I’ve been quite the optimist during this “coronavirus crash”.
I’m not changing my stance, but I just can’t see stocks climbing without a small pullback or two.
The Australian stock market has rebounded off its 23 March coronavirus crash lows and is now 20 per cent off it’s pre-pandemic high of 7,162.
That’s OK for us, but the Yanks are only 8.4 per cent off that old highwater mark and that’s strange with unemployment over 13 per cent and infections on the rise.
I’m not expecting a big drop down but I would not be surprised to see a 7-10 per cent pullback.
Here are 10 reasons why:
Rising virus cases
The US reported 45,000 cases of the Coronavirus on Friday taking the national total to 2.46 million cases and “…as of Friday, the U.S′ seven-day average of new cases increased more than 41 per cent compared with a week ago.”
This trend could easily spook Wall Street because as infections rise, the threat of a slower economy reopening becomes very real and this affects company sales, profits and share prices.
Following the US trend
The chart below is a sensible reason to be concerned that the US stock market rebound, as measured by how the S&P 500 Index is way ahead of itself.
That’s a big rebound, and even though our market is still 20 per cent off its pre-crash high of 7162, we shouldn’t dive as hard as the US if Wall Street falls but we would follow the trend from the Big Apple.
“Fatigue was to be expected after the best 11-week sprint in market history, a gain of 44 per cent in the S&P 500 from March 23 through June 8,” observed CNBC’s Mike Santoli and he’s absolutely spot on.
The big tech-growth stocks — the FAANG group — must be due for a pullback, though they have shocked us for years.
May to October is historically the slower half for US stocks.
On a high
The median S&P 500 stocks trade on a forward P/E of 20 times, which is historically high.
Warren Buffett hasn’t been a buyer and I can’t get out of my head something he said years ago: "A pin lies in wait for every bubble."
Home-based Coronavirus novice traders, especially in the US, could panic if the market sells off and this could exaggerate any stock dumping.
The charts, even before the virus data worsened, were telling us that the market was set to move sideways to downward.
Fund managers are cautious
Fund managers in the US are wary. From a Citi survey, the respected bank’s equity strategist Tobias Levkovich reported:
They maintained cash levels twice the long-term average, which says they’re nervous;
Only a third think the S&P will be back to early-June levels above 3200 by year end;
When asked whether a 20 per cent market drop or 20 per cent rally was more likely, 70 per cent of managers chose a 20 per cent decline! (CNBC);
Given the nine points made above, how likely is it that profit-takers will say: “Let’s just sell and if I’m wrong, I can get back in after a 5 per cent rise but if I’m right I could avoid a 10-20 per cent loss or maybe more?”
I don’t think a huge sell-off is likely, but with those 10 worry-points and a Trump US election campaign on between now and early November, I just can’t see stocks climbing without a pullback or two.
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