Markets short term are a little overheated, so it is no surprise to see a period of either sideways or a pullback towards the uptrend trend. Markets continue to remain resilient as investors take solace in the fact there is likely more fiscal and monetary stimulus to come.
If we lean on history and take a look at the US markets since the GFC, we saw their markets race ahead of most other world markets. This was following the FED as they cut interest rates to zero and introduced QE. Although this year is going to be devastating to the world economy the likelihood of markets and the economy rebounding strongly in the coming years is what is exciting markets.
The recovery in markets seems to be extreme considering we are in a recession but don’t forget that markets are forward-looking. People are starting to ignore current valuations and earnings expectations and look to what they can be in a few years once we see a recovery.
Markets are seeing the light at the end of the tunnel and are being held up by
- Economies reopening
- Hopes of a vaccine
- Low-interest rates with the view they are going lower
- Bond buying, to keep the Credit markets ticking along
- Increased unemployment benefits and programs to help keep staff employed that would have lost their jobs otherwise
- Hints of further stimulus on the way.
Earnings sentiment is still exceptionally low, with many analysts downgrading expectations. If sentiment continues to increase around lockdown relief, we could see a shift here later in the year. But for now, things are expected to be negative through the July – August reporting seasons. Future prediction on growth at this stage seems to be weak through the rest of this year and most of next, where it is expected to jump strongly.
U.S markets stalled at resistance last night (SP500; 3130) and tracking sideward last night give us an idea as to how we might trade today, especially considering the futures are sitting flat at the moment. With our market facing its own resistance at 6000 today, we will need some heavy pushing from their futures to allow us to preempt their break and push through our own. What’s more likely is we finish the week rather subdued, with little going on today if not a slight fall.
We are still trading in an uptrend in both the medium and short term like the U.S, so we should expect a break of these key levels eventually. When that occurs is anyone’s guess as we could simply track sidewards for a spell whilst as we digest the major forces affecting the market.
What could push us through is simply the uptrend, maintained by the status quo of stimulus and further possible developments in expansionary fiscal and monetary policy. Its hard to say what will pull us back. Any bad news is usually met with the expectation of further or continued stimulus, so it seems we are in a phase where good news is good, and bad news is good.
US stocks took a breather overnight, ending a four-day run of gains. Recent equity rallies have left US shares at their highest price-to-earnings ratios for nearly two decades. Investors have been happy to buy up stocks with the fiscal and monetary stimulus flowing and many are expecting further fiscal stimulus to be announced shortly. Utilities, Healthcare, and Technology stocks were the weakest sectors overnight, while Financials continued their recent strength to close higher. Despite closing lower, the tone of the market doesn’t seem to have soured, rather stocks that have enjoyed over two months of strong gains needed to tread water a little bit.