Thursday happened to be one of the worst days for the market all year. Stock indexes dropped between 5-6 percent in the blink of the eye as the number of COVID-19 cases spiked higher in several states. Was that simply an excuse to sell, or should we be worried about a second surge?

 

As far as a second surge is concerned, I don't know what Wall Street is talking about. We are still in the initial phase of the pandemic. All that has happened is that a number of states are playing catch up with ground zero states like New York, New Jersey and California. Of course, it doesn't help that most states, like Florida, Texas, Arizona, Mississippi, Alabama, etc., have all but ignored the medical guidelines for re-opening their economies. This flouting of the best medical advice in favor of political partisanship has contributed to the sudden spike in cases since Memorial Day.

 

If investors spent a little more time listening to the epidemiologists, instead of bidding up airlines and cruise ship stocks, they would have realized that new cases would start to show up by the second week in June. And, like clockwork, that is just what is happening. But I believe this so-called "second surge" was simply the excuse traders needed to take profits in a market that had become way too frothy.

 

In my column last week, I wrote:

 

"Can we go even higher? I expect so. Look for the S&P 500 to hit 3,220-3,250 next week before pausing to catch its breath." The S&P 500 Index touched 3,232 on Monday before profit-taking set in. Thursday, that same index fell to the level I discussed with you two weeks ago, the 200 Day Moving Average at 3,002, and that is where it bounced on Friday.

 

Is it a coincidence that the new virus numbers coincided with the technical levels that I have been watching? You might think so, but I believe otherwise. As such, we should see some further correction next week after this bounce has played itself out. I am guessing we possibly break back down below the 200 DMA on the S&P 500 Index, depending on the virus news.

 

My reasoning: the surge in COVID-19 cases will continue into next week and beyond. That won't change. That should cap the market's upside, but not the downside. I believe investors will be jumpy until we determine the extent of the new virus surge.

 

A countervailing bull trend would be the argument that the medical community is now far better prepared to handle an uptick in virus cases, so further isolation tactics are not necessary, and we can expect fewer deaths. At the same time, both the Trump Administration and businesses are determined to re-open the economy. They are on the record stating that there will be no further economic shut-downs. That should support the stock market, at least temporarily, in my opinion, if things get out of hand (virus-wise) across the nation, than all bets are off.

 

Of course, both the bulls and the bears are avoiding a very ugly truth hiding underneath of all this financial, medical, and economic story-telling. The fact is that American lives are at stake. We are way beyond the worst-case estimate of 100,000 deaths and over 2 million virus cases and we are still counting. For our elderly community, this pandemic is a death warrant just waiting to happen.

 

The greatest tragedy of all is that most Americans, through their willful and selfish decision to ignore the rules as a matter of national political and economic policy, have made the decision that "the lives of the elderly don't matter."  I can only say shame on us.

 

Over the last two weeks, as Americans returned to work, the stock market climbed rapidly. It has now reached, and breached, an important historical technical indicator. If it can remain above it, investors will begin to believe that the worst is over.   

 

The S&P 500 Index (as opposed to the Dow Jones Industrial Average) is what most professionals consider the benchmark index. This week, buyers pushed that index above the 3,000 level for the first time since the pandemic caused the markets to crash back in March. Why is that important?

 

That is the level that coincides with what is called the Two Hundred Day Moving Average (200 DMA). The 200 DMA is where investors historically draw a line in the sand. It is considered a long-term indicator of the health of the stock market. The indicator appears as a line on a chart of stock prices. It moves higher and lower along with the longer-term price movements of the financial instrument it follows; in this case, the S&P 500.

 

As long as the index is above the 200 DMA, stocks are considered to be in a long-term uptrend. If that sounds a bit like voodoo, so be it, but that little line has proven to provide uncanny support for stocks time and time again. Below the 200 DMA (where we have been for the last few months), technicians and chartists would say that markets are still in a down trend.

 

Now, remember, this is far more of an art than a science. Sure, this week we have closed above the 3,000 level two days in a row. That is a good sign, but I would feel more confident if we remained above that level for a few more days. Friday should give us a good test case of the market's willingness to remain above the line, thanks to President Trump.

 

I gave readers a heads-up last week on the concerns I have over the president's ploy to switch the market's (and the nation's) attention from the pandemic to blaming China for almost everything, including his own failures. In a classic Trump tactic, he is pointing his finger at the Chinese for reneging on the trade deal, for starting the pandemic, for changing the rules of the game in Hong Kong and, if we wait long enough, who knows what he will come up with.

 

That is not to say that the Chinese are blameless, because they are not. My beef is that Trump's timing is off. The problem with China is that its leadership has shown in the past that they neither bluff easy, nor give in to threats, especially where they perceive their national interest is threatened. If Trump wants to go down the road of sanctions, trade duties, etc., so will the Chinese. Ask yourself "do we really need another potential trade embargo, or another disruption in supply chains on top of what our economy and work force are already grappling with?"

 

Up until now, investors have focused almost entirely on the pandemic, the economy, and its aftermath. The consensus seems to be that, barring another resurgence of the virus, the economy and the markets have weathered the worst and things are looking up. Enter Donald Trump, stage left, and his new beef with China. Depending on the outcome, which will hopefully be revealed sometime later today at his press conference, investors will either run for the hills, or stay put. Readers will know the verdict by simply watching the 200 DMA.

 

 

 

 

As we begin the Memorial Day weekend that usually launches the nation's summer season, investors are anxious to discover if Americans will ignore CDC warnings, and go back to their old ways of celebrating the holiday. And if they do, will new cases of COVID-19 spike?

 

The re-opening of much of America this week had been met with some celebratory gains in the stock market, but as I predicted, it has been an up and down week, despite the gain. The S&P 500 benchmark Index actually "kissed" 3,000 before falling back the following day. It was a first tentative probe of that level since the March declines.

 

However, if the S&P 500 Index can get through that resistance level over the next few weeks, we have a real chance to re-gain all of the remaining declines in the stock market. That's a big "if" and depends, as we all know, on future medical data. Investors will be watching and their future actions depend on how successful re-opening the country's economy will be.

 

By now, most, if not all, the bad news on the economy, on corporate earnings, and the existing data on the pandemic have been discounted by the markets. Therefore, unless something sudden and terrible should arise on those fronts, I would advise you to ignore those headlines.

 

Instead, readers should pay attention to two developing trends.

 

The first one is the United States re-escalation of trade and political tensions with China. Yesterday's column, "Chinese checkers," outlined my thoughts on this subject. Suffice it to say the Trump administration is doing all they can to shift attention and blame from the COVID-19 issue and their response to it. Focusing on "bad" China is both popular and easy, especially with elections only six months away.

 

In addition, China has managed to throw fuel on that fire by proposing a new national security law in Hong Kong, during the annual meeting of the country's top legislative body, National People's Congress, which begins Friday. If passed, the new law would prohibit secession, subversion of state power, terrorism activities, and foreign interference. Analysts wonder whether the specifics of the law would allow security forces, or even mainland Chinese military forces, to quell demonstrations and the like.

 

Hong Kong, itself, has the power to self-rule. In 1997, Great Britain agreed to return its colony to China under a "one country, two systems" form of government. It is largely a separate legal and economic system separated from China with more freedoms and limited election rights.

 

Under the Sino-British Joint Declaration, China promised to maintain this system until 2047. On Thursday, the U.S. State Department warned that "any effort to impose national security legislation that does not reflect the will of the people of Hong Kong" would be met with international condemnation. The president chimed in, warning China of a strong U.S. response if their government followed through on this new security law.

 

The second trend, also political, concerns the presidential race. As restrictions are lifted nationwide, both political parties are beginning to ramp up their campaigns. Media reports that the Biden campaign has shifted further to the left to include Bernie Sanders' supporters could alarm Wall Street. Sectors such as financials, health care, energy and technology would fare worse under a left-leaning Democratic party, according to prevailing wisdom.

 

Investors also fear that the Trump re-election strategy of further raising tensions with China could also damage what is already a weakened economy, as well as sentiment in the stock market. Given that a Trump re-election bid is no longer a short thing, this combination of concerns could make this campaign season especially volatile for the markets.

 

Given the recent gains in the stock market over the last month or so, it is clear that stock market participants believe that the country will be back on its feet in no time. Over in the fixed income space, it is another story entirely. The question is which market will be right?

 

The betting in the bond market is that U.S. interest rates are not only going to zero, but there is a high probability that America, like Europe and Japan, will soon see negative rates, as early as next year. Six months ago, that was unthinkable.

 

On Wednesday, Fed Chairman Jerome Powell gave a virtual speech at the Peterson Institute of International Economics. He said, "The FOMC committee's view on negative rates really has not changed. That is not something that we're looking at." But he did not rule out that option in the future if the economy worsened. The bond market thinks it will.

 

He also warned that "the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems." That is Fed-speak for don't look for a recovery any time soon, and you may see a lot more bankruptcies. 

 

Negative interest rates are considered a tool that has failed the test of time. Both Europe and Japan have tried them, and while negative interest rates have staved off a severe recession up until now, they are a bad choice. The current opinion is that they should be used "when everything else fails." Unfortunately, that message has not dented the conviction of our real estate speculator-cum-president.

 

 "I disagree with him on one thing now and that's negative interest rates," remarked President Trump after Powell's speech. In Trump's mind, negative rates are a "gift." I understand where the president is coming from.

 

As a real estate magnate, one of the critical variables in any deal is interest rates. How much you can borrow at the lowest rate possible in order to sell sometime in the future at hopefully appreciated prices. While Trump has had a spotty record in doing so, his most successful deals depended on buying at the right price and borrowing at the lowest interest rates.

 

Trump looks at the U.S. economy in the same way, in my opinion. Even the naivest businessman recognizes that the U.S. economy is not a real estate transaction. In an economy, there are always three or four parties to such a transaction — the lender, seller, borrower, and buyer. If rates are too low the lender loses money. If the sale price is too low, the seller gets hurt. The borrower/buyer may make out but maybe not in the long run. Despite efforts from his cabinet, advisors, etc., Trump just doesn't get it and he won't be swayed from his penchant for zero interest rates.

 

In any case, the bond market believes the economy may be moving into dire straits, which is not the message we are receiving from the White House, nor many analysts on Wall Street. Presently, a debate rages on whether the economy will take on a "V"-shaped recovery, like the stock market, or instead, recover in a less rapid "U"-shaped fashion. In either case, the expectations are that it will recover, that COVID-19 is disappearing, and things will be back to normal by this summer, if we open the economy back up now.

 

That's the message from the president, much of the Republican leadership, and their constituency, both on Wall Street, as well as Main Street. Can one blame them? Business owners are terrified with nightmares of imminent bankruptcy. Most will do anything, including risking the health and possible lives of their employees, to open back up.

 

Politically, Trump's standings in the polls are dropping dramatically. Few, if any, presidents have been re-elected when unemployment and the economy are this weak.  Come to think of it, "weak" would be a great leap forward compared to the reality.

 

So, who has it wrong?  The stock jockeys, or the bond vigilantes? Maybe they both do. We could see virus cases drop but continue to linger with flare-ups in the fall. That would stretch out the "U" recovery, but it wouldn't knock us back into another Great Depression. The stock market, on the other hand, could come back down to earth at the same time, reflecting a more reasonable valuation of the economic circumstances.

 

In any case, last week, I warned readers to expect a correction "this week or next." It appears that the stock slide has begun. Throughout the remainder of May and into June, the markets could be unsettled with a bias to the downside. The decline, however, won't be in a straight line. Let's target 2,660 on the S&P 500 Index as a first stop. That would bring us to around a 9.5 percent decline from the recent highs. While that plays out, that should give investors enough time to ascertain whether the economic re-opening exercise that is underway will be a success or failure. Stay tuned.

 

If ever one needed an example of the above saying, today's market would prove that point. Friday's unemployment figure for the month of April revealed that 20.3 million Americans are out of work, bringing the unemployment rate to 14.7 percent. The stock market gained more than one percent on the news.

 

While new cases of COVID-19 are reported and deaths multiply with no cure or vaccine in sight, the NASDAQ turned positive for the year. Corporate earnings have been abysmal and future guidance nonexistent for most companies, but their stocks went up anyway. How can this be, you might ask?

 

As I have said before, the stock market is a forward-looking mechanism. As such, investors are looking beyond this troubling period and anticipating that earnings, and ultimately the economy, will recover. At that point, we could see a typical "sell on the good news" event, but not now.

 

The economic data gave us some additional information on the victims of the pandemic. For one thing, the jobless rate would have been higher (by about another five percentage points), if workers had not classified themselves as "absent from work" instead of unemployed. Still, it was the largest, single monthly decline since record-keeping began back in 1948.

 

The leisure and hospitality industries led the declines, although every industry category experienced job losses. The majority of jobs lost were in low-paying areas indicating that wage earners at the bottom of the scale are taking the brunt of the virus fallout. It also explains why the average hourly wage gain suddenly increased by 4.7 percent, since, with so many low wage earners gone, those with higher wages predominate in the survey.

 

None of that mattered to the markets. From a financial point of view, the actions of the central bank in pouring trillions of new dollars into the financial system are why stocks continue to run. The Fed has all but nationalized the country's debt markets by buying or at least guaranteeing that they will be the buyer of last resort.

 

This week, I suspect that many investors, who tend to follow the headlines in making investment decisions (big mistake), and who sold during the recent downturn have been waiting for a chance to get back in on a re-test of those lows. threw in the towel. Those stock chasers are rushing back into the market now (and are probably late as usual).

 

One of the worries I have, however, is the overly large concentration of buying in a handful of mega stocks, especially the FANG names. The action is similar to the frenzied FOMO buying experienced at times when marijuana stocks or the meatless burger was "hot." I hope to see a broadening out of buying interest into more sectors and securities in order to feel more comfortable in the short-term.

 

Otherwise, like always, readers should soon expect to see some kind of corrective pattern descend upon the equity markets. We did have a 2-3 day sell off totaling about 4 percent from the highs a little over a week ago. The same thing could happen next week or the week after. That is the price of doing business in the stock market. The point is that until new data can show conclusively that the COVID-19 virus is on the waning, there will be that on-going risk of a 10 percent pullback. So, what?