El-Erian: Stocks are unlikely to revisit March lows

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London (CNN Business)US stocks wrapped up their best quarter in more than two decades on Tuesday, bouncing back from historic losses in the first three months of 2020.

The Dow had its best three months since the first quarter of 1987, climbing 17.8%. The S&P 500 gained 19.9%, its biggest quarterly advance since 1998. The Nasdaq did even better, adding 30.6% in its largest upward swing since 1999.
The stunning rebound has been fueled by trillions of dollars in stimulus from Congress and the US Federal Reserve, which is responding to the recession caused by the coronavirus pandemic with unprecedented levels of support.

Up next: The outlook for the rest of the year is murky. The US election looms in November, and some investors fear Democratic hopeful Joe Biden would roll back corporate tax cuts that were enacted in 2017.
And of course, there is the matter of the pandemic. Dr. Anthony Fauci, the top US infectious disease expert, told lawmakers on Tuesday that he wouldn’t be surprised to see the number of new coronavirus cases spike to 100,000 a day.

“We are now having 40-plus thousand new cases a day. I would not be surprised if we go up to 100,000 a day if this does not turn around and so I am very concerned,” he said.
Investors know the economy is in very bad shape. But many are hoping for a rebound in the second half of the year as lockdowns ease and people get back to work. That process could be slower than expected.
“There’s enough pent-up economic demand to keep Q3 a positive one for economies and risk assets,” said Deutsche Bank analyst Jim Reid.
But the final three months of the year could be rougher as social distancing prevents a full return of normal economic activity and the onset of winter in the northern hemisphere encourages more indoor life and caution, Reid said.
“So at this stage we think you’ll see a reversal of Q3’s gains,” he said.
What can be done to prevent a reversal in stocks and the economy?
Something simple: Fauci expressed dismay over people congregating in crowds, not wearing masks and paying inadequate attention to guidelines on reopening. “We’re going to continue to be in a lot of trouble, and there’s going to be a lot of hurt if that does not stop,” he said.
Goldman Sachs (GS), for one, is making the case for a national mask mandate, saying widespread adoption could save the US economy.

Something complicated: Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell pledged on Tuesday to consider additional stimulus to help speed the economic recovery.
But there weren’t many details on what a potential deal between the White House and Democrats would look like. House Democrats have proposed a $3 trillion relief plan, while Republicans have a smaller package in mind.
Meanwhile, the Fed continues to track the pandemic.
“Hypothetically, a second outbreak would force governments and people to withdraw again from economic activity,” Powell said. “The worst part of it would be to undermine public confidence, which is what we need to get back to lots of kinds of economic activity that involves crowds.”

Who has the power to change Facebook?

Each day, more brands are suspending advertising on Facebook (FB) to protest how the social media juggernaut handles hate speech. Adidas (ADDDF), HP, and Ford (F) are the latest to join a boycott that includes Unilever (UL), Coca Cola (KO) and Honda (HMC).
While big-name dropouts have dented Facebook’s stock price and prompted its leadership to address some of the concerns, it’ll take a lot more to stop the digital advertising juggernaut, reports Rishi Iyengar.
Facebook generated $69.7 billion from advertising in 2019, more than 98% of its total revenue for the year. But most of those ad dollars come from small and medium-sized businesses who use Facebook to attract customers.

Facebook has 8 million advertisers, it said earlier this year. Of those, the highest-spending 100 brands accounted for $4.2 billion in Facebook advertising last year, according to marketing research firm Pathmatics — or only about 6% of its ad revenue.
Even as Facebook confronts by far the largest advertiser boycott in its history, the sheer number of brands on its platform may insulate the company from too much financial fallout.
“Facebook has an enormous number of advertiser clients,” said Nicole Perrin, an analyst at eMarketer. “They’re definitely pretty reliant on the long tail of small business advertisers.”
Which brings us to the big question: Who has the power to change Facebook? A much broader coalition of advertisers could put pressure on the company, and the same may be true of mass deactivations by users.
Kara Swisher, the influential technology reporter, wrote Tuesday that she was deactivating her personal page on Facebook and unpublishing her brand page. “I am pretty sure that being on Facebook has never helped me at all,” she wrote in the New York Times. “So, it is time to go.”
But there is really just one person with the power to change Facebook. That’s
CEO Mark Zuckerberg, who exercises complete voting control over the company and can’t be removed by shareholders.
There are some signs that real change might be a ways off.
“We do not make policy changes tied to revenue pressure,” Carolyn Everson, Facebook Vice President of Global Business Group, wrote in an email to advertisers that was obtained by CNN. “We set our policies based on principles rather than business interests.”

Hong Kong under pressure

China’s imposition of its sweeping national security law on Hong Kong has already divided the business community. Now executives are anxiously waiting to see whether its implementation will undermine the city’s role as a global finance and trading hub.
Hong Kong’s government insists the law will be good for stability and prosperity, and won’t harm the political freedoms and judicial autonomy the city was guaranteed for half a century when the United Kingdom handed it back to China exactly 23 years ago.

The law was finally published in Chinese on Tuesday as it went into effect. The statute criminalizes offenses such as secession and subversion against the central Chinese government, and it has been harshly criticised by democracy activists.
Some high profile businesses with deep roots in Hong Kong, such as HSBC (HBCYF) and Standard Chartered, have voiced support for the legislation. But many other international companies, and some local entrepreneurs, are nervous.
“As the Hong Kong national security law comes into effect, many business owners in the catering sector are afraid whether we will be penalized for speaking our mind,” said Gordon Lam, a pro-democracy businessman, who leads the Hong Kong Small and Medium Restaurant Federation.
Companies and workers who want to leave Hong Kong have few comparable choices in Asia. Singapore may be the biggest beneficiary.

Up next

The ADP private employment report for June will be published at 8:15 a.m. ET.
Also today:

• The ISM Manufacturing Index will be released at 10:00 a.m. ET

Coming tomorrow: The US jobs report for June.
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