No break from COVID-19 likely, Fed needs to “pull out a bazooka”

Markets rose sharply on Tuesday.

The S&P 500 jumped 1.9 percent, the STOXX Europe 600 surged 2.9 percent and the Nikkei 225 soared 4.9 percent.

Positive US economic data helped boost stocks. Retail sales jumped 17.7 percent in May while industrial production rose 1.4 percent.

Still, investors are likely to remain on edge as the global case tally for COVID-19 climbed above 8 million on Tuesday and the US showed increases in infections even as officials continued their push to reopen economies and end lockdowns.

“We have 21 states where cases are going up and quite dramatically, and it’s not just testing, but more people are testing positive and in some places hospitals are overflowing,” said Michael Osterholm, head of the Center for Infectious Disease Research and Policy at the University of Minnesota.

One US city has gone against the flow. Miami mayor Francis Suarez announced on Monday that the city will not move into the next phase of reopening because of concern over rising COVID-19 cases.

And while many think that the resurgence in cases is part of a second wave of infection, experts say it is not.

Raymond James analysts wrote: “We expected this uptick and anticipate other states will also see upticks as reopenings continue. This isn’t a second wave, this is another swell that is part of the ‘first wave’ of this virus.”

“We’re now recognizing that we’re not going to see the summer break that we had hoped for,” said Dr Leana Wen, an emergency physician and public health professor at George Washington University.

This could be bad news for the economy.

Already, Goldman Sachs economists led by Jan Hatzius are expecting a 2.3 percent fall in disposal income for Americans in 2021, which could “pose a significant risk to the budding recovery in the quarters following the election”.

And Scott Minerd, global chief investment officer at Guggenheim Partners, said that the S&P 500 is likely to retest its 23 March low of 2,237.40 over the next month, potentially falling to as low as 1,600.

“There's a point where the Federal Reserve is going to have to pull out a bazooka,” said Minerd. “And I think the option of buying stocks on the part of the Fed is on the table.”

Indeed, many fund managers seem to agree that another decline is likely.

The latest Bank of America Global Fund Manager Survey showed that 78 percent of them say the market is overpriced, the highest percentage since the survey began in 1998.

Some 53 percent say the comeback from the March lows is a “bear market rally”. Just 37 percent believe it is a new bull market.