• Harsh Patel, CFA

Caution: Fragility Ahead


If you've been following the stock markets over the past couple of months, you'll be well aware of the strong rebound we saw through April along with a relatively slower uptick in May so far. 


At this point, the risk/reward trade-off for investing in stocks feels tricky. In the digital economy space, a host of stocks have rallied strongly, with some trading at levels higher than they were before COVID was a thing. That leaves us wondering whether there's much further these names can go from here. At the same time, we've seen some financial & real economy stocks bounce back a little, but the ongoing economic downturn has largely negated optimism on that front.


We suspected in April this might a bear market rally, and it seems we've started getting the first hints which suggest that's exactly what it might have been as most indices turned back into the red this week:


Stock Index: past week // year-to-date % changes

  • S&P500: -2.3% // -11%

  • NASDAQ: -1.2% // +0.5%

  • EUROSTOXX: -4.7% // -26%

  • FTSE 100: -2.3% // -23%

  • NIKKEI: -0.7% // -15%

  • HANG SENG: -1.8% // -16%

Where to next?


It's now much more difficult to gauge where we move from here. Uncertainty about the state of the world over the next 3-6 months remains. At the same time, stocks which are relatively insulated from the downturn have been identified and their share prices have seen corresponding gains, if not recovered completely - making it harder to identify attractive investment opportunities in the stock market. And while all this has happened, the set of primary drivers which determine stock market direction is due to change. The Q1 2020 earnings season will start wrapping up over the next couple of weeks, with a lot of the heavyweight earnings already having been announced. This typically means overall equity market focus will start shifting away from "bottom-up" earnings-driven movements back towards "top-down" issues. 


Some of these issues are familiar - think trade frictions between the US & China, trade negotiations between the UK & EU or economic datapoints. These issues - along with updates on monetary policy and fiscal stimulus as well as COVID treatments, vaccines & the easing of lockdown restrictions - should now start coming back into the driving seat when we think about where stock markets might go over the next couple of months. 


As a result, we think the world - and consequently stock markets - will remain in it's current fragile state over the course of the next 6-8 weeks, after which we'll start seeing the real pain inflicted on companies as Q2 earnings season gets underway in mid-July.


For now, when deciding what your best course of action might be, it's worth taking stock of where you are first:

  • Have you been averaging in over the course of the past 6-8 weeks?

  • Do you still have cash left on the sidelines to invest if there's a dip? 

  • Are you taking a long term stance with respect to your investments?

We hope the answer is yes to all of the above - you should be well positioned by now if so. If it's a no, it's worth reassessing your investment decisions, options and strategy so that you're better prepared if / when we have a slight dip in stock markets.

If you're a regular reader, apologies in advance as we might sound like a broken record to you. That said, we still think the digital economy - despite feeling a little overvalued right now - wins over a longer horizon. And in the event of a stock market dip over the next couple of months, we think digital economy stocks should see relatively smaller price decreases too. That makes digital economy names a robust place to start your search for investment options. In addition to this, we think there are individual names out there in the rest of the economy - those with a strong balance sheet, little or no solvency issues and those with a strong brand - which could turn out to be great investments over the long run given their relatively battered share prices today. Happy hunting!


Earnings season next week


Q1 2020 earnings season is still ongoing, so we've picked out the most interesting companies which are scheduled to report earnings next week - we hope there are some names below which you are keeping eye on:

  • 18 May - Panasonic, Ryanair

  • 19 May - Walmart, Home Depot, Imperial Brands

  • 20 May - Target, Experian, Xiaomi

  • 21 May - Nvidia, Intuit, Palo Alto Networks, Generali, HP, Best Buy

Economic data latest


The economic data continues pointing towards a deep recession, with much of the economic pain caused by the pandemic being inflicted on small/medium businesses. We've listed the past week's key data for you to catch up on below, followed by things to look out for next week: 


This week

  • US weekly jobless claims of 2.98m vs. expectations of 2.5m

  • US crude oil inventories shrank by 0.745m barrels vs. expectations of an increase of 4.147m barrels, helping WTI crude prices rally this week

  • UK Q1 GDP -2.0% quarter-on-quarter vs. expectations of -2.5%

  • Germany Q1 GDP -2.2% quarter-on-quarter, in line with expectations 

  • China Industrial Production +3.9% year-on-year vs. expectations of +1.5%

Next week

  • 20 May

  • UK CPI inflation for April. Consensus expectations of 0.9%

  • Eurozone CPI inflation for April. Consensus expectations of 0.4%

  • 21 May

  • US weekly jobless claims

  • US home sales

  • UK Purchasing Managers' Index (PMI) readings - leading indicators of economic activity

  • 22 May

  • UK Retail Sales for April. Consensus expectations of a 16% contraction relative to March

  • German Manufacturing PMI for May. Consensus expectations of a 40.0 reading


And finally...😂😭😂😭


We'll leave you with our quote of the week, delivered eloquently by a man who has arguably the largest sway over your investment portfolio as the equity market shifts focus back towards top-down issues: 


"When you test, you have a case. When you test, you find something is wrong with people. If we didn’t do any testing, we would have very few cases."


- President Donald J. Trump, 14 May 2020


Not sure whether to laugh or cry? That's ok - neither are we 🤦‍♂️



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Evarvest Limited refers to the Evarvest network and / or one or more of its subsidiaries, each of which is a separate legal entity.