Before The Bell
The major U.S. equity indexes pushed forward last week, even in the face of some terrible news on both the earnings and economic fronts, particularly the latter, which saw an historic jump in the nation’s unemployment rate (more below). Our sense is that a good deal of the dismal economic data have already been factored into valuations, and investors are now looking ahead with an eye on when the U.S. economy is going to be open for business. In addition, the stock market is getting immense support in the form of the unprecedented amount of monetary and fiscal policies put in place to offset the economic damage from the COVID-19 pandemic. The near-zero interest-rate environment is providing cheap financing for both the corporate world and Wall Street , and making stocks the best option again for investors.
On Friday, the big news came from Labor Department, and the data on employment and unemployment made for terrible readings. Specifically, the Labor Department reported that nonfarm payrolls fell by an historic 20.5 million positions in April, as the mandated government shutdowns to stop the COVID-19 spread pummeled the U.S. economy and forced massive layoffs in the retail, recreation, leisure, and hospitality industries, among others. Not surprisingly, the unemployment rate, which fell to historic lows last year, ballooned to 14.7%; the consensus expectation is that it will top 20% in the May report. The April payroll figures, combined with data showing initial unemployment claims increased by another three million plus in the latest week, did little to faze investors, which bid stocks higher over the final two sessions of last week. Perhaps, Wall Street believes the dismal labor data may push lawmakers to unleash further stimulus to help support Main Street workers and businesses. This gives investors some hope that relief measures would eventually offset the economic carnage from the pandemic. For the five-day stretch, the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 index rallied 2.4%, 4.7%, and 3.1%, respectively.
So where are investors looking these days for equity exposure? The clear answer is the high-growth technology sectors, with many of the big-tech names leading the way higher. In particular, the cloud computing and cloud-related services companies are benefitting from more workers and students staying home and performing their daily tasks on the cloud. The stocks of those companies are performing well, but they have plenty of companionship, as investors are picking up the technology names across most of the subsectors in the technology group. The recent high interest in technology has helped the NASDAQ Composite retrace all of the losses suffered in late February and mid-March and then some, with the technology heavy index now in positive territory, year to date. (For comparison purposes, the small-cap Russell 2000 Index is still down 20% since the start of the year.) Encouraging quarterly data and, maybe more so, better-than-expected outlooks from some industry giants, including Microsoft (MSFT) and Oracle (ORCL), has emboldened investors to pour funds into the sector in a big way recently.
Looking ahead, the first-quarter earnings season is starting to wind down this week, with investors now waiting for the retailers with April-quarter endings to report their results. Speaking of the retailers, investors will be keeping close eyes on the retail sales data later this week. That will provide a big clue of just how severe the corona-virus impact has had on this changing industry. We would not be in a rush to jump into this beaten-down sector ahead of what most certainly be a dismal snapshot of the industry. Retail sales are expected to have plunged more than 11% in April following a record 8.7% decline in March.
The investment community also will be eagerly awaiting the latest commentary from Federal Reserve Chairman Jerome Powell who will deliver prepared via webcast hosted by the Peterson Institute for International Economics at 9:00 A.M. EDT on Wednesday. The central bank leader is expected to speak about the current issues facing the U.S. economy. Last month, the lead bank said it would keep short-term interest rates near zero until it felt that the U.S. economy “weathered recent events.” Additional clues on the Fed’s outlook for the U.S. economy will be the focal point for market watchers. The Fed Chair’s commentary may have an impact on trading during the middle session of this week. The market seems to be brushing off the thought of negative short-term fixed-income rates down the road.
Before the market’s open, the futures point to some selling after last week’s rally. Overnight, most of the main indexes in Asia finished higher, but as trading moves into the second half of the session on the Continent, the major European bourses are holding similar percentage losses (more than 1%) to the ones we are like to see on these shores. Trading in the week ahead is likely to be driven by coronavirus, news, commentary from Fed Chair Powell, and the latest reading on retail sales, which will give investors a sense of how the U.S. consumer is feeling amid the COVID-19 pandemic. What the latter data may do is push more investors into the stocks of retailers with significant online presences. Stay tuned.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
