Markets are definitely overheated and a pullback in the trend was way overdue. But we need to be patient here to see if fear of a second wave will continue markets lower in the short term. Considering the market pushed up around 20% between May and June we could see more than 5% given back. In saying that, as long as governments and central banks continue on the stimulus path, we will likely continue to see the medium to longer term trend remain up.
Fear is centred around a second wave of the virus which could slow the progress of reopening the world economy. Locally things are looking good, but overseas there are many countries that still experiencing very high levels of daily infected numbers. With China still at risk of a second wave.
At this stage, all-time highs for the SP500 and the XJO could still be a reality this year or maybe early next. If we continue to see world economies get back up and running, and with current stimulus levels, we could see buyers re-enter the market.
Earnings sentiment for companies remain low, indicating weak reporting is expected for July and August, however, that was priced in with the falls. Because we already expect bad reporting this season, rather than looking for growth we will be looking to see how bad the report is compared to expectations. Then we need to look at forward expectations as compared to price action and look at forward PE ratios.
The Asian region could open a bit lower today after a resurgence of numbers both in China and Japan might set off some selling.
Beijing closed the city’s largest fruit and vegetable supply center and locked down nearby housing districts as dozens of people associated with the wholesale market tested positive for the coronavirus. Tokyo disclosed its highest daily total of new coronavirus cases since May 5 at 47.
On Friday US markets reversed some of the selling seen on Wednesday and Thursday, rising strongly, but closing well below intra-day highs. Much of the recent selling has been accelerated by reports of increasing virus numbers around parts of the United States, which has sparked fears of a ‘second wave’ of COVID-19. It leaves many states in a bit of a predicament, do they reverse the recent reopening measures and return to a stricter lockdown?
Or do they allow the reopening to continue, possibly at the cost of many lives. The uncertainty around these decisions are likely adding to the worries of investors. Almost every sector closed in the green, with just Utilities, who had held up well during Wednesday and Thursday’s selling, closed in the red. Financials, Oil and Gas, and Materials stocks were the best performers.