It has been a largely sideways move for the stock market since early June, but a Wall Street bull is telling clients that this consolidation episode is likely to “resolve to the upside” due in part to historical credit levels. and liquidity.
“Over the past week, economic data continued to exceed expectations at a historic rate, there were more signs of a broad recovery in the global economy, and excess liquidity that has supported financial assets increased to an even more historic level,” Tony Dwyer, head of market strategy at Canaccord Genuity, wrote in a note Monday. At the same time, a surge in COVID-19 cases and the alleged leadership of Democratic presidential candidate Joe Biden over President Donald Trump in polls have “kept the markets in a consolidation pattern.”
The S&P 500 SPX,
It was up 1.3% on Monday, striking a distance from its June 8 close near 3,233, which was the largest result of the benchmark US large cap index since its record close on February 21. . The DIA Jones Industrial Average DJIA,
It rose more than 500 points, or almost 2%. The S&P 500 and Dow have been largely trading laterally since June 8, while the heavy-tech Nasdaq Composite COMP
You have established a chain of records.
For his part, Dwyer’s optimism is based on a trio of factors, including a series of positive economic data that has pushed the Citigroup Economic Surprise Index “off the charts,” indicating that the global economy is in the initial recovery stage, based on improved readings for the composite core indicators for the 37-nation Organization for Economic Cooperation and Development; and data showing that “real liquidity” has never been so high.
Real liquidity, Dwyer explained, measures the amount of liquid money available using the M2 measure of money supply plus capital and fixed-income mutual funds versus what is needed for economic activity based on industrial production and inflation (see table attached).
Canaccord Genuity
Historic levels of credit and liquidity, “coupled with the turnaround in the global economy, should see any consolidation period resolved to the upside,” even with a weak second-quarter earnings season to come, Dwyer wrote.
Earnings outlook: S&P 500 earnings plummet as coronavirus hits all sectors, with Wall Street expecting a rebound that may not come
For now, it sticks to its call for a prolonged period of consolidation given the extent of the rise in the markets since the March 23 low. He has asked for the risk to be added in a pullback by the S&P 500 to 3,000. “With EPS ‘second-quarter reporting season and the likely cautious guidance on corporate earnings starting this week with major banks, we see no reason to change that game plan,” he wrote.
.
