Stocks End On A Positive Note
Stocks had a rough couple days this week, but ended on a positive note. S&P 500 was up 0.39% on Friday closing the week down 2.26%. It’s down 11.36% year to date and up 0.45% in the past year. It’s up 0.62% since April 14th. While it looks like normalcy awaits us, we expect stocks to react negatively to reports of the economy getting back online.
However, don’t let that trick into making you think stocks won’t recover once the economy is back to normal sometime in the next few quarters.
The market is digesting the huge rally off the low, but that doesn’t mean you should abandon ship. From March 23rd to April 14th, the S&P 500 rallied 27.2%. That’s 2 years worth of gains in a few weeks. Traders that bought in late March need to take their profits while the late comers who have a longer term time horizon need to buy. Fact that we have had some good news in the past couple weeks justifies the rally opposed to fueling more gains.
Personally, I’m buying my favorite companies when the market goes to the low end of the recent range. Recently we’ve heard technical analysts mention that the market made a lower high. It also made a lower low on Wednesday. These are very small differences though.
Many will be ready to buy a lot of stocks if the market falls below the Wednesday low. We can hope technical analysts are faked out by a mini decline. Perma bears keep ignoring buying opportunities. When stocks fall about 5%, they claim the market is going back to the March low.
Here’s a random market fact. S&P 500 hasn’t increased every day in a week since the first week of April 2019. Considering how strong the rally was from April to this February, you’d think the market rarely has perfect weeks. It’s actually not rare. The market had 2-3 perfect weeks per year in the prior bull run. We are about 2-3 below average. Many foresee a perfect week coming this summer.
Biggest Risks Facing The Market (Geopolitics)
The chart below shows the biggest risks facing the stock market. As you can see from May 8th to May 15th, concern about geopolitics declined. However, we’ve recently seen an uptick in the seemingly never-ending battle between China and America. The Trump administration attempted to block shipments of semiconductors to Huawei from chip manufacturers.
U.S. Commerce Department amended an export rule to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.”
This is another intellectual property dispute. A question many are asking is if COVID-19 causes a spike in tensions. It’s possible considering the fact that the virus originated in China and had a huge impact on the global economy. It’s not for me to judge who did what wrong. It's just that ensions will likely rise. We don’t expect tensions to increase until the economy gets back to normal because governments have bigger issues to worry about.
You can argue the increase in tensions this week means the government thinks the COVID-19 threat is more manageable. In summary, I think this survey response is wrong, but don’t see stocks declining on trade tensions in the near term.
High Valuations
2 most common concerns are valuations and a 2nd COVID-19 wave. It's not wise to sell stocks because of heightened valuations. You should sell the expensive stocks and keep the cheap ones. Now, I’m not saying to buy value stocks. A company with a strong moat and high growth can be cheap with a high PE multiple.
Valuations are stretched, but they should be because tech controls so much of the market. I really like tech, but I won’t be buying these firms until we see a strong correction. They are still overheated. Shopify stock is up 45.7% in the past month. It’s up 88.08% year to date. Many truly wonder what this stock’s limit is.
Tesla is up a paltry 7.24% in the past month. It might fall soon because Musk delayed its battery day event from the 3rd week in May until next month. He said there might be a webcast next month and an in-person event a few months later. Elon Musk has hyped this event up hard.
On the Q1 call he said, “Yes. Actually, we don’t want to preempt Battery Day. We want to leave the exciting news for that day, but there will be a lot of exciting news to tell. And it would be one of the most exciting days in Tesla’s history and we’re just trying to figure out the right timing for that.”
2nd Wave COVID-19
Latest data seems to suggest Sweden’s approach to not shutdown didn’t cause that many more deaths than there were in the places that had severe shutdowns. That begs the question if this was worth it. This question matters because if a 2nd wave hits, policymakers might deal with it differently. Sweden has had 29,207 cases and 3,646 deaths. The number of new cases has plateaued which is good.
Number of new cases has been falling in America, but not as quickly as some had hoped. At least the curve has flattened. We won’t need to look at Sweden much longer because states are starting to reopen. Obviously we don’t know if a 2nd wave is coming.
All we can do is look at Georgia’s data because it was one of the first states to partially reopen. On May 15th, there were 795 new cases and 46 new deaths which isn’t bad. Number of active cases in New York is about to peak which explains why much of upstate has reopened.
The number of active cases went from 265,555 to 267,744 on May 15th. It seems like NYC will partially reopen in early June. New Jersey shore will reopen for Memorial Day weekend.