Love me, love me not… Stocks rallied yesterday for a third straight session as investors focus on economic recovery. Tensions are heating up between the US and China once again, escaping the gaze of exuberant investors… for now.
N O T E W O R T H Y
Recovery bets in. S&P500 up by +1.48%, Nasdaq Composite Index up by only +0.77%, best sector: Financials (+4.3%), worst sector: technology (+0.6%). Drop the mic. Should I just end with that first sentence? The pattern seems quite clear, traders are betting on the recovery. The tech sector has been a dominant player for much of the past decade and became a security blanket for investors as the pandemic crisis hit. After all, those types of stocks are immune to the cyclical gyrations of the economy. Those same cyclical economic moves typically have a strong influence on sectors such as Real Estate, Basic Materials, Financial Services, and Consumer Cyclicals. Consumer Cyclicals include industries such as Entertainment, Autos, Retail, and Housing. That strong influence means that when the economy contracts, they follow suit and vice versa. As I like to frequently remind my readers, economies naturally expand and contract. I have to remind them, because we haven’t had a contraction in over a decade. To be more exact, the last recession ended in mid-2009 and the US economy has been expanding ever since. By 2016, many economists felt that the expansion was about to end but the late in the year election victories by a pro-business administration along with a pro-business congressional majority boosted consumer and investor sentiment. The 2017 tax package provided new capital to corporations and consumers. That new capital… and confidence managed to expand the already long-in-the-tooth expansion. The stock market responded and also expanded making new highs regularly and when that failed, the Fed stepped in with monetary stimulus. The formula for success appeared to be working, defying textbook economics. Then came the unexpected: COVID-19. Slowing the pandemic meant pausing the economy which led to the end of the expansion. The move accentuated the downfall of those aforementioned cyclical sectors. By accentuated, I mean their stocks really took a hit. What is somewhat atypical in this recent downturn is the Energy sector which is slightly sensitive to economic moves but historically behaved more like Tech and Communications Services, which remain somewhat immune from the large swings felt by the cyclicals. Supply gluts combined with lower demand resulting from the trade war, the pandemic, and the increasing focus on green energy, put the Energy sector into a tailspin.
As investors appear to be factoring in a sharp economic recovery, they are focusing on those stocks hardest hit by the virus, putting aside the FAANG stocks and ending their fling with the ZAP stocks (I made that one up: Zoom, Amazon, Peloton). It seems pretty logical doesn’t it? Things will get better and all of those really cheap cyclical stocks will rally… in theory. However, as we are learning, not all cyclical stocks are created equally. The sharp economic downturn has managed to expose weaknesses in many companies one might not expect. Not weaknesses in business models, but rather balance sheets and cash flow statements. That means that some once beloved companies will not survive long enough to even get to the recovery. Moreover, the ones that do will spend a long time recovering from the shock. Finally, it seems clear that the post-recovery normal will not be the normal we once enjoyed and it is still unclear what that normal will be. What this all means is that investors need to tread carefully as there are still many unknowns lurking about which will ensure that the road back to normal will be a bumpy one.
THE MARKETS
Stocks rallied yesterday as both Japan and EU approve massive stimulus plans and the US continues to slowly ease shelter restrictions. Trouble continues to brew between the US and China over Hong Kong, though the markets have yet to factor in its effects. The S&P500 rose by +1.48% (now over important resistance points 3000 and its 200-day moving average), the Dow Jones Industrial Average climbed by +2.21%, the Russell 2000 jumped by +3.11%, and the Nasdaq Composite advanced by +0.77%. Bonds rose and 10-year treasury yields fell by -1 basis point to 0.68%. WHILE YOU SLEPT, Chinese lawmakers defied the US and passed national security regulations on Hong Kong a day after the US would not certify Hong Kong’s independence. The move caused Nasdaq futures to slip into the red while the other indexes remain in the green. The Nasdaq Composite contains many tech and semiconductor companies which are impacted by a healthy trade relationship between the US and China.
NXT UP
- Durable Goods Orders (April) are expected to have fallen by -19.0% compared to a revised -15.3% pullback in the prior reading.
- A second read of Annualized QoQ GDP Growth (April) is expected to show a -4.8% contraction in line with the prior estimate.
- Personal Consumption (1Q) may have fallen by -7.5%, slightly better than the initial -7.6 estimate.
- Initial Jobless Claims (May 23) are expected to come in at -2.1 million, down from last weeks -2.438 million new claims for unemployment benefits.
- Pending Home Sales (April) are expected to have contracted by -17.38% compared to last month’s decline of -20.8%.
- New York Fed President John Williams and Philadelphia Fed President Patrick Harker will speak today.
- This morning Dollar General and Dollar Tree beat estimates while Burlington Stores missed its mark. After the closing bell we will hear from Costco, Marvell Technology, salesforce.com, Nordstrom, Williams-Sonoma, VMware, and Dell Technologies.