US stocks rally on as investors look beyond Q1 and Q2
US stocks continued to march higher, albeit at a more moderate pace, shrugging off a historic fall in March consumer spending and weekly rise in jobless numbers which have shown some scant signs of stabilising. However, as we underlined last week, the plunge in economic activity and bleak corporate earnings in the face of nation-wide shut-downs are unlikely to come as a shock. Indeed, investors seem increasingly unperturbed by these gloomy numbers which are more a reflection of the containment efforts in flattening the virus infection curve than any systematic economic collapse which have historically been triggered by bursting of asset bubbles that took years to recover from.
With S&P having bounced by over 30% from its lows in March and managing to close above its 50 days moving average, bearish institutional investors are under increasing pressure to put more of their big cash positions back to work while those calling for an imminent correction to new lows after this so called ‘bear market rally’ seem to have toned down their negativity. With Fed’s aggressive actions leaving the US financial plumbing functioning reasonably well again, a financial crisis looks to have been averted for now. This has led the spotlight back on developments surrounding the virus itself, potential treatments and vaccines in the works and the shape of infection curves in the US and Europe with also a close eye on China’s economic activity as a potential guide in how to ease the lockdowns in the months ahead.
Promising treatments and vaccine timelines looking more encouraging
As we also noted in our last publication, although targeted vaccine is still some time away, studies of existing and experimental treatments in much bigger control groups are in the works around the world and we are already seeing the start of number of promising findings being released which are clearly improving market sentiment. These findings should provide much more conclusive data about which treatments are proving more effective and at what stages of the infection they should be used which could hopefully drastically reduce mortality rates in the coming months.
The recent publication by the University of Chicago is a case in point as their smaller group trials suggest that patients that have been administered with Gilead’s Remdesivir drug in moderate and severe cases of the infection have mostly shown a rapid recovery with less than a handful of fatalities. This is part of a bigger trial study group of 4000 cases which should provide a more conclusive findings in the weeks ahead. Other promising treatments, notably convalescent plasma transfusion from blood samples of recovered patients are also in clinical trials globally which we should hear more about soon.
With over 70 potential Covid-19 vaccines under development by biotech and research teams around the world with at least five already in clinical trials, development of preventative medicine in fighting the virus is also looking most encouraging as the medical and pharmaceutical world are starting to dedicate significant resources to solving this crisis. One notable experimental vaccine called “ChAdOx1 nCoV-19” developed by Oxford University scientists is looking promising enough that it is already being mass-manufactured for millions of doses even before the clinical trials prove its effectiveness. If it does, the vaccine is to be made available by September, beating all other vaccine timelines by months. Needless to add, any major vaccine breakthrough will completely blow the market bears out of the water, taking us from potential U, W or L-shaped recovery scenarios back to a V-shaped one which has long been abandoned by now.
We retain our key market strategy of remaining bullish technology
All through this human health crisis this year, we have argued that the general outlook for technology stocks remain relatively rosy as work-from-home regimes and in-home entertainment has kept consumption of online bandwidth at very high levels. Data generation has remained high as has recovery trends in spending we have seen on expanding capacity in data centres and cloud storage, a trend which began in Q3 of last term when high inventory of memory chips peaked. Surging sales of PCs and laptops this year has also helped this cause and although smartphone sales have been negatively effected by the virus-related shutdowns, we believe the recent recovery in sales in China and the resumption in 5G related-spending is also looking most promising.
Indeed, a big component of the US stock market’s rebound thus far has been the rally in these related technology stocks which go far beyond just Microsoft, Amazon, Netflix and Apple and include key chip names such AMD, Nvidia, Intel, Micron, Lam and AMAT. With the latest guidance from key players like ASML and TSMC suggesting that migration towards cutting edge semiconductor manufacturing lines using EUV lithography is actually accelerating, we have high hopes for related stocks in Japan to follow their US peers and continue to outperform other sectors for the foreseeable future. Until an effective vaccine comes along to change the short term global economic scenario, we are likely to stick with this market strategy which has thus far proved pivotal in capturing alpha in this rebound.