The rapid bounce back in stocks looks to be continuing this morning, and this is evidence of a renewed appetite for risk among traders and a sense that things are improving. They undoubtedly will at some point, but this may be a bit premature and there could be more mood swings to come in a still volatile domestic stock market. There are, however, opportunities outside the U.S. in places where the pandemic hit earlier, and that are therefore much further along the road to recovery. The most obvious of those would be China.
Chinese GDP figures were announced for Q1 this morning, and definitely look to be in the “not as bad as it could have been” category. Economic activity dipped by 6.8% in the first quarter. Bad for sure, but not completely disastrous, and new coronavirus cases there seem to have peaked in February.. Problems started there earlier and seem to be receding earlier too.
The actual data regarding coronavirus and its effect on the U.S. on the other hand is getting worse, with yesterday seeing the highest number of virus-related deaths in the country in one day so far. And yet, there is such a fear of missing out on a bounce, such a desire to get ahead of the curve, that the pre-market is showing big gains this morning on what really amounts to not a lot.
President Trump outlined his plans for a return to work in America and there are reports of encouraging results from clinical trials of a Gilead(GILD) treatment for Covid-19. Those things have created an optimistic atmosphere, but neither is particularly significant, at least not yet. The Gilead trials are still ongoing, so as those running them at the University of Chicago pointed out yesterday, it is far too soon to draw any conclusions.
On the other front, the timing and pace of a return to work will be decided at a lower level than the White House. The State Governors and, more importantly the workers themselves, will make the determination when it is safe to do so. As many health experts and industry leaders have pointed out in the last few days, much more extensive testing is needed before they would be comfortable with re-opening.
However, traders tend to look forward and, with the Chinese model to go on, they are looking forward to a return to normalcy, or something close to it, right now. That makes sense, but does it make sense for the Chinese stock market, as represented by MCHI, to be still 12% below its highs while the S&P 500 ETF(SPY) is down around 17%?
As I have said frequently here, trading is essentially about balancing risk and reward, and that calculation seems to favor MCHI over SPY.
It is not that there are no risks to investing in China. The biggest of those, as some of the coronavirus numbers have shown, is that there is some doubt as to the accuracy of Chinese data. Until now, though, the market has taken GDP numbers at face value and that probably won’t change.
If so, have an economy that is on the path back and with the potential to make back all the known drop in GDP in a month or two, versus one where the extent of the damage is still unclear and where the problem is still worsening. The first has a 14% upside based on a return to the high, while the second offers 16%.
I know where I would rather be long right now.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
