Let's look at a couple of charts, and some patterns, to see if my currently cautious state of mind has some grounds. And why I still think that the economy won’t recover quickly enough to buy now S&P 500, indices or stocks.
As I already mentioned in one of my previous blog post, the economy correlates with the financial instruments, and the market. It is not that market always reflects the real economy but some correlation is definitely there.
So, let’s have a look at the current manufacturing indicators.
The US and Europe are experiencing dramatic fall. As I already mentioned earlier, the economy has literally hit the wall. Manufacturing is experiencing a “free fall”.
China’s manufacturing figures tell different story:
The Chinese data, which I do not find 100% reliable, show that production capacity is returning. In this situation, I wonder who these goods will be sold to? The current supply chains have collapsed, and most likely these goods will stock up in China, at least for a while.
The identical picture is in services sector, the image is almost identical as in manufacturing, so I’ll spare the space and your time here. The only difference is that the US services sector has not fallen so hard yet. In my opinion, it is just matter of time. The latest data will be published on 05/05/2020, we’ll see if my prediction was correct.
Now let’s look at the Durable goods new orders data.
As you can see, there is now a drop in orders for goods. If you look at it for a longer period of time and compare it to the SP500, then even a child can clearly see the correlation of these data. For correlation I use the SP500 index and durable goods orders in millions of dollars (Units: Millions of Dollars, Seasonally Adjusted)
And in the current economic climate, I don't really see any reason to increase orders. Therefore, all those who think that this is a great moment to shop - think carefully. I'm not saying that the fall of shares is set in stone, but caution would not hurt either.
If we look at the unemployment rates, then there are some record marks as well, as I mentioned forecasts and pointed out trends earlier. Even though the forecasts pointed to “exaggeratedly bad numbers”, the reality turned out to be even worse…
I’m not adding any graphs here since there are plenty of them in news and media all over the place. What we all ought to do is to watch projection of jobless claims, though.
It would now be worth paying attention to corporate earnings. Reports and forecasts. This week there are many publications of big companies’ profit reports. Why is this important? Let me explain by showing this graph.
What else matters? The market cap to GDP indicator or so-called the Buffet Indicator is easy to grasp.
2000: Dotcom Bubble; 2007: Housing Bubble; 2020: … Bubble?
Since I have mentioned gold in some of my previous posts, it is worth to look at the SP500 to Gold ratio.
And last but not least – for the first time in history, there has been a moment when the price of oil is negative! Not low, but negative!! However, if you look up all the charts I posted above, is it any wonder?
Not at all. Demand has fallen and many warehouses are full. As long as the quarantine measures continue, I do not see any improvements in this sector either. The closest ray of hope will be when several countries will acknowledge that the peak of COVID-19 has been reached and some restrictions can be slowly reduced. And, the “keyword” is SLOWLY, which means that oil prices will recover, slowly…
Many may argue that folks will forget this and come back to normal rather quickly. As soon as there will be a possibility to socialize, travel, attend concerts and sport events, most of things may return to normal. Nevertheless, unless there will be a solid evidence that this virus is not going to hurt us again, there will be a large number of people who will look and live with caution and won’t spend any money they may need for tough times to come again. And, as there will be many who will hold their breaths on spending, the economy will not be able to get back on track quickly.
Another very popular view is that a period of high inflation is expected. Because federal reserves and other regulators have turned on cash machines at full capacity. But don’t let yourself be fooled by that. Look at the negative oil prices, rising surpluses in China (we don’t know if that data is reliable, though), pessimistic consumer sentiment, falling commodity prices, and cheap crop prices instead. I'm even starting to think about the opposite scenario - deflation. Maybe I'm wrong, the time will tell but it looks like the deflation scenario to me.
That's why I'm not on the side of trenches at the moment who say I have to buy, or it will pass quickly. I really need to see some real positive signals in order to change my mind on this. We need to see positive profit indicators, to see improvements in fundamental indicators. There should be more tangible evidence that the COVID-19 is retiring. So far I see emotions and sentiments instead. Don’t get me wrong, we all need a hope to cope with situation like this but as a trader I need some more substantial evidence to make any conscious decision. And I have a bad feeling that the recent positive rise in the markets will be disappointing…
Stay tuned!
Agris