All Clear for Stocks?

With government officials beginning to lay the foundation for a re-opening of the economy, along with good news about a potential cure for the virus, the markets have begun to see light at the end of the tunnel.  This turn of events is not by itself an all-clear signal.  But, it does allow room for stocks to move up in the next few weeks.

Stocks could take another big hit if /1/ the re-opening is delayed substantially, /2/ the re-opening is more limited than expected, /3/ the recovery is slower than expected, or /4/ drug trial tests disappoint. 

Meanwhile, the stock market has been reacting to two opposite factors — /1/ current economic weakness stemming from the virus versus /2/ hope for a re-opening of the economy.  The latter should dominate in the next few weeks.  Concomitantly, weak data will likely be discounted as temporary or ignored as history. 

The ups and downs in the market have reflected shifting news about these two factors. For example, last Thursday, stocks started down because the US economic data — Unemployment Benefits Claims and Housing Starts — were weak.  But, there were hints in these data that the worst may be over.  The market reversed to the upside in part because of these hints and also because Trump was going to release a plan to re-open the economy gradually that afternoon.  But, at mid-day when Governor Cuomo extended the NY shutdown to mid-May, the market turned down.  It ended little changed on the day -- only to jump after hours and on Friday on favorable news about the Gilead drug.   

At this point, the hope for a re-opening should dominate in the stock market for the next few weeks.  Government officials are focusing on a re-opening in May, albeit partial and gradual.  Good news on the drug/vaccine scene make this scenario more likely.  And, more drug trial tests are expected by month end.  There shouldn’t be much selling with this “risk” in play.

This week's US economic data calendar is light, but should reflect the economy's shutdown for the most part.  Consensus looks for a drop in the April Markit US Mfg PMI to 38.5 from 48.5 in March.  Initial and Continuing Claims are expected to stay high, although down from the prior week.  Consensus expects Initial to fall to 4 Mn from 5 Mn in the prior week.  Consensus sees -11.8% m/m in Total and -5.0% in Ex Transportation Durable Goods Orders.  But, there is mixed evidence with regard to Nondefense Capital Goods Ex Civilian Aircraft Orders. So, an increase cannot be ruled out.