Six reasons why April rally may not march ahead in May

Updated: May 08, 2020 6:53 PM

A series of disparate events could change the course of the rally.

US markets, NYSE, bull market, stockalMarkets are already grappling with weak economic data.

By: Ashutosh Sinha

The selloff in March was severe. The rebound in April was no less spectacular. But can the rally extend its reach into May, as several worries begin to resurface?

Since hitting the recent low on March 23, the bulls helped Dow gallop 30 percent in April, the best monthly gain since 1987. The first trading day of May was different. The markets trimmed the rally with a 600-point fall, which could set the trend for May. A series of other disparate events could see the optimism generated by ‘awesome April’ fading.

Second wave of infections

There is a growing fear of a second wave of infections, which was highlighted in The Lancet (https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)30845-X/fulltext).

Several countries from Australia, are already experiencing a second wave of infection, according to Channel News Asia (https://www.channelnewsasia.com/news/asia/asia-pacific-covid-19-coronavirus-second-wave-infections-12566132).

Extended lockdown worries

China, South Korea, Thailand are some countries where there have been simmering worries. The extension of the lockdown in Asian countries like Malaysia, Indonesia, India, and Singapore has only added to the aggravated fears. Several countries in Europe also extended the lockdown into May.

All this could mean that businesses could be hit hard, the travel ban could be extended or countries may defer the pace at which the lockdown was being withdrawn. The lockdown in Germany is being eased (https://www.rfi.fr/en/europe/20200424-germany-prepares-for-covid-19-second-wave-as-lockdown-begins-to-ease-coronavirus-merkel) as the country is prepared to face the second wave of infections.

Weak economic data

Markets are already grappling with weak economic data. Q1 GDP in the US contracted by 4.8 percent while the Eurozone GDP contracted by 3.8 percent. The markets now have a sense of the gravity of the situation. If some countries are hit by a second wave of infections or some have to extend their lockdown, things could potentially get worse.

Muted earnings growth

Tech has been the only savior for the investors, with Google, Microsoft, and some of their peers exuding confidence since the evidence of increase in demand for cloud services. To use the metaphor, these stocks have been on fire, so have the staples stocks. But consumer sentiment could be hit hard and if it extends to the US markets, it can spell disaster. Conventional belief in the markets has it that “a panic bottom is not broken”. Investors will be clinging on to that belief for now.

Fisc worry for nations

Countries are feeling the heat of the COVID-19 impact. Markets in GCC countries saw several indices losing ground in trading on Sunday, the first day of the week. Saudi Arabia’s Tadawul Index, the largest stock market in the region fell by six percent, its biggest fall in two months. Other markets in the region faced the same (https://www.khaleejtimes.com/business/markets/uae-gcc-markets-slump-saudi-stocks-down-by-6). On Monday, the index recovered smartly but the cat may have been set among the pigeons (https://liveindex.org/tadawul-all-share).

Saudi Arabia’s Finance Minister has said that the country will take strict measures to deal with the economic impact of COVID-19 (https://in.news.yahoo.com/saudi-strict-painful-measures-deal-171255423.html). Jordan’s Prime Minister has also confessed that their finances are under strain. As the impact of COVID-19 unfolds, investors fear that the fault lines in the economies of other countries may be exposed too, which could slow down spending further.

Trade war again?

Worse, just as the trade war between the US and China was off the front pages, the two countries are again engaged in an exchange of words. This time it is about the origins of the coronavirus. President Donald Trump could be mulling trade action (https://www.moneycontrol.com/news/world/donald-trump-threatens-new-tariffs-on-china-as-us-mulls-retaliatory-action-over-virus-5210271.html), according to this Reuters report. Several options were already being considered. Another round of tde war could spell trouble for the markets.

Berkshire Hathaway’s quarterly loss reported last week was digested by the market. It appeared to be lesser optimism in the words chosen by Chairman Warren Buffett as he spoke to the investors. While it may not have a direct bearing on the markets, it does dampen the spirits for the millions who weigh each word of what he says.

April was a time when the fury of the March selloff was forgotten by the investors. In the new month, things could be different.

The conventional belief in the markets is ‘when it’s May, it is time to go away’. Investors will be hoping, this time, things could be different.

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