The early encouraging news on Gilead’s remdesivir along with a blue print on how to gradually reopen the US economy definitely gives good reason that we are getting our arms around this virus and its dramatic impact and we can more confidently look at the other side. That however is why the S&P 500 has already rallied about 30% (after today’s opening) off the March 23rd lows retracing about half its loss. I’m not sure exactly when it will be, whether during earnings season (as we get deeper in it) or after but I do believe the market will then shift its focus. This focus will be on what type of growth rate are we going to see after, what will earnings look like in the back half of 2020 and for 2021 and what P/E multiple should we put on that. I’m sure some will argue for a higher multiple like 18-20 where it was in the last few years because rates are low but I’ll argue it should be at best mid teens because growth will be slow and that is why rates are low. And if I’m right that higher inflation follows, it will certainly be at best mid teens and likely lower.
We also will see how this traumatic experience is going to change behavior in coming years. I have to believe that while memories are typically short, consumers are going to save more and companies are going to realize the importance of having a stronger balance sheet. Both are positive in the long term but also means slower consumer spending, less investment and hiring in the meantime. It also means that lower Fed driven interest rates won’t be stimulative. Bottom line, we are past the worst of this virus impact I believe, with admittedly set backs along the way, but we’ll have a much different economy ahead than we are used to.
The market response here to the Gilead news is not all consistent. Stocks of course are loving it, but the 10 yr yield is only up 1 basis point after falling 14 bps in the last 3 days and WTI is down another 5.5% to below $19. Brent crude on the other hand is up more than 2% and copper is also up by 2%.
The other news of note on this day was the economic data out of China. The estimate for Q1 GDP was down 6% y/o/y and it instead printed lower by 6.8% with particular weakness in retail sales. Fixed asset investment was also soft. A positive was the better than expected industrial production figure as factories slowly turned back on in March. As China continues to reopen and life is slowly resuming, the data should improve in Q3 but almost solely due to domestic factors as we know many of their export markets are still closed. The Shanghai comp was higher by 2/3 of a percent while the H share index was up by 1.5%.
I mentioned the other day about the divergence between inflation breakevens and the price of oil. Well, that gap closed over the past 2 days as implied inflation expectations in the 10 yr TIPS fell 13 bps yesterday after dropping by 10 bps on Tuesday. There still is a gap however as seen.
OIL in orange, 10 yr INFLATION BREAKEVENS in white
This is what happens when things close but passenger vehicle registrations in Europe in March got cut in half, falling by 52% y/o/y. The actual number of cars around 850k is the lowest since 1990 when the data first started to get reported.