(Reuters) – The resilience of a months-long rally in US stocks is being tested as a long-feared resurgence in coronavirus infections weighs on hopes of a strong economic recovery in the United States.
FILE PHOTO: Jasmine Bermúdez and Brad Philbert stop to take a picture in front of the “Charging Bull” statue while wearing masks to avoid exposure to coronavirus disease (COVID-19) in New York, USA. , March 17, 2020. REUTERS / Lucas Jackson / File Photo
Investors have pointed out for weeks a possible surge in coronavirus infections as a possible obstacle to the recovery of US stocks. That threat appears to materialize more and more, with California, Texas, and other US states noticing huge leaps in coronavirus infections this week, even as other areas like New York appear to have lowered their infection rates.
For now, many market participants believe that the hardest hit US states are unlikely to reinstate the economically devastating blockade measures implemented earlier this year. Still, the surge in cases threatens to slow economic activity and undermine the case for a “V” recovery that has helped extend the massive spring recovery in stocks. The S&P 500 rose 36% from its low in late March, while the Nasdaq hit its most recent record high on Tuesday.
“Throughout this week, we’ve been hearing how it’s going to get worse. The facts seem to be supporting that narrative, ”said Brian Battle, chief operating officer of Performance Trust Capital Partners, referring to the virus.
The S&P 500 fell 2.6% on Wednesday and oil prices fell more than 5% after the United States recorded the second-largest increase in coronavirus cases since the health crisis began. Shares were shuffled between profit and loss on Thursday.
The United States recorded the second-largest increase in coronavirus cases since the health crisis began on Tuesday. Arizona, California, Mississippi and Nevada recorded record increases in coronavirus infections on Tuesday. Texas set a record high on Monday.
The governors of New York, New Jersey and Connecticut, once critical hotspots for coronaviruses, announced Wednesday that visitors to states with high infection rates should be quarantined for 14 days upon arrival.
“Even if the government does not order them to stay home, people will not feel comfortable going out. They’re not going out shopping, ”said Thomas Simons, a money market economist at Jefferies.
The threat of a slower recovery has highlighted valuation concerns that have arisen as stocks rose. A net record 78% of fund managers believe the stock market has been more overpriced since 1998, according to a June survey by BofA Global Research. The survey showed that owning technology stocks was considered the “busiest” trade on the market for the second consecutive month.
The S&P 500’s forward price / earnings ratio now stands at 24.5, according to Refinitiv, a level that was last seen some 20 years ago during the dot-com boom.
“The markets were priced too perfectly for the past few weeks,” said Oliver Pursche, president of Bronson Meadows Capital Management. “We were overbought both technically and fundamentally.”
Many investors believe that expectations of continued Federal Reserve support and encouragement from US lawmakers will limit the downside in the markets.
So far, Congress has allocated nearly $ 3 trillion in financial aid, while the Fed has implemented numerous programs to inject trillions of dollars of credit into the economy.
“The fundamentals challenged by the virus shock have possibly been more than offset by a strong global policy response,” analysts at BlackRock said in a recent report.
US government bond yields near record lows have also boosted the attractiveness of the stocks.
Still, investors are weighing those factors against the damage the economy has already suffered, as well as other possible threats to the recent equity recovery.
One of them could come from concerns about trade tensions between the United States and China. President Donald Trump and senior US officials recently said the trade deal remains intact after White House trade adviser Peter Navarro said Monday that the hard-won deal had “ended.”
Some investors also believe that money managers who rebalance their portfolios to reduce equity exposure at the end of the quarter may also affect stocks. A portfolio that had 60% equity allocations and 40% bond allocations earlier this year may now be heavier toward equities after the breakthrough in the markets.
Pension funds can sell up to $ 76 billion in shares at the end of the quarter, analysts at Goldman Sachs said in a recent note. //
“Quarterly rebalancing requires the sale of shares,” wrote Michael O’Rourke on JonesTrading on Wednesday.
Reports by April Joyner and Sinead Carew; Additional reports by Ross Kerber; Editing by Ira Iosebashvili and Nick Zieminski
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