After weeks of euphoric rise, disappointing economic data and fears of a second coronavirus wave are pushing US equities down.
Microsoft Corporation (Nasdaq: MSFT), who beat earnings predictions on Wednesday, is down more than 4% today after reporting its slowest earnings growth in two years. Similarly, after weeks of rallying, Amazon (Nasdaq: AMZN), Apple (Nasdaq: AAPL), and Netflix (Nasdaq: NFLX) are slipping along with the overall market. Even Tesla (Nasdaq: TSLA), whose stock price has appreciated by more than 300% since March, is down nearly 5% despite posting its fourth successive profitable quarter.
The sudden halt in the major stocks’ impressive rally suggests the the market is running out of steam and may be on the verge of a major correction.
For informed investors, this is hardly surprising given the dire global economic situation.
Last week, initial jobless claims surpassed the 1 million mark for the 18th consecutive week: 1.416 million people filed for unemployment and economist believe an additional 1.3 million filed initial claims for state benefits. As a result, lawmakers are considering extending the emergency federal unemployment benefits (which is paid on top of state unemployment) at a reduced rate of $200-$300 per week and sending Americans a second $1200 stimulus check.
In parallel, fears of a second coronavirus wave are intensifying, and the US economy is not reopening as scheduled. The retail, tourism and hospitality sectors will continue to suffer in the coming months: Princess Cruises, who belongs to Carnival Cruise Lines, just announced the cancellation of all cruises until December 15th, 2020; American Airlines’ Q2 2020 revenue dropped 86% to $1.6 billion from $12 billion last year, resulting in a $2.1 billion net loss; and bankruptcies continue to rock the retail sector. Most corporations have already either raised liquidity by emitting bonds – like the cruise lines – or received government bailouts – like the airlines – but it remains to be seen how long they will be able to survive the current conditions.
The US Government is expected to present a second coronavirus bailout valued at $1 trillion. In March, the first bailout was criticized as being insufficient to prevent massive layoffs and corporate bankruptcies so there is little guarantee the new plan will succeed.
As always,all eyes will turn to the Federal Reserve for additional guidance and stimulus. The Fed’s aggressive response resulted in its balance sheet skyrocketing from $4 trillion to nearly $7 trillion in just a few months. Economists fear this rapid monetary expansion could lead to high inflation. However, rather than lending the funds to businesses in the real economy, the banks who receive the bulk of the newly printed cash are stocking it “on account” in the form of excess reserves. Is this the correct strategy? While inflation may be kept under control, the real economy may not receive the stimulus it needs to stay afloat.
In sum, hopes of a speedy recovery rest on the quick commercialization of a vaccine. On this front, the news is rather promising.
The University of Oxford published early results of a clinical trial demonstrating that “the vaccine induces an antibody response within 28 days […] in a similar range to that in individuals who have recovered from COVID-19”. These results are encouraging but further testing is needed to ensure the results are replicated. In the USA, the National Institutes of Health and Moderna Inc (Nasdaq: MRNA) are entering the final stages of testing for their COVID-19 vaccine which reportedly resulted in the “volunteers, who were given the vaccine in March, developed neutralizing antibodies in their bloodstream, at levels comparable to those who have survived COVID-19”.
The frantic race to discover the cure is heating up and dozens of companies and research institutes are working hard to make it happen. As the global situation worsen, the biotech sector is expected to continue surging higher and the first company to propose a vaccine will reap significant rewards.
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