Before The Bell
The most recent five-day of stretch of trading on Wall Street may best be described as a disjointed affair, as there were a few atypical occurrences over the week, including the Dow Jones Industrial and S&P 500 Index often moving in opposite directions to the NASDAQ Composite for a number of sessions, both stocks and bonds in demand at the same time, and fixed-income and gold prices falling at the same time equities traded lower. The selloff in the NASDAQ Composite and the gold market may best be explained as some profit taking after the tech-heavy NASDAQ set a number of consecutive record highs in the previous week and the precious metal hit a multiyear high earlier this month. We also think the high degree of uncertainty that investors are dealing with during these unprecedented times has created some unusual trading activity recently. In general, the main battle between the bulls and the bears is weighing the reopening of the U.S. economy and some increasing hopes on the coronavirus vaccination front against the recent spike in COVID-19 cases across much of the nation. For the week, the Dow 30 and the S&P 500 Index delivered respective gains of 2.3% and 1.2%, while the NASDAQ was down 1.1%. There clearly was some rotation out of the growth names and into some of the value plays.
On Friday, the session went to the bulls, as the Dow 30, S&P 500, NASDAQ, and the small-cap Russell 2000 climbed 63, nine, 29, and six points, respectively. Helping stocks was again some encouraging news on the vaccine front and a solid report on housing starts and building permits, another report that showed the U.S. economy is recovering, albeit at an uneven pace. Overall, the majority of the 10 major equity groups finished in positive territory, led by the healthcare, basic materials, and utilities sectors, and advancers led decliners by a comfortable margin on both the Big Board and the NASDAQ. Conversely, the energy and financial groups were the biggest laggards, with some likely profit taking in the latter after the financial stocks rallied on some recent better-than-expected earnings data from a few of the big banks.
Speaking of earnings, the second-quarter reporting season kicks into high gear this week, highlighted by reports from eight Dow-30 companies and Tesla (TSLA); the stock of the battery-powered car maker has been on fire in recent months. So far the earnings news can be termed mixed, which has also added to some of the interesting trading sessions we noted above. The expectation of a dismal earnings season already seems to be a given for Wall Street, so we continue to expect outlooks and revised guidance to drive the performances of most stocks after their companies report results. Despite last week’s minor haircut for the technology stocks, we continue to think that the tech names are most likely to deliver the best results, as recent social-distancing measures have fast-tracked some of the technological changes to the business world, including the increased importance of cloud technology and cyber security. Not surprisingly, the stocks of companies like Amazon.com (AMZN), Microsoft (MSFT), Apple (AAPL), and NVIDIA (NVDA) have done very well in recent months. Conversely, another pandemic-driven winner Netflix (NFLX) sold off a bit on Friday after the company said that net subscriber additions would be weaker than expected in the current (September) quarter.
The next fortnight of earnings news may very well produce some big individual moves, but our sense is that the market’s direction in general will continue to be driven by COVID-19 reports and the upcoming results from the business beat. On the latter front, it will be a rather light week, but we will get data on existing and new home sales, the leading indicators, and initial weekly unemployment claims. The latter report, given the jump in unemployment due to the COVID-19 pandemic, has been a hot-button topic for traders in recent months, often driving trading on Thursday mornings.
In addition to the coronavirus, earnings, and economic news, a big issue for Wall Street over the next two weeks is whether the Trump Administration and Congress will produce another round of stimulus for unemployed Americans and small businesses that are still suffering from the economic fallout of the coronavirus pandemic. If Congress fails to deliver some relief prior to breaking for summer recess at the end of this month it could have a detrimental impact on both Main Street and Wall Street. Conversely a relief package for those set to lose their unemployment benefits on July 31st may give a boost to the U.S. stock market. This situation remains fluid and therefore has the potential to impact trading over the next fortnight. Our sense is that some package will eventually be worked out especially with it being an election year.
Before the market’s open, the equity futures are presaging another mixed—but none too far removed from the neutral line—opening for the U.S. stock market. So far overseas, the trading also has been mixed. Overnight, the main indexes in Asia varied, with the big winner being the Shanghai Composite (up 3%) after the Chinese Communist Party encouraged more investment in China-based stock. Meantime, the major European bourses are slightly positive as investors await news about another round of stimulus for the euro zone in the coming days; reports have surfaced this morning that European leaders have agreed in principle on a stimulus package. On these shores, the new week has brought some more M&A news, with Chevron (CVX) agreeing to purchase beaten down Noble Energy (NBL) in a $5 billion transaction. 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.
