Before The Bell
The major U.S. equity averages, which pressed forward last week despite some uninspiring news on both the economy and the coronavirus, are pointing notably lower this morning. Much of the recent good tidings about the commencement of the distribution of the COVID-19 vaccine developed by Pfizer (PFE) and European-based BioNTech gave way this morning to some troubling news out of the United Kingdom on the coronavirus front.
Prime Minister Boris Johnson announced another round of pandemic restrictions in England, while much of Europe has shut its borders to the United Kingdom. These developments were a reaction to reports of a new variant of COVID-19, discovered last week. The prime minister said the new strain spreads up to 70% faster than the previous version of the deadly virus. International stock markets fell sharply around the globe on fears that the strain could spread globally.
Before the opening bell, all of the major U.S. equity futures are down sharply, with the Dow futures at one point off as much as 550 points. The concerns about Britain’s decision roiled investors around the globe, as the possibility of more restrictive shutdowns would be a problem for a number of economies that are already showing signs of slowing, including the U.S. economy. Indeed, last week data on initial weekly unemployment claims showed a worse-than-expected spike in applications, to 885,000. It is a sign that economic conditions are slowing stateside, and with the lockdowns increasing in major economic centers, including the state of California, there is a fear that economy will slow even further.
The news out of Britain is likely to spike some notable equity rotation on Wall Street this morning. The worse of the investment community’s fears about COVID-19 and increased lockdowns will likely be felt by the economically sensitive sectors. In particular, the energy stocks are likely to be under some heavy initial selling pressure, as oil prices both stateside and on the Continent are down sharply on economic concerns due to COVID-19.
So where should investors look this morning amid the pickup in volatility around the globe? Our sense is that investors may want to revisit the technology names that fared well during the height of the coronavirus pandemic earlier this year. The technology companies, especially those that provide cloud computing and cloud-based functionality that allow for working and learning from home, may get a another boost from the recent increase in lockdowns to slow the resurgence of the deadly virus. There already seemed to be a move that way last week, with the technology heavy NASDAQ Composite climbing more than 3% over the latest five-day stretch. Likewise, we have seen some recent rotation out of the energy stocks, as investors even before today’s news out of the United Kingdom were concerned that the U.S. economic recovery is slowing amid the resurgence in COVID-19 cases and related lockdowns. The energy sector was down more than 1% on Friday.
At the start of the abbreviated holiday trading week (the U.S. stock market will close for the week at 1:00 P.M. (EST) on Thursday), it is not looking like we will see the start of a Santa Claus rally. But in this unprecedented year, we have seen that the mood on Wall Street can turn on a dime, and there are some events that could provide some support for equities over the next few weeks, including the announcement over the weekend that lawmakers on Capitol Hill had agreed to a $900 billion stimulus package designed to help individuals and small businesses hurt by the coronavirus. That, along with the aforementioned roll out of the Pfizer COVID-19 vaccine and now another option from Moderna (MRNA) could potentially support equities in the near term.
The coronavirus is likely to be the central focus of traders over the next three-plus trading sessions. But investors should note that the abbreviated week will bring some important reports on the state of the U.S. economy, with the bulk of the releases coming on Wednesday. Over the course of the next three days, we will receive reports on consumer confidence, new and existing home sales, initial weekly unemployment claims, personal income and spending, and durable goods orders. The consumer confidence and personal income and expenditures reports may bring the state of the U.S. consumer into the spotlight and may provide some light on how the retailers likely fared during the all-important holiday shopping season, which is winding down. In the retailing space, we think the mass merchandisers and companies with significant online businesses will fare the best during this unprecedented year of lockdowns and social-distancing measures. For those considering a stake in the retailing sector, we would look at the stocks of those such companies.
– William G. Ferguson
At the time of this article’s writing, the author held positions in one or more of the companies mentioned.
