CEO says stalled rally indicative of waning sentiment and concerns over stuttering economic restart
The bear market rally is showing signs of fatigue as countries grapple with the realities of re-opening vast swaths of their economies.
Equity markets retreated in June after rallying aggressively off March lows the previous two months. Kevin McCreadie, AGF’s CEO and Chief Investment Officer, said this could be a sign that investors are becoming despondent at how long the pandemic is lasting. Much of that waning sentiment could be linked to new cases of the virus across the United States and the likes of Texas pulling back on restart plans.
He said: “Think of what it does to people’s confidence when restaurants and bars are forced to close again and those who work there are also out of a job again. After such a long shutdown, it is demoralizing—even if we’re not directly involved—and so that’s what’s weighing on markets right now.”
He also believes there doesn’t seem to the same willingness to fight the virus through social distancing and other measures as there was early in the pandemic. Younger people, in particular, seem to be more willing to suffer the consequences if it means not giving up their perceived freedoms.
“Maybe they’re justified to think that,” McCreadie added, “but it’s still unnerving for markets not knowing exactly where this is headed. We believe the bar is very high to shut down states or provinces again, however, the fear of that will hang over markets if the virus continues to surge.”
The CEO expects stocks to grind higher from here over the next few months with bouts of volatility until we are clear of the pandemic, and he does not expect Q2 earnings to be much of a catalyst because of how the quarter lines up with the economic shutdown; when the market soared at the end of March it wasn’t until May that the U.S. economy started to open again.
McCreadie warned this is probably baked into the market somewhat but that the likelihood of there being enough big earnings surprises to the upside to move markets significantly higher seems low—especially if guidance disappoints given the more recent setback in the re-start of the U.S. economy.
He added: “It also doesn’t help that the U.S. Federal Reserve recently told the biggest U.S. banks to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year. Although share prices in many of these banks were hit hard following the announcement, the Fed noted that it will only allow dividends to be paid based on a formula tied to a bank’s recent earnings, setting up the possibility of further fallout down the road.”
What would stir the markets out this recent slump? More stimulus? Potentially, but with governments around the world having spent a load of money in the past few months, McCreadie said it should be no surprise if they decide to drag their feet on new measures.
While Canada has recently been downgraded to a sovereign credit rating of AA+ from AAA, in the U.S., the presidential election could play a huge role in how quickly the U.S government rolls out its next fiscal package.
“The Democrats have President Trump on the ropes and may be less incentivized to work with the Republicans on a plan that both can agree on,” he said. “After all, a weak economy hinders the President’s chance of re-election more than it hinders candidate Biden’s chance of being elected. In other words, the incentive to stimulate the economy may not be as strong as it was at the beginning of the pandemic, or at least, it’s not so clear cut and both parties remains far apart on the size and make-up of the next package.”