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.
What's happening: Bullish fund managers are starting to lay down bets that it will be this way for a while. "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."
And 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.
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.
Zoom in: 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.
The last word: It's not really about the fundamentals anymore. "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."