Before The Bell
The major equity indexes continue to push higher, with the Dow Jones Industrial Average and the broader S&P 500 Index finishing with gains in eight of the last nine trading sessions. The S&P 500 Index ended yesterday just 0.2% off of a record closing price, Likewise, the Nasdaq Composite trades near an all-time high above the 11,000 mark and the Dow 30 is again above the 28,000 level and not too far off its record high established this past February before the coronavirus pandemic evolved stateside.
A confluence of factors continue to embolden the bulls and increase Wall Street’s appetite for riskier assets. At the top of the list has been a much better-than-expected second-quarter earnings performance. With the reporting season nearing a conclusion, more than 80% of the S&P 500 companies have beaten lowered expectations. The encouraging data from Corporate America, along with the better-than-expected July job creation figures and a continued decline in the unemployment rate, suggest the U.S. economy is recovering, if not as fast as expected initially. Market watchers also are encouraged about the improving outlook on the COVID-19 cases front, with the number now on a downturn in recent hot spots, including Texas and California. The improving coronavirus data, combined with positive developments on a possible COVID-19 vaccine, have made for a nice cocktail for equity investors. Hence, the respective gains of 290, 229, and 47 points, for the Dow 30, NASDAQ, and S&P 500 Index yesterday.
The leadership during the week’s middle trading session came from a number of sectors, but the main theme was the continued rotation into the economic-sensitive groups. There was notable buying in the information technology, consumer discretionary, and healthcare sectors. In addition, investors may want to keep close tabs on the energy names in the coming days. The group, which was beaten down earlier this year as demand for energy commodities—and subsequently prices—tumbled as the world’s largest economies were shut down to slow the spread of the coronavirus, may get a near-term boost from some encouraging inventory data from the oil patch. Specifically, there was a bigger than expected drawdown in oil reserves, which may suggest that an improving economy is driving a pickup in demand for energy products. That said, the oil and gas situation remains fluid and volatility is likely to remain elevated. So for those on a bargain hunting spree in the oil and gas patch, a prudent investment strategy may be to look at energy stocks that Value Line ranks either 1 (Highest) or 2 (Above Average) for Safety. These stocks tend to deliver more stable performances, especially during this volatile stretch for the energy space.
Another sector that will receive some attention from Wall Street in the coming days and weeks is retailing. The performance of this industry has been all over the map since the COVID-19 pandemic swept across the United States. In a nutshell, it has been a “survival of the fittest” in the retailing space. A few of the companies that were struggling from both a financial and operating perspective pre-coronavirus, have filed for Chapter-11 bankruptcy protection, while the industry leaders with deep pockets have seen their businesses grow in these unprecedented times. In particular, Amazon.com (AMZN), Walmart (WMT), The Home Depot (HD), and Target (TGT) continue to prosper during these difficult economic times. We think that those investors looking at the retailing space should key on stocks of companies that have a big online presence and the infrastructure to meet the growing desire for contactless shopping. Our sense is that those companies are most likely to post better-than-expected results over the next fortnight.
Turning to today, investors were greeted within the last hour by better-than-expected report on weekly initial jobless claims. The figure fell below the one million mark for the first time since the coronavirus pandemic engulfed the nation in mid-March. That data, along with the aforementioned July employment figures, give further credence to the prevailing sentiment on Wall Street that the U.S. economy is recovering from the worst COVID-19-driven decline in output since the Great Depression. On point…
Before the market’s open, the equity futures, which were negative prior to the weekly jobless claims release, turned positive on the aforementioned improving labor market data, though still none too far removed from the neutral line. Our sense is that these claims figures may be a further wind in the sails of the bulls as they set to embark on the penultimate trading session of a week that has so far been another productive one for those long equities. The spotlight this morning may again be on the technology space, as the NASDAQ futures are presaging a nice gain for the tech-heavy composite. Stay tuned.
– William G. Ferguson
At the time of this article's the author did not have positions in any of the companies mentioned.
