Joshua Roberts/Reuters
Tomorrow is a day of remembrance of those who made the ultimate sacrifice to defend the United States and its ideals. Let’s not forget the famous words of John F. Kennedy, which in these times ring especially true:
“Ask not what your country can do for you, ask what you can do for your country.”
The week ending 5/22 saw weekly gains across the three major indices. The S&P 500 and Dow added 3.2% and 3.3%, respectively, for the week, while the Nasdaq climbed 3.4%. The S&P, which closed at 2,955.45, is now ~5.9% away from reaching its March high of 3,130.12 points.
Positive activity in equity markets has been a result of increasing optimism for various covid-19 vaccine candidates, including one being developed by Moderna. On Monday it announced positive results from a small preliminary trial which caused its stock price to shoot up 30%. Not too long thereafter the company announced a stock offering later that day to take advantage of their higher valuation, ostensibly to bankroll further vaccine development. After calls for the company to release additional data from the trial were largely ignored, its stock price subsequently slumped later in the week. Despite this episode, along with that Gilead Sciences a few weeks ago, there are over 100 ongoing projects dedicated to finding a covid-19 vaccine, and the general feeling is that with the added pressure and urgency that exists with this particularly disease, the typical timeline for achieving a commercially- viable vaccine is expected to be drastically accelerated, and inevitably one of these projects will bear fruit.
In a well-articulated piece on medium.com, Daniel McMurtrie, founder and CEO of Tyro Capital Management, plays devil’s advocate and argues a bull case. Despite the cognitive dissonance between rising unemployment and rising equity prices, he explains why this is, and why it’ll keep going. As I’m sure we’ve been seeing increasingly, “virus and its impacts are increasingly being normalized and tolerable for Americans after 2 months stuck inside.” One needs to look no further than the filled-to-capacity Wisconsin bars or the many cases of people refusing to wear masks to understand that many are willing to take the risk of contracting covid if it means saving the economy, or more simply, trying to live normally again.
Low interest rates and fiscal stimulus that has resulted in many people earning more than they had been pre-covid is proving to be very bullish for equities, as market participants have realized the government is willing to do anything it takes to avoid a liquidity crisis and backstop essentially the entire economy. He does note there are institutional bears out there, but they’re sitting on the sidelines right now, and that retail investors are participating in the upside more than any other investor group.
Ultimately, he argues, as long as the government continues to provide fiscal stimulus, businesses continue to reopen, and the covid case count/mortality rate remains low, then we will see another bull run in equities. However, he also notes that if any of these things does not happen, then the bull case collapses and we’ll very much re-enter another bear market.
In a recent podcast, Venture Stories by Village Global, McMurtrie explains that no matter what happens, in the long-term, all of this will have more serious implications and will bring about existential questions, not least of which is “if we know the government will always step in and keep companies from failing in future crises, then there will no longer be risk in equities, and if that’s the case, why should investors be rewarded for their exposure in them?” He also touches on value investing, to which he says “the whole system is on life support right now.” To summarize his words: “what’s the point in identifying value opportunities when, if the government stops its stimulus, ‘look out below’?”
It has become increasingly apparent the beta for equities as a whole has approached 1 as they have become dependent on the macro picture, particularly government intervention. House Democrats are currently negotiating a second round of stimulus checks but it is expected this bill will have a tougher time obtaining approval by Senate, which is hesitant to sign off on an additional round “unless it is truly needed.” Additionally, Senator Mitch McConnell has signaled he has no intention of extending the $600 federal increase to state unemployment benefits, which are set to expire at the end of July.
In sum, the three things to look for now are (1) data surrounding business re-openings, (2) any significant changes in covid-19 case counts and (3) government actions with regards to ongoing monetary and fiscal stimulus.