Stocks have been on a tear based on hope. Don’t expect it to last … but do expect truly strong stocks to continue doing well
Yesterday evening, we received wonderfully encouraging news.
After the markets closed, reports surfaced that drug-maker Gilead is seeing positive early results for its antiviral drug, Remdesivir.
From CNBC:
The University of Chicago’s phase 3 drug trial found that most of its patients had “rapid recoveries in fever and respiratory symptoms” and were discharged in less than a week, health-care publication STAT News reported.
If Remdesivir does, in fact, cure patients, it could help re-open the world economy at a far faster pace, enabling global economies to sidestep further economic damage.
As I write Friday morning, markets are up on the news. However, as thoughtful investors, let’s examine the whole picture …
An analyst who covers Gilead (and is bullish on the stock) wrote a report indicating that Gilead’s study didn’t include patients on ventilators. We don’t know how they’ll respond to the drug. Additionally, there wasn’t a placebo group. He also noted an earlier study on Remdesivir in China “needed to show [much more than a] 60% effect size vs. placebo to stop at interim … and it clearly didn’t.”
In other words, we need more studies — more data — before we can make any conclusive judgement.
Even Gilead itself notes this. From a company spokesperson:
Anecdotal reports, while encouraging, do not provide the statistical power necessary to determine the safety and efficacy profile of Remdesivir as a treatment for COVID-19.
But let’s err on the side of positivity. Assuming the drug will, in fact, show conclusive positive results, it won’t be on shelves tomorrow.
Clinical trial results involving patients with severe cases of COVID-19 will continue taking place this month. It’s expected we’ll see data from testing on patients with moderate symptoms next month.
If all goes well, it’s still unclear when an approved drug would be available to the public, but “several months” at the earliest is a safe guess.
In the meantime, the world remains on lockdown. Nevertheless, we’re hoping for the best.
Now, since we’re still months away from a potential cure, let’s shift back to the challenges of today.
***The difficult new landscape in which we find ourselves
First, keep in mind, much of the below would be addressed if we’ve truly found a COVID-19 cure in Remdesivir. But until that’s a certainty, let’s call things for what they are …
More than 20 million Americans have now lost their jobs — that erases nearly all job gains since the Great Recession a decade ago …
IMF Managing Director Kristalina Georgieva recently said, “We anticipate the worst economic fallout since the Great Depression” …
Fed Chair Powell recently said the U.S. employment situation is deteriorating “with alarming speed” …
90% of Americans are still under stay-at-home orders …
New York state and the U.K. just moved to extend lockdowns on reports that some Asian nations that seemed to have come out the other side of the crisis have recently seen a jump in infections and deaths (Singapore confirmed 447 new cases on Wednesday — that’s its highest daily count so far) …
When states do begin to re-open their economies, experts suggest it will be a bit like a game of “whack-a-mole” where partial re-shutdowns are required to stamp out the re-emergence of various COVID-19 hotspots …
Nearly one-third of all apartment-renters didn’t pay April rent. That number will be worse in May …
The federal small business rescue loan program is now tapped out, having already exhausted its $349 billion limit. As I write, additional funds have not been appropriated (keep in mind, small businesses employ 47% of all Americans) …
U.S. retail sales plunged 8.7% in March …
Manufacturing output slumped by the most in over 74 years …
Predictions from leading economists claim that the U.S. economy will contract by 30% from April through June …
Health experts suggest we’ll see a second wave of infections as 2020 rolls on (again, barring a curative antiviral) …
We’ve barely just begun Q1 earnings season, so we’re missing key information about just how bad the earnings damage has been … keep in mind, Q2 earnings reports in July will likely be just as bad or worse …
Phew.
***Now, despite all of that, this is not a gloom-and-doom Digest. But it is a “let’s get real” Digest
So, let’s get real …
In the face of everything just noted, the S&P is on a blistering 27% rally since March lows … and finds itself only 16% below its all-time-high.
Now, the S&P 500 is an index compromised of a shade more than 500 of the largest companies in the U.S. Do all of these companies deserve to have rallied 27% (on a weighted average) in light of the dire details we highlighted a moment ago?
No.
So, let’s get real …
This massive rally has been fueled by hope … hope that, since we’ve passed peak COVID-19 cases, the worst is behind us … hope that all the Americans who lost their jobs will be able to return to them promptly … hope that a re-opening of the economy will lead to a quick V-shaped recovery … hope that investors will just write off a Q1 earnings-debacle as a one-time blip on the radar (or 2-time blip with Q2) and we’ll be back to smooth sailing by Q3.
And now, hope that Gilead’s drug will return our world to normal.
But from March-lows through Gilead’s announcement yesterday evening, what this rally hasn’t been based on is the specific economic/earnings situation facing each individual company.
In other words, the rally has been more of a hope-based “rising-tide-lifts-all-ships” swell.
But tides can’t surge forever.
Now, this doesn’t suggest we’re going to see another market freefall. Rather, I’m suggesting that hope-based rallies tend to fizzle unless the object of the hope materializes.
So, let’s hope Remdesivir is the cure the world desperately wants. But if not, what will drive the market’s direction at that point?
Cold, impartial numbers — which is where we find ourselves as we enter Q1 earnings season.
Some earnings numbers will be atrocious, others “meh,” others actually strong.
Bottom line …
If there are any hiccups from Gilead’s trials, expect to see “a tale of two markets” — one comprised of healthy companies with stocks that should hold up well, the other comprised of COVID-19 infected (so to speak) companies with stocks that will either suffer or go sideways.
In both cases, the fates of these stocks will be based on the specific earnings-strength of each individual company.
It’s a bit like Warren Buffett’s folksy quote:
It’s only when the tide goes out that you learn who has been swimming naked.
While hope is wonderful, it’s time to bet on the specific investments in various sectors and asset classes that are truly strong and have the ability to perform well regardless of what the coming months bring.
Okay, so … how do we identify those?
***How about letting our stable of expert analysts provide you their thoughts?
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It’s a potpourri of market strategies that, while different, have a complementary effect on one another.
Now, despite their different market-orientations, one thing they share in common is that today they’re all seeing pockets of strength in the sectors and asset classes in which they specialize.
Briefly recapping, Louis Navellier — the “King of Quants” as Forbes calls him — is focusing on companies powered by strong earnings that are outperforming in the face of the coronavirus crisis.
Matt McCall is our resident thematic expert, tracking the market’s biggest next-generation “themes” or trends, before they show up on anyone else’s radar (he just recommended an AI company just over two weeks ago that’s now up 72%).
Our expert global macro investor, Eric Fry, is helping his subscribers make huge returns with various commodities plays. One of his gold picks is up 70% since his March 19 recommendation.
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All-in-all, these analysts are doing the required work for us — separating the fundamentally-strong from fundamentally-weak investments. With today’s market conditions, this separation is the required price of admission to putting money to work.
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As we wrap up, we’ll be watching closely for updates on Remdesivir. If it puts an end to the coronavirus crisis, fantastic. But while we hope for that outcome, aligning your money with only the best of the best is the safest strategy you have.
Have a good evening,
Jeff Remsburg
