Silver Linings

Silver linings.  Stocks went on a wild ride yesterday pulling out of early losses closing in the green as investors bet on a brighter, eventual, future.  Beaten down bank stocks got a lift yesterday, leading the rally.

N O T E W O R T H Y

Banking on it.  Yesterday’s market action was another one of those head scratchers where many traders find themselves saying:  “...not sure what drove that rally, but I am happy it went up”.  Of course, the traders that were betting on a further selloff had a slightly different sentiment. The day started with a disappointing report on Initial Jobless Claims which showed that 2.981 million Americans filed a first-time claim for unemployment benefits.  The number came in higher than expected but still lower than last week’s.  Many are hopeful that the trend indicates that the worst may be behind us.  Still, the number brings the total number of unemployed in the past 2 months to 36 million - which is a lot by any measure.

Meanwhile, tensions between the US and China continue to grow behind the scenes.  The Administration has been steadily turning up the intensity on its criticism of China’s handling of the COVID-19 breakout.  In recent weeks there have been on-again off-again trade discussions between the two countries as China has fallen short of import benchmarks set in the Phase One trade deal.  Earlier this week the FBI announced that it was investigating hackers, thought to be Chinese, who have been attempting to steal secrets related to Coronavirus treatments. Attempted hacks were on drug manufacturers, universities, and hospital systems.  In a Fox Business interview yesterday, President Trump spoke of the hacking incidents and said he was not interested in renegotiating a trade deal with China.  He further stated that he would be looking into Chinese companies listed on American exchanges which do not follow US accounting rules.  Meanwhile, the President directed the US federal employees retirement fund to forego planned investments into Chinese companies which would be a threat to national security.  This morning, WHILE YOU SLEPT, the US announced plans to cut off Huawei from chip suppliers causing futures to slip.  Lest we forget that the trade war, which now seems far in the past, caused a significant drag on a then-healthy economy.

Yesterday’s rally in stocks was not a typical one as it was not led by techs (though they did well), but rather it was heralded in by the banking sector.  The Banking Sector?  With no real news on the sector the rally caught many by surprise.  Stock buyers are constantly looking for bargains and banks certainly look cheap after the group fell by around -45% year to date.  Remember that stocks can be cheap for right reasons and for wrong reasons.  It is smart to avoid stocks which are cheap for right reasons - these are referred to as value traps.  A bank’s core business, besides charging ATM fees, is to borrow short and lend long.  This works really well in periods with high interest rates and steep yield curves.  The current economic crisis is likely to keep rates low for an extended period of time and Fed Funds traders are expecting rates to be negative next year.  On the positive side, the yield curve has been steepening somewhat as the Treasury has added significant supply to longer maturities.  The 2/10 yield curve, which was inverted last year, was around +47 basis points yesterday.  In normal conditions the steeper curve would be a good thing for banks.  But… these are not normal conditions.  Banks are shouldering the bulk of financial struggles which are plaguing both their corporate and their retail clients, ever increasing their provisions for bad loans.  At some time in the future, these stocks will be cheap for the wrong reasons, but for now it’s a bumpy road to recovery.

THE MARKETS

Stocks early-morning losses gave way to a later session rally led by the financial sector.  The S&P500 traded up by +1.15%, the Dow Jones Industrial Average climbed by +1.62%, the Russell 2000 inched up by +0.35%, and the Nasdaq Composite Index advanced by +0.91%.  Bonds rose for a third straight session and 10-year treasury yields fell by -3 basis points to 0.62%.

NXT UP

- Retail Sales (April) are expected to have fallen by a record -12.0% compared to last month’s revised drop of -8.4%.

- Empire Manufacturing (May) is expected to come in at -60 compared to last month’s -78.2.

- Industrial Production (April) may have dropped by -12.0% after dropping by -5.4% in March.

- University of Michigan Sentiment (May) is expected to have fallen from 71.8 to 68.

- Next week we have housing numbers, PMI’s, Philadelphia Fed Business Outlook, Leading Index, and minutes from the last FOMC meeting.  Check back on Monday for calendars and details.

daily chartbook 2020-05-15