Market Update 6/5/2020

Stock futures begin the weekly trading at 5pm Central time on Sunday evenings. This week, following the protests, looting and general unrest in the country the futures opened lower. Given the state of the economy coming out of the quarantining period, civil unrest seemed like yet another dagger in the back of the economy. However, that drop was extremely short-lived. By the end of trading on Monday the Dow climbed almost 100 points. By Wednesday the Dow was up nearly 1000 points in just 3 trading days. Hardly what anyone could’ve expected given the news across the country.

In what certainly feels like an Alice in Wonderland, upside down world, trying to make sense of the market given general fundamentals seems nearly impossible. Typical safe havens were crushed this week. Long-term US Treasury Bonds were down over 5% for the week. Gold, another flight to safety investment, was down over 3%. Clearly the financial markets didn’t care about the tumultuous reactions taking place across America. Furthermore, within the stock market itself there was a complete reversal of the trend taking place over the last 6 weeks. The tech heavy Nasdaq 100 underperformed the small cap Russell 2000 index. For the week, the Nasdaq was up only 2.7% while the Russell 2000 was up over 7.8%. Also of particular note, travel and leisure and retail stocks rallied substantially. In early trading today, American Airlines stock was up over 100% and Gap Stores an impressive 40%. This type of price action brings to mind the late ‘90s Tech Boom, hardly what would be expected given the overall economic outlook.

At this stage, the market seems to have priced out any further risks due to the coronavirus as well as any further political risk with the election only 5 months away. At stake for the market in the election is the growing prospect that Trump will become the first one-term president in 30 years and the high potential for the repeal of the tax cuts that directly benefited large corporations. Should the corporate tax cuts be rolled back, the impact on corporate earnings would be negative, causing forward Price to Earnings valuations to be at levels not seen since the height of the Tech Bubble. It all feels a bit surreal to borrow a term frequently overused.

If this is a bubble it is impossible to know how long it will last—animal spirits are quite different from physics in that they are nearly impossible to measure. I’ll be the first to admit that my attempts to make heads or tails of the current market environment has proven futile. To that end I assume I’m not alone.