Another week of Horrible data (May 4-May 8, 2020)

Risk-on sentiment prevailed in the previous week with all major US indices gaining more than 3% for the week. (SPY/SPX +3.4%, QQQ/NDX +5.7%, IWM/Russell2000 +5.77%, Dow +2.67%)

In the bond world, yield curve steepened with 30 yr Tsy yield +10.8bps WoW vs 10 yr Tsy yield +4bp WoW vs 2yr Tsy yield +3.7bp WoW. US HY OAS tightened by 10bps until Thursday while US IG OAS widened 3bps WoW. Another interesting development here was that Fed Funds Futures for Jan’21 turned negative briefly. So far Fed has been saying they are against the NIRP, let’s see if the bond market forces it’s hand.

If one were to draw an inference from just the above 2 facts (equity markets rising and yield curve steepening), it seems like growth is coming back. Market seems to be looking beyond any bad data point that comes across even if it’s the worst EVER:

  • ISM Non-Manufacturing PMI of 41.8 vs 52.5 last month
  • ADP Employment change of -20.2mm vs -20mm consensus
  • Initial jobless claims of 3.17mm vs consensus 3mm taking overall jobless claims in last 7 weeks to 33mm
  • Continuing Jobless claims of 22.65mm vs consensus 19.9mm
  • Non-farm Payroll of -19.5mm vs consensus -21mm

Why did markets rally with all this bad data? Some say unemployment data are lagging numbers and I agree. But when they say that this is appropriately priced when the S&P is only -9.3% YTD and +1.7% from 1year ago, that is a tough one to agree with.

All risk assets except Banks (KRE +0.6% WoW, KBE +0.6%), Utilities (XLU +0.5%), Staples (XLP +0.9%), Industrials (XLI +1.35%) and Healthcare (+1.6%) rallied hard

  • Semis (SMH +7.2%)
  • Biotech (+6.2%)
  • Consumer Discretionary (+4.5%)
  • Tech Hardware (+6.4%)
  • Homebuilders (+7.3%)
  • Oil & Gas Exploration (+7.2%)

In commodities world, Lumber (+11.6%) and Oil (+24.5%) led the way.

Most market commentators are puzzled by the disconnect between the stock market and reality. Some have started saying, “Stock market is not the economy. The economy is not the stock market”. Other more confident proponents of a solid quick recovery think re-opening will unleash the “pent up demand” bazooka.

We know the situation is not good. I think V-shaped recovery is not possible from my reading of investor calls from 1Q results.

Trump administration re-ignited the optimism for Trade war stuff last week, just before the horrible unemployment numbers. I am not sure how bad the situation really is that they have to again rely on this narrative for markets to keep moving up. How does it gel with US claims of the virus originating in Chinese labs?

From a technicals perspective, S&P is near the 61.8% retracement level again. One trade that has done well is Long Tech/Short S&P and is now probably the most crowded trade. How do we play the current scenario?

  • I would say follow the commodities and design some trades around them as Fed can’t buy commodities or artificially inflate them for long. I am looking at lumber.
  • Traditional stock picking with sector hedges is another way