Jul 9, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

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🚨 Join me and Axios national political reporter Alexi McCammond today at 12:30pm ET for conversations with California Lieutenant Governor Eleni Kounalakis, Stockton Mayor Michael Tubbs and Cupcakin' Bake Shop founder Lila Owens for a virtual event on small businesses during the coronavirus outbreak.

🎙 “You just have to accept that some days you are the pigeon, and some days you are the statue." - See who said it and why it matters at the bottom.

1 big thing: Ignore the economy! Buy stocks!

Illustration: Eniola Odetunde/Axios

U.S. economic data are crumbling as increasing coronavirus cases keep consumers at home and force more cities and states to restrict commerce, but the stock market has continued to rise.

  • And bullish fund managers are starting to lay down bets that it will be this way for a while.

What's happening: "The reason is: You have monetary and fiscal policy pushing the economy out of a problem and that is very, very bullish," Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management, tells Axios.

  • "When you have these extreme accommodative policies it is because there is a problem in the economy. Investors historically focus on the problem and are cautious, yet that’s when you want to get most optimistic."

The big picture: It isn't just U.S. equity prices jumping — copper prices are closing in on their highest levels since the coronavirus pandemic began, the dollar is falling against the euro and traditional risk-on plays like the Australian and New Zealand dollars, and Brent crude oil is up 5% so far this month, having gained 95% over the last three.

Between the lines: Investors are counting on Congress to pass a new $1 trillion-plus coronavirus relief bill later this month and are confident the Fed will continue to carpet bomb markets with liquidity through its unlimited quantitative easing and corporate bond-buying programs should stock prices fall.

  • While the U.S. remains "in the throes of the pandemic," expansionary monetary and fiscal policy is providing "a potential Goldilocks moment for investors,” Seema Shah, chief strategist at Principal Global Investors, said in a note to clients.
  • Bank of America on Tuesday recommended investment-grade bond buyers take on bottom-of-the-index BBB-rated bonds and even suggests "some out-of-index exposure to BBs."

Yes, but: Many investors warn of various canaries in the coal mine.

  • The extreme imbalance on the stock market has pushed the Nasdaq to its greatest advantage over the S&P 500 since before the dot-com bubble burst and the Nasdaq's price-to-earnings and price-to-sales ratios are at the highest since then as well.
  • The Cboe's volatility index, despite the consistent gains, is about 41% above its historic average and double its February low.

The last word: "Next year when governments are not responding and the problem’s behind us, I suspect that the level of optimism will grow but that’s actually a less attractive time to be in equities," Morgan Stanley's Slimmon says.

  • "You’ve seen this movie before; it always ends this way."
Bonus chart: And buy gold!
Expand chart
Data: FactSet; Chart: Axios Visuals

Despite holding in a tight range through most of the second quarter, gold has broken higher since late June and “seems to have recovered its mojo,” Ross Norman, CEO of Metals Daily, told MarketWatch.

  • The precious metal stayed above the $1,800 level and hit its highest in nearly nine years Wednesday.

What's happening: Gold is “neither responding to either the U.S. dollar nor the virus, but the second quarter economic impact,” of the massive M2 money supply growth leading to concerns about future inflation, debt and negative real yield on U.S. Treasuries, Norman added.

Double bonus chart: Ignore earnings!

Data: FactSet; Chart: Naema Ahmed/Axios

During the second quarter, the median estimate for S&P 500 companies' earnings per share declined by 37% while the index gained nearly 20% in price, according to data from FactSet.

  • The earnings decline is on pace to be more than 10 times the average decline in bottom-up EPS estimates over the past 10 years and the largest in a quarter since FactSet began tracking the data in 2002.
  • The previous record was -34.3% in Q4 2008.

One level deeper: All eleven sectors recorded a decline in their bottom-up EPS estimate during the quarter, led by the Energy (-488.0%), Consumer Discretionary (-122.5%), and Industrials (-85.7%) sectors.

Of note: "So far this year, the five largest stocks on the S&P 500 — Apple, Microsoft, Alphabet, Facebook and Amazon — have rallied double digits, but just one of the 50 smallest S&P 500 is in positive territory," per CNBC.

2. Catch up quick

Joe Biden plans to deliver an economic speech outlining what are expected to be moderate policy proposals today in Scranton. (Bloomberg)

The so-called reopening trade is reversing as coronavirus infections in the U.S. surpassed 3 million. While the S&P is roughly flat over the last month, some airline, cruise ship and casino stocks are down more than 25%, and an index of bank stocks is off nearly 20%. (WSJ)

United Airlines is considering terminating almost half its staff and doesn't expect further government support to cover staff costs beyond Oct. 1. (WSJ)

3. The myth of closing the wealth gap by being "model minorities"

A prevailing myth about the wealth gap between white and Black Americans is that it could be closed if Black people valued hard work and education like so-called model minorities, typically Asians and other recent U.S. immigrants.

  • But data show that to be untrue.

Reality check: A 2014 Bureau of Labor Statistics study finds that across races in the U.S., "Once families decide to invest in their children’s higher education, little difference exists in the level of expenditures between racial and ethnic groups."

The big picture: The success of recent immigrants and "model minorities" has much to do with U.S. immigration laws. Since 1965, the U.S. "has given preferential admission to those with higher-than-average levels of education; white-collar, professional, and technical employment; and thus household incomes," University of Texas history professor Madeline Y. Hsu wrote in 2015.

  • Even as newcomers, "'successful' immigrant groups actually retrieve a comparable class position as the one they held in their country of origin," the Samuel DuBois Cook Center on Social Equity notes.

Between the lines: A 2019 study from Georgetown finds wealth is a better predictor of college acceptance and future success than intelligence or high test scores.

The intrigue: Research also shows that post-graduate education helps Black Americans less than it does white or Asian Americans to attain wealth and higher incomes.

  • "The median family incomes of all nonwhite groups trailed their equally educated white counterparts," a 2017 St. Louis Fed study found.

Worth noting: The "model minority" myth also hurts these groups, studies show, in part by lumping diverse groups who have significantly different economic and educational outcomes together, and by putting undue stress on members of those groups.

4. Wall Street giants plan more active role in climate fight

Illustration: Sarah Grillo/Axios

Axios' Amy Harder writes: The Rocky Mountain Institute (RMI) is launching a center focused on climate that will be supported by Wells Fargo, Goldman Sachs, Bank of America and JPMorgan Chase.

Why it matters: Banks have increased their rhetoric on the threat of climate change recently, but they still finance billions of dollars for the oil, natural gas and coal industries, which account for 80% of the world’s energy consumption.

  • This initiative is the latest sign of how the financial sector is (slowly and unevenly) embracing a transition to cleaner technologies.

How it works: The Center for Climate Aligned Finance will, among other things, try to help fossil-fuel companies and other carbon-intensive sectors aggressively cut emissions with the input of banks and shareholders.

  • RMI is directing 10 employees to work on the initiative and plans to hire more, which will be the bulk of the banks' financial role.
  • Paul Bodnar, managing director for the group’s climate finance, said he hopes the initiative would build on the Poseidon Principles, a framework launched last year that integrates climate considerations into shipping finance, which RMI was also involved in helping craft.

But, but, but: Details were hard to come by, including how much money the banks were putting toward the effort. During a press call Wednesday, no bank officials said explicitly that they would change their lending and investment practices based on the initiative.

Go deeper: Read the full article.

Dion Rabouin

Thanks for reading!

Quote: “You just have to accept that some days you are the pigeon, and some days you are the statue."

Why it matters: On July 9, 2001, "The Office," a mockumentary created by Ricky Gervais and Stephen Merchant, premiered on BBC Two in the U.K. Gervais' character David Brent delivered the line.