markets are clearly responding to the significant stimulus in the US and throughout the world,” said Kent Insley, chief investment officer with Tiedemann Advisors.
Insley told CNN Business that the massive stimulus from the Fed as well as various programs from Congress should help the market for the foreseeable future. Cheap money will push investors into riskier stocks over Treasuries, which now yield next to nothing.
“lt may be a low growth environment but rates are going to remain low. Stocks still look more attractive over the long term compared to bonds,” Insley said.
He added that investors should focus on companies with solid balance sheets that can continue to post decent growth rates. And he said that investors don’t have to limit themselves to big tech stocks — the so-called FAANGs and Microsoft (MSFT).
Betting on an eventual rebound
Others are also dismissing concerns about weak profits.
“In the grand scheme of things, one year of earnings are not that meaningful for the valuation of a company unless there is a major liquidity issue,” said Sam Hendel, president of Levin Easterly Partners.
Hendel said he is worried about heavily indebted energy firms and struggling travel and leisure companies. But he added that firms in other parts of the market, most notably tech, consumer staples and health care, have the “ballast to withstand an economic contraction.”
He favors companies like broadband and media giant Comcast (CMCSA), packaged food and beverage firms Treehouse (THS), Post Holdings (POST) and Primo Water (PRMW) and health care companies Pfizer (PFE) and Quest Diagnostics (DGX).
Hendel also thinks it’s reasonable to think that a major biotech or pharma company will come up with a viable coronavirus treatment sooner rather than later. That could further boost health care stocks.
“We’re not trying to call the bottom on Covid-19, but we hope and pray for a vaccine coming as well,” he said. “What 9/11 was for the defense sector, Covid-19 is for health care.”
More broadly, there are still hopes that stocks won’t fall back into a bear market.
Merger activity is slowly starting to pick up as companies grow a little more confident that the Fed and Congress will continue to be there as a backstop to keep the economy from sliding further.
Ted Swimmer, head of capital markets with Citizens Bank, said that over the past two months, his firm has been positively surprised by the number of companies issuing new capital and talking about plans to grow again.
“The government is providing so much support, so I’d be surprised if the market touches the March lows again,” he said.
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