The strength of the stock market is impressive. In the United States, the broad S&P 500 equity index gained 3.2% last week. This was a 32% upturn from its March 23 low. Risk appetite is fuelled by hopes of a COVID-19 vaccine, continued signals of virus stabilisation, restarted economies and data showing that growth bottomed out in April. The Swedish krona is also benefiting from this environment. Medical advances will be important to risk appetite as well as business and household confidence, in a world that is likely to face virus-related setbacks. Heightened security and trade policy concerns have not been enough to lower market willingness to take risks.
Frosty US-Chinese relations
The Senate unanimously passed a bill that would make it harder for Chinese companies to obtain US stock market listings and force already listed companies such as Alibaba and Baidu to show that they are not controlled by the Chinese government. The measure will now go to the House of Representatives for a more extensive consideration. In a tweet, President Donald Trump accused China of sponsoring disinformation campaigns in Europe and the US. This was in response to China's plans to let the ongoing National People's Congress adopt new legislation strengthening Beijing's political control of Hong Kong. China's plan to enact controversial security laws in Hong Kong shows that it wants to impose "one country, one system", which may completely change Hong Kong's economic and financial market role. It has triggered new demonstrations in Hong Kong and American threats of economic sanctions against China. During the People's Congress, Beijing is continuing to declare its desire to implement the US-Chinese trade agreement (Phase 1) but is meanwhile stepping up its anti-Washington rhetoric.
Weak macroeconomic statistics...
In the US, a further 2.4 million people filed initial unemployment benefit claims last week, bringing the total to nearly 39 million since coronavirus-related lockdowns began in March. Among the many bad April statistics were "existing home sales" in the US, which fell nearly 18% compared to March: the biggest month-on-month downturn since July 2010. The weak April data were no surprise; more interesting will be how fast things improve in May and June.
...but more stimulus measures on both sides of the Atlantic
US Treasury Secretary Steven Mnuchin is keeping the door open for a new crisis package, but just not right now. The Federal Reserve (Fed) has reiterated that it is prepared to use its balance sheet in an aggressive fashion if needed.
Today (May 27) the European Commission will unveil its proposed "recovery plan" after Germany and France agreed last week to launch a support package totalling EUR 500 billion in the form of grants, not loans, to the European Union countries hardest hit by the pandemic.
Sizeable but expected upturn in Swedish government debt
Sweden's National Debt Office published a new forecast, expecting a central government budget deficit of SEK 402 billion this year, to be funded by increased borrowing in all types of debt instruments.
Our market view
Recently stock markets have mostly fluctuated in response to changes in the news headlines about a possible vaccine against COVID-19, but reports about new stimulus measures have contributed to a continued positive undertone. The prospects of a return to a more normal situation will probably also drive market performance and undoubtedly justify the rebound in share prices that occurred after their sharp declines in March. But the scale of the rebound is a source of concern.
Because of the economic slowdown, corporate earnings forecasts for 2020 are being revised sharply lower. From expectations of earnings increases around 10% globally a couple of months ago, forecasts are now pointing to declines of more than 20%. Most observers, including us, expect earnings to regain a lot of lost ground during 2021 and probably also set the stage for earnings to continue increasing after next year. But already driving up share prices towards their earlier peaks is challenging, given the prevailing uncertainties and the sizeable dips in earnings curves we are seeing.
We are forecasting that economic growth will rebound starting in the second half of 2020. This scenario, combined with continued low interest rates, lays a good long-term foundation for equities. The growth picture and a stabilised credit market are generating clear potential for corporate bonds. An optimistic stock market view today focuses on the brighter long-term outlook and maintains that current historically stretched share price valuations are justified by continued low interest rates and bond yields. We share this view of long-term fundamentals and see reasons for slightly higher valuations, but in the short run there are still many risks of disappointments, since the rapid upturn makes the market more sensitive to the negative news about economic growth and corporate earnings that can reasonably be expected to pop up on the radar during the coming months.
Please contact your private banker if you have any questions or concerns.