It’s been a largely sideways move for the stock market since early June, but one Wall Street bull is telling clients that this bout of consolidation is likely to be “resolved to the upside” due in part to historic levels of credit and liquidity.
“Over the past week, the economic data continued to surpass expectations at a historic rate, there was further indication of a broad recovery in the global economy, and excess liquidity that has supported financial assets surged to an even more historic level,” wrote Tony Dwyer, chief market strategist at Canaccord Genuity, in a Monday note. At the same time, an increase in COVID-19 cases and presumptive Democratic presidential nominee Joe Biden’s lead over President Donald Trump in the polls have “kept the markets in a consolidation pattern.”
The S&P 500 (S&P:SPX) on Monday rose 1.3% , putting it within striking distance of its June 8 close near 3,233, which was the U.S. large-cap benchmark’s highest finish since its record close on Feb. 21. The Dow Jones Industrial Average (DOW:DJIA) was up more than 500 points, or nearly 2%. The S&P 500 and Dow have traded largely sideways since June 8, while the tech-heavy Nasdaq Composite (NASDAQ:COMP) has set a string of records.
Dwyer’s optimism, meanwhile, is based on a trio of factors, including a run of positive economic data that have pushed the Citigroup Economic Surprise Index “off the charts” signs the global economy is in the early stage of recovery, based on improved readings for the composite leading indicators for the 37-nation Organization for Economic Cooperation and Development; and data that show that “real liquidity” never been higher.
Real liquidity, Dwyer explained, measures the amount of liquid money available using the M2 measure of money supply plus equity and fixed-income mutual funds versus what is needed for economic activity based on industrial production and inflation (see chart attached).
Historic levels of credit and liquidity, “coupled with the turn in the global economy, should cause any periods of consolidation to be resolved to the upside” even with a weak second-quarter earnings season set to get under way, Dwyer wrote.
For now, he’s sticking to his call for a drawn-out period of consolidation given the scope of the surge in markets since the March 23 low. He’s called for adding risk on a pullback by the S&P 500 to 3,000. “With Q2 EPS reporting season and likely cautious corporate profit guidance kicking off this week with the major banks, we see no reason to change that game plan,” he wrote.