Here’s the worrying message the market is sending about the economic recovery

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One way to see what the market is saying about the economic recovery is to simply observe that the S&P 500 SPX,
+ 0,64%
jumped 49% from lows in March and is only 2% below its level in mid-February, when the coronavirus began to spread outside of China.
Beneath the surface, however, things don’t look so good as the market width has shrunk. The percentage of what Ned Davis Research calls its “Rally Watch” indicators – things like the percentage of stock markets above their 50-day moving averages – has declined. Meanwhile, valuations have become more strained.

Tim Hayes, chief global investment strategist at Ned Davis Research, says the rise in GC00 gold,
+ 0,71%,
high stock VIX,
+ 3,00%
and the volatility of high yield corporate bond markets and declining TMUBMUSD10Y bond yields,
0,521%
are all signs that confidence in the economic recovery is weakening.
“We now wonder if they will extend these [unemployment] benefits – will Congress come up with something or not? But the point is, if the economy isn’t responding to all of that liquidity, you have a different environment than you had between 2009 and 2018, ”he says.

Earnings returns are the opposite of price / earnings, so lower returns equate to higher valuations.

The firm still recommends its benchmark allocation to equities, 55%, and overweight bonds at 45%.

“From 2009 to 2018 we had a few setbacks, but basically we had a secular bull market, double-digit annualized returns from stocks, responding to this massive infusion of cash that effectively mirrored the global economy,” says Hayes. “One of the characteristics of a secular bear market is that you get negative annualized returns. I’ve mentioned the start of 2018 a few times, but since then many indices have had negative annualized returns, ”he says.
If the economy does not show signs of recovery and the breadth of the market improves, it could contribute to a potential reallocation out of equities, Hayes says.
The buzzing
Unemployment claims data in the United States will be in the spotlight after the Department of Labor reported two straight weeks of increases in claims for the first time. The New York Federal Reserve’s household debt report is due at 11 a.m. Eastern time.
Stimulus talks are still separated by “trillions” of dollars, according to White House chief of staff Mark Meadows.
Wholesale Cost of Costco,
+ 0,05%
reported that its July same-store sales jumped 13%. Manufacturer of Roku streaming devices ROKU,
-0,61%
and video game creator Zynga ZNGA,
-1,17%
also reported optimistic financial results, due to the pandemic keeping people at home.
Fastly FSLY,
-6,24%
may slip as the cloud-based online content services company identified video-sharing platform TikTok as its biggest customer after revenue beating.
Bausch Health Cos. BHC,
+ 2,47%
shares soared after the company announced plans to divest its eye care business to a separate public company
Rocket Cos. RKT,
,
parent company of Quicken Loans, priced at $ 18, below its target range, as its IPO is expected to begin.
The market
After Wednesday’s 373 point surge in the industrial DJIA Dow,
+ 1,39%,
ES00 US equity futures contracts,
-0,20%
YM00,
-0,18%
wobbled and were recently trading lower.
Oil CL.1,
-0,75%
futures fell while GC00 gold,
+ 0,71%
and SI00 silver,
+ 4,51%
futures have increased.
La livre sterling GBPUSD,
+ 0,41%
rose after the Bank of England kept interest rates stable.
Table

UBS shows how commodity prices generally react to increases in liquidity. So far, prices have moved away from their lows, but have not improved significantly. Analysts expect broadly diversified commodity indices to appreciate by around 15% over the next 12 months, and say cyclical commodities such as crude oil are about to see the gains the most importants.
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