SPX has rebounded by as much as 27% since 23 Mar 2020, from around 2200 to 2846 on 14 Apr 2020, driven by unprecedented massive stimulus by the Fed. However, last night’s dire economic numbers (retail sales and factory output) indicate the recent rebound is more likely a dead cat bounce instead of a recovery. Despite Trump saying he will announce the relaxing of stay-home guidelines this week, in view of a plateauing of cases in the US, the fact remains – a global recession is here, as indicated by the IMF.
The region around 2800 is regarded as a key Fibo retracement level, and we are likely to see renewed selling/profit-taking around the 2800-2900 levels. A key indicator is whether the index can hold above 2800. Failure to do so, would prompt more selling and drive the index lower.
One positive is that tech stocks have weathered the past 3 months better than others, as seen below in the relative performances between S&P 500, Dow Jones Industrial Average and Nasdaq. This ties in with our longer-term bullishness in tech-driven secular growth themes such as cybersecurity, big data and robotics, all of which we carry on our digital platform iAdvisor.
One key play would be gold. As central banks around the globe continue expand balance sheets, embark on massive stimulus measures and drive interest rates to near-zero, the demand for gold as both a safe haven instrument and a store of value continues to be high.
Spot gold has recently risen above the $1700/oz resistance; if it manages to close the week above $1700/oz, this would be a bullish signal indicating more upside towards $1800, an important level since 2012 as shown in the chart below.
The chart below helps to put things in perspective, the last time the Fed cut rates to near-zero in 2008/2009, spot gold (denoted by the white line) proceeded to gain more than 150% over the next 2-3 years.
Buying physical gold would be best, in our opinion, but there have been reports of physical gold shortage due to overwhelming demand and supply chain disruptions. As such, even buying gold ETFs entails a higher risk.
Another way to gain exposure to gold would be to invest in gold mining companies. Of course, the risks that come with this are more equity driven, hence we focus on higher quality gold mining companies that are liquid and have lower debt. A portfolio of gold mining companies can be accessed on iAdvisor as well.
This chart is interesting as it gives a good idea of how far along each country is with regards to “flattening the curve”. Iran, Italy, Hong Kong and Germany have all experienced a considerable amount of days in which the rate of daily increase has dropped steadily. The recent surge in Singapore’s cases in April, following a plateau in March, highlights how vulnerable a country can be when there is a small lapse in containment measures.
It should serve as a warning to investors that a government’s eagerness to re-open and kickstart its economy can expose a country to a new wave of infections, if there is a sharp lapse in containment measures. Social distancing laws are likely to be here to stay for a while more, and this means that economies will take longer to recover.
Sources: All images from Bloomberg