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Business

The world’s most accurate economist says a full US recovery is unlikely before 2022 — and warns of a stock-market correction before year-end

  • Christophe Barraud, chief economist of the broker-dealer Market Securities, has been ranked Bloomberg’s most accurate forecaster of US economic data eight years in a row. 
  • He told Business Insider that the US won’t return to its fourth quarter 2019 GDP of 2.1% until at least 2022, and for some European countries, a recovery won’t happen until 2023. 
  • “It will take a long time for life to return to normal,” Barraud told Business Insider.
  • Read more on Business Insider. 

The US economy has a long road of recovery ahead from the shock of the coronavirus pandemic, and that could weigh on the stock market’s epic rally, according to Christophe Barraud, chief economist of the broker-dealer Market Securities.

The pandemic slammed the US economy, putting millions of Americans out of work and leading to a 5% slump in gross domestic product in the first quarter of 2020. And, it’s going to get worse — economists estimate that US GDP will slump more than 30% in the second quarter, before returning to growth at the end of the year. 

A recovery to the pre-pandemic level won’t happen overnight, according to Barraud. 

“It will take a long time for life to return to normal,” Barraud told Business Insider. Even if there is a vaccine by the end of the year, it likely wouldn’t be distributed until 2021, leaving a long time for the US to grapple with the virus. 

Because of this, he said that the US won’t return to its fourth quarter 2019 GDP of 2.1% until at least 2022, and for some European countries, a recovery won’t happen until 2023. 

Barraud has a track record of getting it right. He has been ranked Bloomberg’s most accurate forecaster of US economic data eight years in a row. He’s also been ranked as a top economist for the euro-area since 2015, and for China since 2017. 

Read more: Bank of America identifies 3 indicators that could make or break the stock market this summer – and warns they’re all deteriorating fast

Uncertainty could spark market correction 

As the US economy recovers, Barraud sees much uncertainty that could lead to a correction — meaning a drop of 10% or more — for stocks in the second quarter. This would thwart the market’s recent momentum — the S&P 500 just posted its best quarter since 1998 and the Dow Jones industrial average had its best quarter since 1987. 

“Markets are not pricing in a lot of risk,” said Barraud, adding that this may be due to dovish fiscal policy, or the potential for another round of stimulus in the short term as countries deal with the virus.

He also said that market structure has changed, with some of the rebound in the second quarter driven by heavy buying by retail investors, hedge funds, and commodity trading advisers. 

But that could change, he said. Market focus could shift in August and start looking more closely at the presidential election, and what that means in terms of fiscal policy, trade policy, and more. That could lead people to take some profits, and market structure might revert back to what it looked like before coronavirus, Barraud said. 

Read more: GOLDMAN SACHS: Buy these 13 stocks that are poised to crush the market within the next 2 weeks as earnings season gets underway

Risks include: 2020 election, earnings, and COVID-19

In addition to the election, he sees the upcoming earnings season and a potential second wave of COVID-19 as events that could pull markets lower. 

“At this point people look a little optimistic about EPS for next year,” said Barraud, adding that analysts and investors are expecting a V-shaped recovery and aren’t pricing in the potential risks, such as increased taxes, that could come as a result of the presidential election in November. 

“The market could react because at this point there is no room for disappointment,” he said.  

In addition, because a coronavirus vaccine isn’t likely to be distributed in the US until next year, there is “still some time for a second wave, which would be very damaging,” he said. This could raise further uncertainties about the employment situation in the US, as well as stocks going forward, according to Barraud. 

“My advice would be to be cautious from August, maybe take some protection,” Barraud said. 

Read more: ‘We may have a blow-up’: Famed investor Jim Rogers explains how central bank ‘madness’ has the stock market hurtling towards another crash

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Business

Sharp Pullback By Banking Stocks Weighing On Wall Street

Following the rally seen going into the close of the previous session, stocks have pulled back sharply during trading on Friday. The major averages have all shown significant moves to the downside.

The major averages have seen further downside in recent trading, hitting new lows for the session. The Dow is down 573.67 points or 2.2 percent at 25,171.93, the Nasdaq is down 207.30 points or 2.1 percent at 9,809.70 and the S&P 500 is down 56.22 points or 1.8 percent at 3,027.54.

Banking stocks have helped to lead the way lower after showing a strong move to the upside in the previous session. Reflecting the weakness in the sector, the KBW Bank Index has plunged by 5.3 percent.

The pullback by banking stocks came after the Federal Reserve said the nation’s biggest banks are healthy but could suffer up to $700 billion in losses on soured loans if the economy languishes.

The Fed ordered certain banks to cap dividends and suspend share buybacks to conserve funds.

Banking stocks rallied on Thursday amid news U.S. regulators plan to ease banking regulations, including allowing banks to more easily make investments in riskier funds such as venture capital funds.

Significant weakness has also emerged among airline stocks, as reflected by the 4.7 nosedive by the NYSE Arca Airline Index.

Energy stocks have also come under pressure amid a decrease by the price of crude oil, while steel, brokerage and telecom stocks have also moved notably lower.

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Friday. Japan’s Nikkei 225 Index jumped by 1.1 percent, while Australia’s S&P/ASX 200 Index surged up by 1.5 percent.

Meanwhile, the major European markets are turning in a mixed performance on the day. While the German DAX Index has dipped by 0.3 percent, the French CAC 40 Index is up by 0.5 percent and the U.K.’s FTSE 100 Index is up by 0.8 percent.

In the bond market, treasuries have shown a strong move to the upside in morning trading. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, is down by 2.6 basis points at 0.648 percent.

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Business

U.S. Stocks Move Sharply Lower As Coronavirus Concerns Resurface

Stocks moved sharply lower over the course of the trading day on Wednesday, more than offsetting the upward move seen over the two previous sessions. The tech-heavy Nasdaq pulled back well off yesterday’s record closing high.

The major averages climbed off their worst levels of the day but still posted steep losses. The Dow plummeted 710.16 points or 2.7 percent to 25,445.94, the Nasdaq tumbled 222.20 points or 2.2 percent to 9,909.17 and the S&P 500 plunged 80.96 points or 2.6 percent to 3,050.33.

The sell-off on Wall Street came as it seemed traders could no longer ignore the spiking number of new coronavirus cases in several U.S. states.

Fueling the renewed concerns, Florida and California both reported their single biggest daily increases in new cases of COVID-19.

Florida’s Department of Health confirmed 5,508 new cases on Tuesday, while the California Department of Public Health reported an additional 7,149 cases.

New York Governor Andrew Cuomo also announced that out-of-state visitors coming to New York, New Jersey and Connecticut from regions with high COVID-19 rates will be required to quarantine for 14 days.

A CNBC analysis of data compiled by Johns Hopkins University found the nation’s seven-day average of daily new Covid-19 cases spiked more than 30 percent compared with a week ago.

During congressional testimony on Tuesday, White House health advisor Dr. Anthony Fauci warned of a “disturbing surge” in coronavirus infections.

President Donald Trump has repeatedly blamed the jump in coronavirus cases on increased testing and doubled-down on his suggestion that testing should be slowed.

With the exception of the sharp pullback seen earlier this month, traders have largely shrugged off the concerns about the increase in coronavirus cases amid continued optimism about a quick economic recovery.

Sector News

Airline stocks saw substantial weakness amid concerns about the impact of the new quarantine requirements in New York, New Jersey and Connecticut, with the NYSE Arca Airline Index crashing by 7.7 percent.

Substantial weakness was also visible among energy stocks, which moved sharply lower along with the price of crude oil. Crude for August delivery plunged $2.36 to $38.01 a barrel.

Reflecting the weakness in the sector, the Philadelphia Oil Service Index plummeted by 7.9 percent, the NYSE Arca Oil Index dove by 5.8 percent and the NYSE Arca Natural Gas Index tumbled by 4.9 percent.

Banking stocks also showed a significant move to the downside over the course of the session, dragging the KBW Bank Index down by 4.8 percent.

Steel, brokerage, chemical and networking stocks also saw considerable weakness on the day, reflecting a broad-based sell-off on Wall Street.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region turned in a mixed performance during trading on Wednesday. Japan’s Nikkei 225 Index edged down by 0.1 percent, while China’s Shanghai Composite Index rose by 0.3 percent.

Meanwhile, the major European markets all showed substantial moves to the downside on the day. While the German DAX Index plunged by 3.4 percent, the U.K.’s FTSE 100 Index and the French CAC 40 Index tumbled by 3.1 percent and 2.9 percent, respectively.

In the bond market, treasuries moved higher over the course of the session after seeing initial weakness. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 2.5 basis points to 0.684 percent.

Looking Ahead

Trading on Thursday may be impacted by reaction to the latest weekly jobless claims report as well as data on durable goods orders in May.

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Economy

Solar Stocks at Cusp of Long-Term Uptrend

Solar stocks are holding up well despite the pandemic, which slowed commercial and residential construction to a crawl, especially in places like California that imposed virtual contracting halts. The state is now underpinning a steady sector bid, with a new law that mandates solar energy for all new construction. Solar tariffs against China have also bolstered sales and installations by local operators that include Arizona's First Solar, Inc. (FSLR) and Utah's Vivant Solar, Inc. (VSLR).

High oil prices were required to support sector uptrends in prior years, so April's crude oil collapse into negative numbers should have undermined buying interest. This didn't happen because political pressure has taken control of the tape, with growing calls by millennial and Gen-Z environmental groups for an end to fossil fuel use. While their long-term success isn't ensured, center and left-of-center voters have been lining up at a rapid pace to support that goal.

Financing costs now provide a strong tailwind for sector growth, with collapsing yields allowing major installers and small consumers to tap clean solar energy without breaking the bank. On the flip side, the Federal government is now winding down healthy subsidies paid directly to consumers, with the 26% maximum tax credit dropping to zero in 2022. However, that could change if a Democrat wins the White House in November.

First Solar came public at $24.50 in November 2006 and entered a momentum rally that posted an all-time high at $317 in the second quarter of 2008. It then collapsed with world markets, cutting through $100 and dropping to $85 in November. That level held support into a 2011 breakdown that pierced the IPO opening print before bottoming out at an all-time low in the lower teens in 2012. The subsequent uptick failed within 10 points of new resistance in 2014, while a 2016 breakout attempt also failed to clear the barrier.

The stock sold off to a four-year low in April 2017 and failed another breakout attempt in the first half of 2018. It then entered a broad declining channel that carved a series of lower highs and lower lows, culminating in March 2020's three-year low at $28.47. The second quarter bounce has now reached within 10 points of channel resistance, which needs to be mounted on healthy volume to set off a buying signal.

A rising channel has contained price action since 2012, setting a long-term target at $90 if the stock can mount smaller-scale channel resistance. As you can see from the blue line, the rising channel will align with the 2011 triple top breakdown in about three years, lowering the odds that the stock will trade in the triple digits in 2021 or 2022. However, the target would still offer healthy gains from currently traded price levels.

Vivant Solar is a small-cap installer that is well positioned to profit from California's solar construction mandate. The stock posted an all-time high at $18.71 during the first public session in October 2014 and rolled into a brutal downtrend that hit an all-time low at $2.16 in 2016. Price action since that time has alternated between months of apathy, vertical rally waves, and bone-shattering declines.

The 200-day exponential moving average (EMA) reveals a steady uptrend under the surface, lifting from $3.50 in 2017 to $7.50 this year. The stock posted a four-year high in February 2020 and plunged to a two-year low a few weeks later, while the second quarter bounce has recouped about 70% of the losses. The on-balance volume (OBV) accumulation-distribution indicator has held up remarkably well through the volatile action and is now trading at an all-time high, predicting that price will soon test the 2020 high.

The Bottom Line

Solar stocks are making a comeback, with macro tailwinds likely to grow in coming years.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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Markets

Stocks’ Huge Rally Is Pushing Investors Back Into Hedge Funds

After years of losing both clients and clout in financial markets, signs are emerging that hedge funds are back in favor in the U.S.

In the past few months, investors such as George Soros’s family office and the Texas pension fund have been plowing cash into hedge funds in an effort to diversify their assets after stock markets rebounded much more sharply from the coronavirus-stoked sell-off than anticipated.

Some well-known fund managers, sensing the moment, began accepting new capital for the first time in years, including D.E. Shaw & Co. and Seth Klarman’s Baupost Group. Twenty-five of these funds, have pulled in about $15 billion this year, according to one prime broker. A Credit Suisse Group AG survey released this week highlighted the shift: Investors are more interested in hedge funds than any other major asset class going into the second half of the year.

The trend is nascent and tepid — some analysts still project net outflows from hedge funds this year — and could fade as quickly as it appeared. But it is an encouraging sign for an industry that has been mired in a long and relentless slide since its peak during the 2008 financial crisis.

“The sentiment is that the worst is behind us for now,” said Kate Holleran, managing director of capital solutions at Barclays Plc. “We’re hearing anecdotes of investors revising or paring back their redemption requests and taking a more business-as-usual approach.”

Amid the chaos of Covid-19-induced market volatility, hedge funds have done their job. About 51% made money this year through May, while the S&P 500 index lost almost 6%, according to research firm PivotalPath, whose database represents about two-thirds of hedge fund assets.

Mediocre Returns

That hasn’t been the case for much of the past decade. While some funds made money during the 2008 financial crisis, the subsequent years produced mediocre returns. The Federal Reserve kept interest rates low, crushing the volatility that traders needed to make money. Meanwhile, stocks were in the midst of the longest bull run in history.

Frustrated with underwhelming performance, pension plans and other large institutions pulled about $140 billion from hedge funds from the end of 2015 through last year, according to Hedge Fund Research Inc.

Dawn Fitzpatrick, the $25 billion Soros Fund Management’s chief investment officer, is part of the change. She decided to pump $1.7 billion into hedge funds beginning in March, spying new opportunities in the industry, according to a person familiar with the firm. Last year she pulled $3.5 billion from almost 30 funds citing high fees, poor performance and the desire to manage more money in-house.

Fitzpatrick sent about $1 billion to marquee managers who had been closed, said the person, who asked not to be identified because the decisions aren’t public. She focused on an array of strategies, including middle-market lending in areas where her team doesn’t have expertise, the person said.

A spokesman for Soros Fund Management declined to comment or provide names of managers the firm hired.

Issac Septon, CIO at the The Observatory, a single family office, said he had increased his hedge fund exposure earlier this year by 20%, topping up existing managers and adding new funds to his roster. Most of the cash went to technology, event-driven and mortgage funds and firms specializing in Europe, he said. He redeemed from just one manager who struggled in March.

Some institutions had already planned to exit hedge funds before the pandemic and see no reason to return.

Fresno County Employees’ Retirement Association voted to pull its roughly $300 million in hedge funds at the end of last year, focusing instead on equity investments, said Doug Kidd, investment officer at the $4.6 billion pension system.

“In fact, the ‘Fed Put’ appears stronger and more enduring than ever contemplated previously,” he said. “Time will tell whether there are unforeseen consequences, but for now the Fed is telling us there is no need to hedge.”

Adding Funds

Panayiotis Lambropoulos, a portfolio manager of hedge fund investments at the Employees Retirement System of Texas, disagrees, and said he expects volatility and uncertainty to increase as markets adjust to the reality of lower earnings and weaker economic growth.

The pension system has added a couple of hedge funds this year, and Lambropoulos is looking at more strategies including convertible bond arbitrage and volatility-oriented funds. A range of credit funds, from direct lending to those trading stressed and distressed securities, are also being considered.

Jens Foehrenbach, CIO at Man FRM, a division of Man Group that invests in more than 50 hedge funds, said he too is interested in credit funds, and for the first time in a while is bullish on equity hedge funds given the increased dispersion across stocks.

Even with this newfound optimism from some investors, net redemptions could continue this year, especially if stock markets start to tumble and investors need cash. A few institutions have already redeemed to raise money to run their operations or boost charitable giving.

The first hedge funds to get hit were those with weaker track records.

David Gallo told investors last month that he was closing his 13-year-old Valinor Management because several of his largest and oldest investors, predominantly hospitals, endowments and foundations, had put in redemption notices. While performance in the past 18 months had been good, the $1.4 billion firm posted “uninspiring” returns from mid-2015 through 2018, according to a client letter.

Barclays’s Holleran forecasts that after $30 billion in net withdrawals in the first quarter, redemptions for the year could total $50 billion to $100 billion. The lower end of that range is the most likely outcome, she said.

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Business

U.S. Stocks Pull Back Off Best Levels But Close Mostly Higher, Nasdaq Sets New Record High

Stocks moved mostly higher during trading on Tuesday, extending the upward move seen over the course of the previous session. With the continued advance, the tech-heavy Nasdaq reached another new record closing high.

The major averages pulled back off their best levels in late-day trading but remained firmly positive. The Nasdaq advanced 74.89 points or 0.7 percent to 10,131.37, while the Dow climbed 131.14 points or 0.5 percent to 26,156.10 and the S&P 500 rose 13.43 points or 0.4 percent to 3,131.29.

Apple (AAPL) helped to lead the Nasdaq higher, jumping by 2.1 percent to a new record high as traders reacted positively to news out of the tech giant’s Worldwide Developers Conference.

The continued strength on Wall Street was also widely attributed to White House trade adviser Peter Navarro clarifying his remarks about the U.S.-China trade deal.

“It’s over,” Navarro said in response to a question about the trade deal in an interview on Fox News on Monday, adding that the “turning point” was China’s failure to warn the United States about the coronavirus outbreak.

However, Navarro subsequently released a statement attempting to clarify his remarks, claiming his initial comments were “taken wildly out of context.”

“They had nothing at all to do with the Phase I trade deal, which continues in place,” Navarro said. “I was simply speaking to the lack of trust we now have of the Chinese Communist Party after they lied about the origins of the China virus and foisted a pandemic upon the world.”

Trump also sought to reassure investors with a post on Twitter declaring the trade deal is “fully intact” and saying he hopes China will “continue to live up to the terms of the Agreement!”

Navarro’s initial comments contributed to an overnight nosedive by stock futures but were clarified before impacting regular trading.

Stocks also benefited from upbeat economic data out of Europe, with a reading on private sector activity jumping to 47.5 in June from 31.9 in May.

A reading below 50 still indicates contraction, but Simon MacAdam, Senior Global Economist at Capital Economics, noted the readings on activity in developed markets have “come back a long way from their April lows.”

“While activity is still considerably below normal levels, the surprising speed of the recovery poses an upside risk to some of our Q2 forecasts,” MacAdam said.

In U.S. economic news, the Commerce Department released a report showing a substantial increase in new home sales in the month of May.

The report said new home sales spiked by 16.6 percent to an annual rate of 676,000 in May from a significantly downwardly revised rate of 580,000 in April.

Economists had expected new home sales to jump 2.7 percent to an annual rate of 640,000 from the 623,000 originally reported for the previous month.

Sector News

Gold stocks extended the rally seen over the two previous sessions, driving the NYSE Arca Gold Bugs Index up by 1.8 percent to its best closing level in a month.

The continued strength among gold stocks came as the price of the precious metal saw further upside, with gold for August delivery jumping $15.60 to $1,782 an ounce, the highest closing level since October 2012.

Significant strength was also visible among transportation stocks, as reflected by the 1.3 percent gain posted by the Dow Jones Transportation Average.

Steel and retail stocks also saw notable strength on the day, while some weakness emerged among networking and utilities stocks.

Other Markets

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Tuesday. Japan’s Nikkei 225 Index rose by 0.5 percent, while Hong Kong’s Hang Seng Index surged up by 1.6 percent.

The major European markets also showed strong moves to the upside on the day. While the German DAX Index spiked by 2.1 percent, the French CAC 40 Index and the U.K.’s FTSE 100 Index jumped by 1.4 percent and 1.2 percent, respectively.

In the bond market, treasuries closed nearly flat for the third straight session after recovering from early weakness. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, inched up by less than a basis point to 0.709 percent.

Looking Ahead

A lack of major U.S. economic data on Wednesday may lead traders to continue to focus on the latest coronavirus and overseas news.

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Business

U.S. Stock Futures Rebound From Overnight Slump, Pointing To Higher Open

Stock futures have shown a substantial recovery from an overnight nosedive and are currently pointing to a significantly higher open on Wall Street. The Dow futures are up by 315 points and the Nasdaq futures are up by 71 points, suggesting the tech-heavy index could reach a new record high.

The futures fell sharply overnight as comments from White House trade adviser Peter Navarro seemed to suggest President Donald Trump had decided to terminate the U.S.-China trade deal.

“It’s over,” Navarro said in response to a question about the trade deal in an interview on Fox News, adding that the “turning point” was China’s failure to warn the United States about the coronavirus outbreak.

However, Navarro subsequently released a statement attempting to clarify his remarks, claiming his initial comments were “taken wildly out of context.”

“They had nothing at all to do with the Phase I trade deal, which continues in place,” Navarro said. “I was simply speaking to the lack of trust we now have of the Chinese Communist Party after they lied about the origins of the China virus and foisted a pandemic upon the world.”

Trump also sought to reassure investors with a post on Twitter declaring the trade deal is “fully intact” and saying he hopes China will “continue to live up to the terms of the Agreement!”

The futures quickly recovered from the overnight slump and have seen further upside since then, reflecting recent upward momentum on Wall Street.

Stocks may continue to benefit from optimism about a quick economic recovery, as traders seem unfazed by the rising number of coronavirus cases and hospitalizations in several states across the country.

Shortly after the start of trading, the Commerce Department is scheduled to release its report on new home sales in the month of May.

Economists expect new home sales to jump by 2.7 percent to an annual rate of 640,000 in May after rising by 0.6 percent to a rate of 623,000 in April.

Stocks moved mostly higher over the course of the trading day on Monday after showing a lack of direction early in the session. The tech-heavy Nasdaq closed higher for the seventh straight session, reaching a new record closing high.

The major averages all finished the day firmly in positive territory. While the Nasdaq jumped 110.35 points or 1.1 percent to 10,056.47, the Dow climbed 153.50 points or 0.6 percent to 26,024.96 and the S&P 500 advanced 20.12 points or 0.7 percent to 3,117.86.

In overseas trading, stock markets across the Asia-Pacific region moved mostly higher during trading on Tuesday. Japan’s Nikkei 225 Index rose by 0.5 percent, while Hong Kong’s Hang Seng Index surged up by 1.6 percent.

The major European markets have also shown strong moves to the upside on the day. While the German DAX Index has soared by 2.7 percent, the French CAC 40 Index is up by 1.7 percent and the U.K.’s FTSE 100 Index is up by 1.5 percent.

In commodities trading, crude oil futures are rising $0.52 to $41.25 a barrel after climbing $0.90 to $40.73 a barrel on Monday. Meanwhile, after jumping $13.40 to $1,766.40 an ounce in the previous session, gold futures are advancing $9.30 to $1,775.70 an ounce.

On the currency front, the U.S. dollar is trading at 106.61 yen compared to the 106.91 yen it fetched at the close of New York trading on Monday. Against the euro, the dollar is valued at $1.1331 compared to yesterday’s $1.1261.

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Markets

U.S. Stocks Have ‘Considerable’ Upside, History Suggests to Leuthold

U.S. stock gains from the late-March bottom are in line with previous new bull markets, which could assuage concerns that the market has risen too far too quickly, according to the Leuthold Group LLC.

A comparison with the early stages of bull markets in 1982, 1987, 2003 and 2009 — selected because they followed bear markets with declines of 30% or more — shows similarities to the current period — and particularly to 1982 and 2009, Leuthold strategist James Paulsen wrote in a note June 29.

The sharp rebound in equities in the second quarter has stoked anxiety about a disconnect with the likelihood of a long path to recoup economic losses from the coronavirus. Even so, history shows the S&P 500 started climbing in the 1982 and 2009 episodes when the economy was still many months away from making up for prior contractions.

“There is potential for considerable upside in the coming year,” Paulsen wrote. “It is worth noting the similarity of today’s rally to past bull markets, which provided investors with additional healthy returns.”

The S&P 500 has rallied 36% from its low at the March 23 close. That gain has prompted some strategists to recommend paring back on risk as valuations rise, though others cite everything from big cash piles on the sidelines to a continued “fear of missing out” as reasons the advances should continue.

Paulsen cautioned that investors should expect “frequent and sometimes substantial” corrections along the way, and recommended planning to exploit continued volatility ahead. But over a longer horizon, he sees a strong argument for further gains.

“In the near-term, the S&P 500 could decline by about 5% to reach the average bull market at this point of the run,” Paulsen said. “However, if stocks continue to trace the average of the past four bull markets represented in this analysis, they could deliver a +14% total return in the coming year, and almost +27% over the next two years (assuming a 2% dividend return).”

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Markets

Beating Wall Street May Be More Than a Blip for European Stocks

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European stocks are entering the second half of the year on a strong footing.

Even after three straight months of gains, a growing number of strategists and investors are turning bullish on the region’s equities. Helping sentiment are reports pointing to an economic bounce, unprecedented stimulus measures and optimism that easing lockdown measures won’t lead to a second wave of coronavirus infections.

That’s building a case for European equities to continue a rare outperformance over peers in the U.S., where infections are on the rise in several states. Both the Stoxx Europe 600 Index and the Euro Stoxx 50 Index have outperformed the S&P 500 benchmark since mid-May, and are on track to beat Wall Street for the first full month since last September, helped in part by a rotation into cyclical and value shares.

“I absolutely agree with the growing positive view on European equities,” Chris Dyer, director of global equity at Eaton Vance, said by email. “From a relative valuation perspective, the discount that Europe trades at versus the U.S. has expanded. Regarding how long can Europe outperform the U.S. stock market, the answer is that this could extend for several years.”

Even after a rally that has recouped more than half of the pandemic-spurred losses through March, European stocks continue to trade near a record discount on an estimated price-to-book value basis versus their U.S. peers. At the same time, institutional money is returning to the region after missing out on the initial rebound.

Strategists at BlackRock Inc., the world’s largest asset manager, are considering upgrading European equities from their current underweight stance, joining market participants at Goldman Sachs Group Inc., Morgan Stanley, Bank of America Corp. and Eaton Vance in turning more optimistic about the region in recent weeks.

Positive PMI data trends are validating early investor optimism about an economic recovery, with euro-area figures for June beating forecasts and France even returning to expansion territory. With those priced in, further signs of healing may be needed for markets to move higher. That could come from continued easing of lockdown measures in countries including the U.K., which is set to reopen pubs, restaurants and cinemas in July.

Some indicators still point to more scope for gains. Despite the market bounce, sentiment in Europe remains deeply negative, and Barclays Plc strategist Emmanuel Cau notes that overall positioning remains cautious.

“Amid elevated tail risks and the looming negative summer seasonality, the lack of widespread investor participation in the rally continues to provide some cushion to equities and could give legs to the rally, in our view,” he wrote in a note Friday.

Historically too, Europe is entering prime time. July is the period that the Stoxx 600 has posted its biggest monthly gain on average over the past decade. And it’s chasing up a May advance with one in June for the first time since 2005.

Still, there are plenty of headwinds that could mar the rosy picture for Europe. Bluebay Asset Management chief investment officer Mark Dowding worries there’s complacency about the economic trajectory and the spread of the virus, noting scope for further downward revisions to growth forecasts. Beyond that, there are also Brexit negotiations, trade tensions and unified approval for the European Union recovery fund to contend with.

Not that such obstacles have stopped bulls so far. Among regional markets, Denmark’s OMX Copenhagen 25 Index has fared the best in the first half of the year. Thanks to a heavy weighting of health-care shares, it’s the only European benchmark to post gains, up 7.1% in the period. Defensive darling, the Swiss Market Index has also outperformed, down 5.4% versus a 14% drop in the Stoxx 600. Germany’s DAX Index is down 8.8%.

Sector-wise, defensives are ahead on the year, but they’re losing their advantage. Although tech and health-care shares are the only sectors in green in 2020, cyclicals such as carmakers and miners have led gains since mid-May.

Strategists are split on the best industry exposure to have in the coming months, following the strong rotation. Bank of America, Barclays and Morgan Stanley still favor cyclical stocks, while JPMorgan Chase & Co. and Citigroup Inc. recommend defensives.

Europe’s recent outperformance against the U.S. also comes amid growing concerns that America’s economic rebound will be stifled by hotspots of fresh coronavirus cases.

Read More: Horrifying U.S. Covid Curve Has a Simple Explanation: Max Nisen

“The jury is still out whether Europe is going to be a multi-year investment or a trade for this year,” Wei Li, head of investment strategy at BlackRock’s iShares EMEA, said by phone. “The reason for us in warming to European equities is the relative success that Europe has had in controlling the virus’s spread compared to the U.S. and more prudence in opening up.”

— With assistance by Sheldon Reback

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Markets

Amateur Traders Pile Into Asian Stocks, Making the Pros Nervous

When the coronavirus pandemic sent shares plunging, you didn’t have to be a professional investor to spot a buying opportunity. In fact, it might be better if you weren’t.

The can’t-miss rise of equity markets around Asia is fueling the explosion of interest among retail investors in the region, mirroring their exuberance worldwide. Millions of investors who had never so much as opened a trading account before have been piling into the market.

Just as the pandemic led bored Americans to make the Robinhood investing app a household name, it’s the amateurs who have helped to lift equities from India to Thailand despite some of the worst macroeconomic fundamentals in memory. But it’s also giving professionals pause – what happens when these investors are no longer around?

“If everyone is going into the same name and something happens, those names are likely to be sold off quite aggressively,” said Catherine Yeung, Fidelity International’s investment director. “I think we just need to be wary that market seems a bit complacent at the moment.”

In Japan, the Tokyo Stock Exchange Mothers Index, which hosts many tech start-up listings, has soared throughout the pandemic: buying the dip on almost any small-cap stock would make money. All but seven of the 320 companies on the board have gained since April’s start, from vaccine hopeful Agnes Inc., up 235%, to Precision System Science Co., which is developing a virus test and has added more than 480%.

“If there’s a report on TV about a coronavirus-related stock that’s going up, they can just buy it the next day and make profit,” said Naoki Murakami, a long-time Japanese day-trader. He points to “simple” bets by amateur investors on stocks such as AnGes or Avigan maker Fujifilm Holdings Corp.

In the U.S., Robinhood and the Reddit forum called r/wallstreetbets have become a dominant force in the market, boosting everything from the stocks of bankrupt companies such as Hertz Global Holdings Inc. to revenue-less start-ups like truck maker Nikola Corp. That pattern has been repeated in Europe with brokerages in Germany, the U.K. and France all reporting a jump in participation by individual investors, fueled by a fear of missing out.

And while the names may be less familiar, the same picture appears across countries in Asia that imposed lockdowns.

Digital Habits

Retail investors supported Singapore’s exit from bear market territory. Dividends in the city-state are a draw, “and they are sitting at home, they have nothing to do,” said Aik Hong Ng, deputy head of Phillip Investor Centre, a unit of Phillip Securities Pte. Some are loading up on debt and leverage to buy more shares.

For more on retail fever around Asia:
  • Small India Investors Are Latest to Snag Beaten-Down Stocks
  • Fear of Missing Historic Rally Has Koreans Borrowing to Invest
  • Retail Investors Are Driving Record Turnover in Thai Stocks
  • Singapore’s Retail Investors Load Up On What Institutions Dump

“Almost-global shelter-in-place measures are entrenching digital habits across all aspects of daily life. This includes digitising our investment behavior,” said Clarie Kwa, chief market officer for wealth management advisory firm 360F in Singapore. “Without the normal distractions of life, people actually stop procrastinating and open their first retail accounts, motivated further by their fear of missing a chance to buy low.”

In the Philippines, AAA Southeast Equities Inc. saw two to three times more new online brokerage accounts opened each month from March when the lockdown was imposed, said President William Matthew Cabango. Meanwhile, India has seen 1.8 million new accounts opened since March, while South Koreans are borrowing to fuel their purchases.

The Amateur

As the first major economy to adopt the zero-interest rate policies and central bank asset purchases that are boosting equity valuations across the world, Japan’s experience may be the most informative.

Burned when the bubble collapsed, for years Japan’s retail investors have avoided stocks. Two decades of underperformance instilled habits that propelled investors to try to sell at the top. Yet that attitude could at last be shifting.

Japanese individuals opened more than 820,000 online brokerage accounts between February and April, more than double the number in the same period in 2019.

A 35-year-old Japanese housewife, who had long watched her husband and parents buy stocks and get gifts typical for shareholders, never before found the right time to start buying herself.

“I’m THE amateur,” she said, declining to give her name citing privacy concerns. “But I saw a chance when shares plunged and I started buying.” She’s been documenting her experience on Twitter under the handle @kabukonosekai, buying the dips on large companies and planning to hold them long term.

In a regular survey this month of retail investors by Monex Group Inc., just 17% said the plunge led them to sell risk assets and move into cash, with 37% saying they took the opportunity to increase their share holdings.

Long-Term Return

Well, who wouldn’t be happy with their performance in the market that goes up regardless of bad news? The question turns to whether these investors will cut and run during the next dip, or learn new ways to succeed.

In China, interest has waned somewhat. A surge of account openings in March and April coincided with lockdowns throughout the country, but May figures were more muted. China has already had a considerable retail investor presence, with the lockdown stock boom paling in comparison to some recent share rallies.

In Japan, where retail investors are less of a force, individuals’ share of trading volume jumped during the state of emergency, and more surprisingly has stayed consistent even as workers have returned to the office.

“Oddly enough, many if not most of the retail investors take a long view,” said veteran investor Mark Mobius, co-founder of Mobius Capital Partners, “and they will probably keep their money in the market and think of a long term return.”

— With assistance by Shoko Oda, Ishika Mookerjee, April Ma, Abhishek Vishnoi, Takashi Nakamichi, and Claire Jiao

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