Thursday, July 2, 2020
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More testing and still low expectations
Financial markets have recovered most of the losses suffered during the darkest days of the COVID-19 pandemic.
The economy has recovered as well, though concerns are mounting that rising case counts could stall this still-fragile rebound.
But credit strategists at Bank of America Global Research wrote in a note this week that there are three reasons for investors to be bullish for the next few months.
“First, the US is detecting a lot of new Covid-19 cases, which lowers the probability/severity of any second wave of infections,” BofA strategists write.
“Second the economic surprise index shows we are still in the phase where consensus underestimates the rebound in data. Third we think the 2Q20 corporate earnings reporting cycle will mirror that — horrific data, but meaningful better than feared and guidance to get excited about. Of course depending on the industry and individual situation.”
To our minds, these three reasons are really just two — testing and expectations.
On the testing side, BofA notes that the widely-cited IHME model — which has been leaned on heavily by the White House but has faced questions on its accuracy — suggests we are now catching around 40% of likely infections in the U.S. with testing. At the April peak in infections, we were likely capturing less than 10% of the true number of infections.
The firm’s case, then, is that while the current rise in cases is not good, we do likely have a decent handle on the extent of the COVID outbreak we’re currently experiencing. A silver lining at best, but still a potential source of upside surprises in the economy.
The last two pillars of BofA’s case for bullishness are largely continuations of what has underpinned the rally we’ve seen in markets over the last three months.
“Citi's economic surprise index, which was at a record low as late as April 30th, is now by far and away the highest on record,” BofA writes. “Of course that should come to an end eventually — but so far it has not.” Citi’s index measures whether economic data come in better or worse than expectations.
As we’ve covered before, financial markets are primarily concerned with whether things are getting better or worse. And when it comes to economic data, expectations have still been too negative.
And these economic surprises, for Bank of America, open up the possibility that analysts making forecasts for corporate earnings in the second quarter are being too conservative. “Clearly investors expect to see horrific numbers overall — but why would the better than expected economic outcome not also flow through to at least better than feared corporate earnings?” the firm asks.
“At the very least companies should be eager to guide the positive trends they are seeing for 2H.”
According to data from FactSet, a record-low number of companies in the S&P 500 have offered guidance for the second quarter. More than 180 companies have withdrawn guidance so far this year.
And so if the first widespread corporate trend we saw in the spring was companies pulling their guidance amid pandemic uncertainty, the second half of this year might see companies bring back forecasts.
Something you’d only expect to see happen if the news is good.
What to watch today
8:30 a.m. ET: Trade Balance, May (-$53.0 billion expected, -$49.4 billion in April)
8:30 a.m. ET: Change in Nonfarm Payrolls, June (3 million expected, 2.509 million in May); Change in Manufacturing Payrolls, June (425,000 expected, 225,000 in May); Unemployment Rate, June (12.4% expected, 13.3% in May)
8:30 a.m. ET: Initial Jobless Claims, week ending June 27 (1.336 million expected, 1.48 million prior); Continuing Claims, week ending June 20 (18.904 million expected, 19.522 million prior)
9:45 a.m. ET: Bloomberg Consumer Comfort, week ending June 28 (41.4 prior)
10 a.m. ET: Durable Goods Orders, May final (15.8% expected, 15.8% prior); Durables excluding Transportation, May final (4.0% expected, 4.0% prior)
10 a.m. ET: Factory Orders, May (7.9% expected, -13.0% in April)
[Yahoo Finance UK]
YAHOO FINANCE HIGHLIGHTS
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