Before The Bell
The phrase that might best describe what is happening on Wall Street these days is “investors continue to climb the wall of worry”. Indeed, the major equity indexes, led by the NASDAQ Composite which ended the most recent five-day stretch with three consecutive record highs on its way to the doorstep of the 11,000 mark, rose again last week despite some disconcerting factors still in play as the second half of the trading year got underway. Better-than-expected reports from the business beat, including data on employment and unemployment and consumer confidence, along with hopes of another round of fiscal stimulus later this month before Congress breaks for summer recess and some hopes about the fast-tracking of a coronavirus vaccine, have put some wind in the sails of the bulls even with worries about the coronavirus pandemic, uncertainty about the presidential election later this year, increasing tensions between the United States and China, and what is expected to be a dismal second-quarter earnings season still very much front-and-center on the minds of traders.
Whether Wall Street, backed by a very accommodative Federal Reserve, continues to press forward may be put to the test in coming weeks, as the COVID-19 news appears to worsening in many states and the earnings season, which commences with reports from several of the nation’s largest banks, including JPMorgan Chase (JPM), is likely to bring some ugly results over the next month. Will investors continue to climb the “wall of worry”? The recent spike in safe-haven instruments, like gold and Treasury bonds, suggests that a good portion of the investment community is still a bit nervous.
On Friday, the Dow Jones Industrial Average, the NASDAQ, and the broader S&P 500 Index delivered strong performances, with respective advances of 369, 70, and 33 points. During the week’s final session, investors continued to balance the positive impact of the U.S. economy reopening and some encouraging COVID-19 vaccine news against the recent spike in coronavirus cases in states that aggressively opened up their businesses, including Texas, Arizona, and Florida. Although the increased cases have brought about more health concerns, Wall Street seems to be operating under the premise that a large portion of the U.S. economy again shutting down like early this year is not an option, given the devastating impact a second shutdown would have on output and on a nation that has seen nearly 50 million Americans apply for unemployment insurance over the last four months. The sharp advance on the final trading day resulted in weekly gains of 1.0%, 4.0%, and 1.8% for the Dow 30, the NASDAQ, and the S&P 500. Friday’s buying was broad based, with nearly all of the 10 major equity groups, save for the healthcare stocks, finishing in positive territory and advancing issues outpacing decliners on both the Big Board and the NASDAQ.
Once again last week, the technology sector was the apple of Wall Street’s eye. Investors continue to gobble up the big technology names, including industry leaders like Amazon.com (AMZN), Apple (AAPL), Tesla (TSLA), and Netflix (NFLX), even as valuations become frothy, as these companies are viewed as best positioned to weather the fallout from the coronavirus pandemic and thrive under what is likely to be the “new normal,” which will likely include more virtual working and learning activities. Wall Street also believes these technology names, along with mass merchandisers like Walmart (WMT) and The Home Depot (HD), are likely to be among the better performers during the second-quarter earnings season, which commences later this week.
And on that note, we expect the banking and financial stocks to be on the radar of Wall Street over the next five trading days. The banking stocks have not performed well thus far in 2020, as worries about the impact of the coronavirus on the economy and historically low lending rates, which hurt the earning power of banks, have unnerved investors. We continue to recommend that investors looking to gain a stake in this economically sensitive sector take a look at the stocks that are ranked 1 (Highest) or 2 (Above Average) for Safety™ by Value Line.
Looking at the upcoming earnings season with a broad perspective, the possibility exists that the stocks may rally some more if the guidance comes in to the upside, as investors already know that the second-quarter operating performance, as a whole, was terrible. The earnings, and to a lesser extent, guidance bars have been set so low that it may make for easy hurdles for companies and may give a boost to the stocks of those entities that do just that in the coming weeks. We shall see in short time.
Before the market’s open, the equity futures point to a higher start for the U.S. stock market. So far overseas the trading has been positive with the main indexes in Asia finishing higher overnight and the major European bourses comfortably in the green as trading moves into the second half of the session on the Continent. Some vaccine hopes seem to be behind the positive market sentiment. Specifically, Pfizer Inc. (PFE) and BioNTech SE (BNTX) said two of their vaccine candidates to protect against the virus that causes COVID-19 received Fast Track designation status from the FDA. Fast Track is a process to expedite the review of new drugs and facilitate development of new drugs. 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.
