Summer rally coming up?

Article about Summer rally coming up?

Jul 3, 2020

Sideways

The Nasdaq reached a new All-Time High yesterday. The S&P 500 index stands at a loss of only three percent this year. Investors are increasingly wondering to what extent the price rise since the corona bottom in March is justified. There seems to be no end in sight to the surprising recovery rally in the stock markets. Yet the reality is somewhat different. A look at the chart of the leading S&P 500 reveals that, on balance, this index has moved sideways over the past month. Yes, this week was a good one but followed a bad one. The week before that was a good one but followed a less good one as well. The return over the past month? 0.23 percent. Not really the result of an overly optimistic stock market.

The virus hasn't beaten yet

So with those price rises, it's not so bad lately. And that's not so strange. The market is actually stuck between two contradictory forces. Investors can read daily that the number of new corona infections in the United States is rising rapidly. Yesterday there were no less than 53,000 new cases. Meanwhile, more than a quarter of the global virus infections come from the United States, while the share of Americans in the world population as a whole is considerably lower. Investors see that the reopening of the American economy is slowing down. In fact, new lockdowns are taking place here and there.

Economy recovers

On the other hand, each reported macroeconomic figure appears to be better than expected. After consumer confidence - not unimportant in such a consumption-driven economy - turned out to be much better than expected yesterday, no less than 4.8 million new jobs were created. For the record, 2.9 million new jobs were expected. Unemployment fell from over 13.3 percent to 11.1 percent. In the European Union, the purchasing managers were higher than estimated. Something that has been going on in China for some time.

Correction in time

Witness the sideways stock market, investors seem to be trapped between these two opposing forces. That's not unhealthy. It gives the market a breathing space after the sharp rise since March. A correction does not necessarily have to take the form of a fall in prices. Correction in time is also possible. The latter seems to be happening now. The relative strength of the S&P 500 index, for example, has fallen from heavily oversold to a more neutral situation over the past month. As it were, equities become more worthy of purchase when they move sideways for some time. When the economy picks up during the period in question, prices become relatively more attractive.

Quarterly figures

In two weeks' time, the quarterly figures season will break loose again in the United States. The companies will present their results for the past second quarter. Expectations are very low. A profit drop of 43 percent is expected for the S&P 500 shares. However, these expectations are from a time when a longer-lasting crisis was still assumed. The rapidly recovering macro figures may point to something else. It might not be as bad as expected. Some companies came out early with their reports.

Summer rally

According to various studies, investor sentiment is on the dark side. In addition, both the government and the Federal Reserve have expressed their intention to come up with new stimulus measures when necessary. Moreover, keep in mind that the coming period until mid-July is historically a very good period on the stock market and hence the tasty recipe for an approaching summer rally. A summer rally? Have you gone completely crazy, do you think? Maybe, but keep in mind that the stock market is perverse and doesn't care what the majority of the right-thinking crowd expects. Scholarships don't go down until there's hardly anyone left who's negative. That moment hasn't come yet.

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