US stocks have put together two weeks of gains and since the late February crash, the S&P 500 Index has regained 53% of its losses. And the huge positive headline that has driven Wall Street up overnight was news that a Coronavirus treatment is showing signs that could help the world get back to normal faster than it was once expected.
We’re not talking a vaccine because it’s too soon to announce that but there’s always been a hope that a miracle treatment drug might show up sooner than experts were predicting purely because the worldwide government support to find a Coronavirus killer, meant we could be in for a positive surprise.
The drug in question comes from Gilead Sciences, whose share price spiked 9.7%, after revealing that its antiviral drug – remdesvir – performed effectively in a clinical trial. “Nearly all the patients treated with the drug were discharged from the hospital in less than a week,” Businessinsider.com reported.
Of course, these are early days and we could be getting ahead of ourselves but Gilead Sciences isn’t the only drug company looking for a solution. And the Federal Drug Administration in the US has been primed to fast-track any wonder drug that might surface.
Hope springs eternal but the market will always buy first and think later when it comes to a possible miracle drug. But this from State Street Advisors chief investment strategist, Michael Arone, sums up how such news will ultimately be assessed. “It’s far too early to signal the all clear, but what this demonstrates is that coronavirus is a health problem that requires a health solution,” he said. “If we can develop a health solution, I think at least from a market perspective, things will rebound pretty quickly.”
The thinking is that a drug that helps patients recover quickly means the economy gets back to normal faster than expected – and that’s a huge deal. This is especially so when you consider that 22 million Americans have lost their jobs.
That said, economic data is so bad right now that it’s quite meaningless in the short term. That’s why I have not continued my “What I like and What I don’t like” review each Saturday because they’re all dislikes. But if we can see the curves on infection and death rates flattening, as they are, and drug treatments are promising to get us back to work, then the emerging data will start to tell us valuable stories.
In contrast, if we don’t uncover a useful drug and the economic data remains bad in the long term, then we’re in trouble and my Saturday reviews will be mainly “dislikes”. I don’t want to contemplate that!
Remember, if this ‘closed’ economy challenge ends quicker than predicted in early March, when world governments mounted a $US7 trillion rescue plan, then we could see 2020 as the year of a short-sharp recession, followed by what the IMF predicted – a V-shaped recovery! That’s when looking at data to see if a quicker-than-expected rebound will be a really valuable pursuit.
That said, the Gilead trial and success is still a small snapshot of a larger trial and this could be market bulls jumping the gun. But it certainly shows what the market would do on steroids if remdesvir or another convincing drug emerges.
Recall my virus data hunter, Chris Joye of Coolabah Capital Investments (who successfully predicted the flattening of the curves when main-stream media could only give us death and destruction news) has always suggested that a solution to COVID-19 would lead to a big bounce-back for stocks and other beaten-up assets.
“When all is said and done, markets will get what they want through signalling what is and is not acceptable,” he said four weeks ago in his AFR column. “Order will eventually be restored. And this crisis will pass, probably within one or two months. Those who survive will face the investment opportunity of a life-time…”
That’s looking like a good call.
To the market story this week and the S&P/ASX 200 rose 1.9% to finish at 5487.5. That was a four-day period, but over five days it was a 5.4% gain!
A big data point I was interested in was China’s GDP number, which came in down 9.8% for the quarter, which actually was better than expected. This news helped BHP, up 1.59% to $31.28 and Rio put on 3.34% to $91.51.
Economic recovery stocks such as Transurban rose 6.7% on Friday with the ‘miracle drug’ news, while Sydney Airport gained 8.3%.
This Bloomberg chart from the AFR shows the winners and losers but you have to be careful because a lot of these big movers are stocks driven by speculators, who have a much shorter-term view.
For the longer-term players, the banks remain in buying territory, with Westpac, for example, now at $15.87 (it was nearly a $26 stock on February 200. If a drug gets us back to work quicker and the economic collapse is weaker than expected and the rebound in 2021 conforms to the IMF forecasts of a 6.1% economic growth surge, then I suspect our banks will lift their bottom lines.
If Westpac can regain its old price, even over a couple of years, that would be a 64% gain, before throwing in dividends and franking.
Gotta love the Dirty Harry Fed boss
You might have missed this great Coronavirus crash story that comes from Chris Joye, who incidentally is a bond fund manager so he watches what the Fed does very closely. This is what he revealed this week:
“Markets have also been buoyed by the US Federal Reserve’s ‘Dirty Harry moment’ last Friday. Whatever guns the hedge fund bears were bringing to the COVID-19 fight, the dithering Fed chair Jerome Powell has clearly committed himself to out-muscling them.” (This was the guy who told the world that the Fed wasn’t going to do any QE when he first cut rates by 50bps in early March.)
Chris said that last Friday’s decision was tantamount to Powell staring down the shorts and declaring: You’ve gotta ask yourself one question: ‘Do I feel lucky? Well, do ya, punk?’
Clearly, Jerome has been hanging out with Donald Trump over the past two plus years and it has added a bit of mongrel to his monetary policy plays. And aren’t we glad that he’s giving it to those bond vigilantes!
Clint Eastwood would be proud of him.
The week in review:
- At a high level, Charlie Aitken said he believes there are 4 dimensions along which to evaluate a company for potential investment: quality, sustainability of competitive advantage, medium and long-term growth prospects, and valuation [1].
- Tony Featherstone wrote that toll-road operators Transurban Group and Atlas Arteria look good for long-term investors [2].
- The big mining trio of Fortescue Metals Group, Rio Tinto and BHP should be able to pay above-market dividend yields this year [3] despite the impact of the Coronavirus according to James Dunn.
- The 7 stockbrokers monitored by FNArena issued 7 upgrades and 14 downgrades in Buy, Hold, Sell – What the Brokers Say [4] this week.
- In Questions of the Week [5], Paul Rickard answered questions about Santos, Bapcor’s capital raising, the possibility of a run on banks and whether there could be another leg down for the stock market.
On our YouTube channel this week:
- How are the experts investing ahead of the Roaring Twenties? [6] – Switzer TV: Investing
- Mark Bouris says COVID-19 will thump the property market [7] – Switzer TV: Property
- The Treasurer Josh Frydenberg explains the JobKeeper Payment in plain English [8] – Switzer TV
Top Stocks – how they fared:
The Week Ahead:
Australia
Monday April 20 – Household impacts of COVID-19 survey
Tuesday April 21 – Weekly payroll jobs and wages in Australia
Tuesday April 21 – CBA Household Spending Intentions (March)
Tuesday April 21 – Reserve Bank Board minutes
Tuesday April 21 – Reserve Bank Governor speech
Wednesday April 22 – Skilled job vacancies (March)
Wednesday April 22 – Preliminary retail trade (March)
Thursday April 23 – CBA ‘Flash’ Purchasing Managers’ Indexes (Apr.)
Thursday April 23 – Preliminary international trade (March)
Overseas
Monday April 20 – China interest rates (April)
Monday April 20 – US Chicago Fed National Activity index (March)
Tuesday April 21 – US Existing home sales (March)
Wednesday April 22 – US FHFA House Price index (February)
Thursday April 23 – US New home sales (March)
Thursday April 23 – US Initial jobless claims (Week ended April 19)
Thursday April 23 – US Kansas City Fed Manufacturing index (April)
Thursday April 23 – ‘Flash’ IHS-Markit Purchasing Managers (April)
Thursday April 23 – US Consumer Comfort index (Week ended April 19)
Friday April 24 – US Durable goods orders (March)
Friday April 24 – US Consumer Confidence index (April)
Food for thought:
“Don’t tell me what you value. Show me your budget and I will tell you what you value.” – Joe Biden
Stocks shorted:
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.
Chart of the week:
AMP Capital’s Shane Oliver highlighted that fiscal stimulus from G20 countries in response to the coronavirus adds up to over 4% of global GDP:
Recent Switzer Reports:
Thursday 16 April: How do I know which stocks to buy? [9]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.