US stocks slumped only slightly last week amid a slew of negative economic data and headlines.
It could’ve been much worse, Evercore ISI analysts led by Dennis DeBusschere wrote in a Sunday note.
Here are five reasons that stocks didn’t tank last week, according to Evercore ISI.
on Business Insider.
US stocks slumped last week, with the S&P 500 falling 2.3% amid a slew of negative economic data showing the impact of coronavirus-induced shutdowns.
But it could’ve been much worse, Evercore ISI analysts led by Dennis DeBusschere wrote in a Sunday note.
That’s because last week brought a number of downbeat headlines that had the potential to move stocks lower, according to DeBusschere. Unemployment insurance filings surged to 36.5 million in eight weeks, retail sales fell a record 16.4% in April as consumers froze spending, and Federal Reserve Chairman Jerome Powell said that the US might need more fiscal stimulus to get through the economic downturn.
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Some tensions between the US and China were revived, and a group of legendary investors including Stanley Druckenmiller and David Tepper called the market overvalued. In addition, as some states begin to reopen their economies from shutdowns to contain COVID-19, there are fears that a second wave of cases could be on the horizon.
Still, DeBusschere sees a number of factors that supported stocks, keeping them from a rout amid the negative news.
“Human ingenuity will allow for a gradual resumption of economic activity,” he wrote. “We lean toward positive outcomes.”
Here are the five reasons that the stock market didn’t tank last week, according to Evercore ISI.
1. S&P 500 valuation is not extreme
“Stocks look inexpensive on a price to cash return, price to cash flow and implied equity risk premium basis (i.e. profitability supported cash return),” said DeBusschere.
“Those metrics tell a different story than PEs. Unlike other periods, the valuation measure you choose could severely skew your view of market risk reward.”
2. Estimated rates of COVID-19 transmission are declining
Estimated transmission rates of the coronavirus are declining, which is “really important,” according to DeBusschere.
In addition, “hospitalization rates are declining and new COVID case growth is trending lower across Europe and Asia,” he wrote, adding, “Second wave data is positive thus far with few signs of virus resurgence.”
3. Some experts have become more positive about vaccines
Josh Schimmer, another analyst at Evercore ISI, has become “MORE positive on vaccines,” DeBusschere wrote. Other experts have also become more optimistic, he added.
“Josh is ‘confident the vaccines can arrive by year end – if we need them,'” said DeBusschere.
“People trading on cluster headlines may be missing the progress on this front.”
4. Hedge funds are short the market
“Hedge funds are net short and only 24% of respondents to the latest EISI investor survey see the next 10% move in stocks as up,” DeBusschere said.
5. Improving economic data
Economic data from China is improving, according …read more
Source:: Business Insider