FOMO is back: Is the S&P 500 stuck in its resistance zone?

Fear of missing out (FOMO) is back. Global equity markets keep climbing the wall of worry. At the forefront is the S&P 500. So far, the re-test of the 2’400-2’600 area has not happened. By the contrary, we keep climbing. This cannot last forever. The technical picture is clear – we must see a pullback, but now fundamental analysts start telling us the same story. If we have learnt one thing at all, we’d tell you the same thing – something else will happen.

Fig. 1: Is the S&P 500 just re-testing its support level?

There are two scenarios: Much lower lows or an overshooting.

It can happen that the optimistic outlook for growth in H2 2020 and 2021 is not materializing. Therefore, we would see much lower levels than 2’400.

Most economists expect that it will take more than a year until global GDP is back at levels seen at the end of 2019. But even that implies a strong H2 2020.

But if all countries need much more time to reach the pre-crisis level, that will significantly reduce not only GDP but also EPS and the S&P 500 together with other global equity markets going much lower than 2’400.

Fig. 2: Economic Output will not reach soon its pre-crisis level

Fig. 3: Government bond buying programs are at extreme high levels

The actual summary of the G4 central bank buying program shows unprecedented levels:

• Fed/ECB/BoE/BoJ have just bought USD 3.4 tn of financial assets in the last 6 weeks; and they will buy a further USD 3.3 tn during the next 6 months
• Politicians are in “whatever it takes” mode. Global fiscal stimulus so far is = USD 7.4 tn = 8.4% of global GDP
• The Eurozone plans to help southern member countries with an additional EUR 1.5 tn program, which would push global fiscal stimulus further up

Therefore, a melt-up of asset prices cannot be ruled out. Personally, we would expect a smaller set back followed by a further climbing the wall of worry. This is under the assumption that the 2^nd wave of the corona virus outbreak will be small. This however is very uncertain. Political pressure is rising. In the US where we still see rising Covid-19 cases the president and some states want to reopen as soon as possible. Let us hope history does not repeat. I.e. during the Spanish flue pandemic, the 2^nd wave was much stronger than the first one. Followed by a human tragedy and by a strong selloff in financial markets.

Fig. 4: China has open, the US wants to open, but it might be too early

This has consequences for the further economic development.

There are 3 main scenarios:

• A fast V-shape recovery starting in H2
• Long lasting recession followed by a financial crisis
• Overheating and inflation pressure

Fig. 5: Spanish Flue and Equity market performance: The real selloff happened during the 2^nd outbreak of the virus

All economic indicators based on survey are showing a continuation of the recession. Forecasts of GDPs keep going down. It seems there is a race to the bottom. Each new publication shows lower figures. Which brings us to the same point as the one we have made with the S&P 500 path forecasts. If all tell you the same thing – expect something else.

To come back to the S&P 500:  the Bull & Bear indicator was always a very good counter indicator and it is still at an extreme bearish level.

Fig 6: The Bull Bear Indicator at its lowest level although we have seen rising prices

That implies that all who wanted to sell are already at the sideline. Recent published statistics about cash holdings do support this view.

Fig 7: Cash levels are at very high levels

So where shall the selling pressure come from?

That is probably well explained by the comeback of acronym FOMO (fear of missing out).

Short-term watch out what happens with the actual resistance level.

But mid-term don’t fight the Fed.

US corporates and US equities do offer the best risk return opportunity. If the Fed and US government will do “whatever it takes” to keep the economy running, we have a very strong safety net for US financial assets.

Similar can be said about the newest intervention in China from the PBoC. Therefore, Chinese equities (A-shares) and most corporate bonds do offer interesting opportunities.

Published: 29/04/20 by Blackfort CIO Dr. Andreas Bickel

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