If you’re unsure about what the rest of this chaotic year will bring to the markets and the economy you’re not alone. Natixis surveyed 36 economists, strategists and portfolio managers from its affiliated investment managers and found they were almost split about whether the great risks for the economy portend a selloff or a rally in the last months of the year.
Fifty-three percent of the strategists foresaw selloff, while 47% expected a continued rally through the end of December.
The bears continue to point to the great disconnect between the stock market and the economy. After the S&P 500 plunged to its 2,237 nadir on March 23—when the economy absorbed the shock of the coronavirus—stocks have since bounced back almost to pre-pandemic levels, the S&P 500 rising to around 3,500 at the end of August. By contrast, the U.S. economy shrank by almost 32% in the second quarter.
Market skeptics have said that the rally is driven largely by tech stocks, and that it’s unsustainable—with bubble-like price-to-equity ratios and shrinking equity risk premiums.
However, speaking in a webinar yesterday, Esty Dwek, head of global market strategy at Natixis Investment Managers Solutions, pointed to things that could possibly prop up stocks, specifically the fact that central banks and the U.S. government have created strong liquidity and there’s a lot of cash still sitting on the sidelines with nowhere else to go but the equity market, creating a technical environment that’s good for these securities.
“So many people have missed the rally,” Dwek said. “So much cash is sitting on the sidelines, that there’s not many places for you to put it.” Indeed, the Investment Company Institute had about $4.49 trillion sitting in money market fund assets for the week ending September 2 (that’s down from $4.789 trillion on May 20). The huge amounts of money parked in cash means that many people have likely been feeling left behind by the rally and might want to put their money back to work when they realize they aren’t participating.
Dwek said that many of the risks have been absorbed and accounted for by stocks, including the U.S. election, which she said would likely be neutral for equities in many ways: A Joe Biden victory could augur tax increases but could also soothe international trade relations.
“It’s not surprising we have that sort of split view” on the market, said Jack Janasiewicz, portfolio manager and strategist at Natixis Investment Managers, who also laid out a more bullish sentiment in the webinar. “I’m a little bit more on the constructive side because of that liquidity backdrop. The amount of central bank support that we’ve had globally has been unprecedented. On top of that the fiscal support has been unprecedented as well, and until either one of those two pillars is really removed from that backdrop, I think it’s tough to get too overly bearish.”
Still, Janasiewicz said that the market has bifurcated into winners and losers, where the companies that can cope with the virus and continue to operate will thrive—“things like tech, entertainment, biopharma, online retailers, the work-from-home environment.” That “K” shape in the market splitting winners and losers will likely continue to play out until there’s a coronavirus vaccine, he said.
The outsize role of tech in the market, at around 22% of the S&P 500, has bears worried, however. Can a handful of big name stocks keep propping up the market, and how vulnerable is it if they catch cold?
Janasiewicz says that comparing the situation to the dot-com bubble is wrong.
“It’s easy to throw the word bubble around. We hear that quite a bit,” said Janasiewicz. “You might think that some of the valuations of the tech stocks are overvalued and I might argue I’m actually thinking they are undervalued given the quality of the balance sheets, given that they have a ton of cash [and] no debt. [They are] buying back stock. Some of these companies [have] almost monopolistic like qualities. So when I factor all those things in, they should be trading at a higher premium to the market. … That’s the opinion part of the valuation story.
“Ultimately when you look at the market cap, especially the big five names that come up, they account for over 25% of the market, but they’re also pulling almost 20% of total earnings per share of the S&P 500. So the quality of the earnings are there.”