“I’m No Epidemiologist, But…”

Authored by Richard Breslow via Bloomberg,

One thing you hear a lot of is, “I’m no epidemiologist, but…”

• The stock market will make new lows.

• The bottom is in.

• If we get a second round of infections, earnings will continue to be hurt and valuations are too high.

• If we come up with a vaccine faster than we thought, the recovery could come sooner than we are expecting.

None of the above is all that convincing when making predictions about where equity prices are likely to go.

All we can go on is what we know now. Whether the policies put in place seem sensible and whether we can catch a break.

We know for a fact that global economic numbers will be horrid. We just don’t know for how long and to what lasting effect.

I’m not at all sure why there’s this fascination over arguing vehemently about the issue of this being a dead cat bounce or the resumption of the rally. The truth is, we haven’t seen this before. There have been some big, quick and tradeable moves. They counted if you caught them. And also if you didn’t. And now we move on.

Lots of markets are at interesting pivot levels. Which matter more in the moment than earning bragging rights over calling the next big one.

The S&P 500 at and around 2,800 matters. Euro Stoxx 50 anywhere between 2,900 and 3,000 is as well.

Get the little things right and the rest will be much more likely to work out as hoped.

Guessing where the next home run will come may be a coin flip at this point.

But we do know that the market has friends within the halls of the central banks. And they care about the level of asset prices. They’ve gone, or are going, pretty much all-in. Doing so doesn’t always work out and, absolutely, not necessarily in a straight line. But it’s worth factoring it into your calculus. We all know what the Fed has been up to. Thankfully, they did a masterful job keeping the financial plumbing functioning. In any case, they didn’t, and perhaps shouldn’t have, stopped there. But, I don’t for a second think they will be able and willing to “take it back” when the time is right as easily as they hope. We’ve seen this play before.

Bloomberg News ran a really eye-opening article this morning detailing the extent of the BOJ’s activities in supporting the economy. And markets. Apparently there is always room to do more. What’s a balance sheet for, if not to use it? The line, however, that stood out came in an attached table. In listing purchases of ETFs and J-REITS was the explanation, “No schedule is announced. They tend to be conducted when equities drop.”

As we wait to see how the various pivot levels play out, it’s worth paying attention to how Italian fixed income trades. BTPs sagged right from the get-go. They have tried to rally since. There was a lot of criticism in Italy over the weekend about the terms that Finance Minister Roberto Gualtieri agreed to last Thursday as part of the euro zone rescue package. And he received some harsh criticism by the populist parties. Whether this becomes a lasting political problem for the government remains to be seen. But it should be on the radar. The Europeans tend toward needing to take multiple bites at the apple. And, to be fair, their equities are up on the day.

Another thing to follow will be the dollar. Maybe it really is going down. It just is unlikely to do so as easily as many forecast. Rates are low. They are going to stay there. Who else can afford to be jacking up theirs?