The Ascent Continues

Stocks rallied to start the week as hopes for a further rebound in economic activity offset elevated geopolitical tensions and escalating protests across the U.S. It was a mixed start to the trading week as investors weighed several fluid situations and developments from the weekend. Internationally, the focus was on the rising tensions between the U.S. and China that originated due to Beijing’s new “national security laws” largely aimed at Hong Kong and most recently resulted in China reportedly halting agricultural purchases from the United States, a component of the trade deal.

Domestically, protests over the death of George Floyd turned violent, and in some cases deadly over the weekend as curfews were put into effect across much of the nation while nearly two dozen states called on the National Guard for assistance. The tensions across much of the nation weighed on futures Sunday night and into yesterday morning ahead of the bell.

Wall Street remained focused on economic data, however, as the May ISM Manufacturing Index was slightly better than expectations and suggested that a continued stabilization and rebound in growth are underway.

Over the past thirty days, oil has bounced materially on the hopes of the global economic rebound and a more disciplined OPEC+. U.S. and European economies are reopening and global data is showed us that the worst of the global slowdown was in April, so there worst is behind us. But, economic data still highlights we’re not anywhere close to precoronavirus levels.
Point being: There’s been a legitimate macro improvement, but at these levels, the market is already pricing in a lot more progress that happens very quickly.

Things Get Better If

The progress we saw in May keeps going (and accelerates) over the summer. By far the biggest key to the macro outlook improving is no “second wave” of COVID-19 infections now that the Western economy is re-opening. If the virus continues to decline that will help speed when the economy returns to “normal.”

To that point, if economic data can bounce back in a big way in the June reports, signaling that the economy is getting close to a precoronavirus level of activity, that will help solidify the belief that 2021 will be a similar year (from an economic and earnings standpoint) to 2019, which is what the market is assuming with the S&P 500 above 3000.

Bottom line, the path is there for a sustainable rally in stocks, but we’ve got to see an almost perfect set up of :

1. A major bounce back in data in the next couple of months
2. No second wave of coronavirus infections
3. Better commentary from corporate America.

That mix is possible, but it won’t be easy

Things Get Worse If

We get a second wave of infections. That is, by far, the worst-case scenario for this market because that would completely dash any hopes of a normal economic or earnings year in 2021. Additionally, even if we don’t get a second wave of infections, there remains a large gap between an economic reopening and a normal economy.

Finally, the market at these levels is very optimistic about earnings and multiples, and there remain a lot of unknowns around what’s an appropriate earnings estimate for 2021.

Bottom Line Going forward, there’s been needed progress in the major market influences throughout May, but that is already well priced into stocks, as are important incremental positives. We’ll be certainly watching how states reopen and how consumer behavior adapts to the new reality.