US Markets Fall as Vaccine Tests are Halted

Vaccine makers pause tests for safety reasons

U.S. equity markets started the day under pressure and stayed that way, closing in the red for the first day in four. That happens from time to time — lest we forget. Tech stocks, which led the gains Monday, softened today as investors took their fingers off the buy button.

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Disappointing news from the vaccine front may have cooled off the enthusiasm. Both Johnson & Johnson and Eli Lilly have been forced to pause their vaccine tests due to health and safety concerns. 

Bank earnings, while robust, may have also sent a chill through the markets as JPMorgan Chase and Citi continue to bolster their balance sheets with loan loss reserves in case the economy swoons again. With more than $34 billion in loan provisions, JPMorgan CEO Jamie Dimon said he has no idea if that's the right amount given the uncertainty around the pandemic. "If there are good outcomes, we're over provision by $10 billion. If there's a double-dip recession, we could be under provisioned by $20 billion," he said.

Apple (AAPL) rolled out its new iPhone 12 today, along with a bevy of other products and services. Shares of Apple had been sprinting higher in anticipation of today's unveiling, but sold off on the news until investors have a clearer picture of the future.

From oversold to overbought quickly = smiling bulls

Quick Reversals Historically Point to Higher Returns

2020 has been a year of stock market extremes. We had the fastest bear market and bull market in history inside one of the fastest recessions.

The last two weeks have been another case in point when we look at the moving averages of stocks inside the S&P 500. According to LPL Financial, more than 90% of the stocks in the S&P 500 were beneath their 10-day moving average two weeks ago, and now more than 90% are above it. This type of oversold to overbought swing is quite rare, but it is very bullish, according to history. One year later, the S&P has risen 14 out of 15 times and is up more than 18% on average. 

Of course, past results are no guarantee of future returns — especially in 2020 — but the extreme fear and greed on exhibit by investors is breathtaking.

S&P 500 price vs iShares MSCIEmerging Markets ETF price vs. iShares MSCI ETF price

Emerging Markets Sprint to the Front

Speaking of reversals, the rebound in emerging market equities has also been breathtaking. The U.S. stock market get much of our attention given our location, and China's stock market has also been making a lot of noise, but emerging market stocks, as tracked by the iShares EEM ETF, have hit record highs ahead of the S&P 500 and MSCI China Index.

When you look inside that ETF, you get a better understanding of why that's happening. Here are its top five holdings:

  • Alibaba 
  • Tencent
  • Taiwan Semiconductor
  • Samsung
  • Meituan Dianping

E-commerce, semiconductors, and electronics. This is the 21st century economy.

IMF World Economic Outlook October 2020

Global Growth Spurt

The Good News

In its semiannual World Economic Outlook, the International Monetary Fund (IMF) projected a global economic contraction of 4.4% in 2020, followed by growth of 5.2% in 2021. The forecast for 2020 is slightly stronger than the 5.2% contraction the fund predicted in June. That's the good news.

The Not-So-Good News

The not-so-good news is that the IMF is very concerned about the impacts of a resurgence in the virus before vaccines are widely available and the massive piles of debt that coronavirus-stricken economies have built up to weather the pandemic.

From the report: "Considering the severity of the recession and the possible withdrawal of emergency support in some countries, rising bankruptcies could compound job and income losses. Deteriorating financial sentiment could trigger a sudden stop in new lending (or failure to roll over existing debt) to vulnerable economies. And cross-border spillovers from weaker external demand could amplify the impact of country-specific shocks."

Companies that borrowed heavily at low interest rates to weather the crisis may have trouble paying their debts, increasing the risk of bankruptcies, the report said. The IMF is particularly worried about smaller companies that don’t have easy access to capital markets, especially in developing economies.

The IMF says the impact could be especially severe in Europe, where small- and medium-size firms account for more than half of total output and two-thirds of employments, according to the report. A look at bankruptcies around the world from the Atradius Group in 2020 does not bode well if there is a setback.

Article Sources
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  1. International Monetary Fund. "World Economic Outlook."

  2. Atradius. "2020 insolvencies forecast to jump due to Covid-19."

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