“If you are going through hell, keep going” Winston Churchill

A sharp rally on Monday, led by the value cyclical based stocks, for a change. After a pull back last week on second wave economic concerns, the rally at the start of this week was driven by hopes of a vaccine, this time from US pharma company Moderna. Europe and the euro were boosted after the announcement that France and Germany had come to an agreement on a 500bn recovery package funded by the European Commission. European equities up over 5% on the day.

Jerome Powell appearing before the Senate Banking Committee on Tuesday,  further reassured equity markets that the Fed will introduce further measures to support the US economy, at the same time warning that the downturn could last longer than forecasters expect.

Equity prices have remained range bound over the past month, as we expected. There has been some signs of a modest bottoming of expectations of economic reports. The Citi economic surprise index, which understandably fell off a cliff, has picked up in recent days.

As lock downs ease one would expect something of a pick up in economic data. The next question will be how quickly will the consumer head back to pubs, shops and clubs when they open? Consumer sentiment has been hit hard. The Michigan consumer sentiment index has fallen around 25% year on year, however there has been a modest tick up in May as retailers attracted spenders with discounted stock.  Despite these gains, personal financial prospects for the year ahead continued to weaken, falling to the lowest level in almost six years.

Sentiment amongst investors having started the year in very bullish mood is now much more cautious. The latest Merrill Lynch investor survey revealed investors are overweight in heathcare, cash and bonds, underweight equities and particularly energy. Fund managers now back either a U shaped or W shaped recovery.

If markets move in the direction that causes the most pain, hopes for a vaccine will fade reducing the attractiveness of an overvalued heathcare sector. Equities will trade higher, if the lock down eases and there is no initial signs of a second wave. The sector rotation in value stocks that took place on Monday will continue.

Our bet is range bound will continue, on the good days vaccines and a reduction in the number of cases will boost sentiment. On the bad days economic fears will cause a set back. At some point one or the other of those will win over the day.

Sentiment indicators have their admirers and detractors, a new one was kindly introduced to me this week. The trading activity of US senators. Their track record looks mixed at best, however they did call the virus threat. As you can see from the chart, they have been large net sellers in recent days. Do they know something we do not? Chart from Quiver Quantitative