The quarter after the half: Why the next 3 months are key for stocks

CENTRAL bank firepower helped stock market bulls finish the first half of 2020 on a high. Now the rally hinges on follow-through in the third-quarter from economic data, company earnings and the coronavirus newsflow.

With central bank and government stimulus approaching US$20 trillion, world stocks’ 35% collapse between Feb 20 and March 23 – the swiftest and deepest sell-off since 2008 – has mostly reversed.

Global shares are within 10% of their February record, while the US Nasdaq and China’s Shenzen indexes are back at multi-year or record highs.

Latest numbers from jobs to manufacturing have kept momentum going. But what comes next is important – for investors as well as possibly for US President Donald Trump’s re-election prospects in November.

Economic data is essentially backward-looking, so April to June figures reflected first big falls, as lockdowns drastically curtailed activity, then a bounceback from March-april troughs. Data from July onwards must confirm whether the rebound is becoming entrenched.

“For now, markets are still in a sweet spot. It’s not until the end of the quarter that we are going to get some visibility,” said Russell Silberston, co-head of developed markets FX and fixed income at asset manager Ninety One.

Markets risk being sideswiped by bad news, Silbertson said, adding: “If you believe markets are forward-looking, perhaps they are overly optimistic.”

What complicates the picture is that the figures mostly do not reflect record rises in US infections and renewed lockdowns.

Extraordinary labour and business support schemes, such as furloughs in Britain or additional cheques for US unemployment, may mask the real state of affairs. Unless renewed, these schemes start to roll off from end-july onwards.

Contrary to common belief, surging stocks and a shrinking economy can go together – past meltdowns attest markets can trough up to six months before crises end. But they do need to see data improving at a steady clip.

“The rate of change (in data) matters more than the level,” said Morgan Stanley’s chief cross-asset strategist, Andrew Sheets. “Markets have got it right.”

Outdated earnings

It’s still tough, for some, to square exalted share prices with the economic outlook. Citi strategists say consensus expectations for end-2021 earnings per share are 30% too high. That would imply global equities trading at 24 times forward earnings, rather than 17 times.

“For now, markets are still in a sweet spot. It’s not until the end of the quarter that we are going to get some visibility.” Russell Silberston