It's Not A Sprint

It’s not a sprint.  Stocks had another mixed close yesterday with tech pulling the Nasdaq to another new all-time high as new virus cases picked up steam. The Fed has our backs for the foreseeable future… at least until 2022, according to Jerome Powell.

N O T E W O R T H Y

Not even thinking about thinking.  If it isn’t clear to you yet, we are at a very powerful inflection point.  Stocks have rebounded from their lows in late March as we learn that roughly 20 million Americans remain unemployed and are seeking work.  People out of work spend less money and folks who still have jobs spend less out of caution.  Because of the lockdowns, spending opportunities have been vastly limited.  Unemployment, lockdowns, and supply chain disruptions have led the US GDP to decline.  The Fed gave its forecast for GDP yesterday, expecting it to decline by -6.5% for 2020, the largest annual decline in history.  On a positive note, the Central Bank expects the economy to grow by +5% in 2021… if everything goes well. Summer is almost upon us and folks are bristling to get outside… and shop… and socialize.  Just in time for those desires, restrictions have been easing up across the country.  Even hard-hit New York City is due to begin its phase one limited opening in the coming days.  Back to the “stocks are rallying” theme.  Let’s not get into why but rather: what.  In hindsight, it is easy to see that cyclical stocks, which are sensitive to the economy, were the hardest hit in the initial market downdraft.  Especially those directly affected by the shutdowns (airlines, hotels, cruises, retail, leisure).  Stocks from companies that benefited from the lockdown soared.  Some obvious ones were in healthcare/pharmaceuticals, online retail, and consumer staples (specifically ones that are in cleaning supplies or long-shelf-life food products).  Then of course, there’s tech.  Technology really is a major growth enabler in just about every industry and we, as a society, become increasingly reliant on it daily.  So one would expect certain areas of technology to be insulated from market turbulence caused by economic calamity.  These have been the major investment themes in the stock market in the past several months.  On good days when it appears that we are turning a corner with the economy opening up, hard-hit cyclicals soar and lockdown essentials lose altitude.  On bad days, though they seem sparse lately, those same cyclicals get trounced, some by double digits. Tech… well it is always up and down but mostly up… regardless of lockdowns.

Yesterday, we learned that new COVID cases appear to be on the rise in at least 22 states.  Texas, one of the first states to ease restrictions, announced 2,504 new cases yesterday, its largest single day tally since the pandemic began.  Meanwhile, Florida revealed that it had 8,553 new cases which is the largest increase in 7 days.  California, a state with some of the most conservative restrictions, noted that hospitalizations have risen 9 out the last 10 days and are at their highest since mid-May. Now, to be clear, more testing means more cases will be discovered.  With testing availability increasing daily, one would expect more cases.  An increase in hospitalizations on the other hand could be a warning sign that a second wave could be on the horizon.  Before we can jump to the conclusion that the small surge is caused by the recent wave of relaxing restrictions, we have to widen our scope and observe states which have seen new cases even out. Georgia, which has allowed gyms and hair salons to open for nearly a month and a half now, have seen new cases plateau.  All in all, it appears too early to tell if a real second wave will hit causing a second lockdown mandate.

Despite all of this conflicting information, one thing has remained constant: the Federal Reserve.  Yesterday, the Fed announced that it would keep interest rates near zero, which was largely expected.  The Chairman told reporters that the Central Bank is “not even thinking about thinking about raising rates”… comforting I suppose.  Further, the Fed will continue to aggressively add liquidity to the system and proceed with rolling out Main Street and municipal lending facilities.  Powell insisted that the Fed has plenty of other options to stimulate growth and that they are considering Yield Curve Control (YCC).  We will hear more about that in the days ahead but at a high level it means more bond buying.  Finally, the Fed Boss expected that the road to recovery will be slow and that things will be different once we get past the crisis.  But for now, the Fed still has the market’s back.  The market’s initial response was positive, but the overall negative tint of the Fed’s view caused stocks to ultimately sell off into the close.  All except the Nasdaq which closed higher, driven by technology shares.  We may be at a positive turning point, but the economic recovery will take time and will surely suffer some setbacks along the way. This is a marathon, not a sprint.

THE MARKETS

Stocks had a mixed close yesterday in response to a cautious Fed.  Cyclical stocks sold off while technology stocks traded higher.  The S&P500 slipped by -0.53%, the Dow Jones Industrial Average dropped by -1.04%, the Russell 2000 sold off by -2.63%, and the Nasdaq Composite Index advanced to a new all-time high, adding +0.67%.  Bonds rose and 10-year treasury yields slipped by -10 basis points to 0.72%.  Gold climbed for a third straight session, adding +1.36% on

second wave fears.

NXT UP

- The Producer Price Index Excluding Food and Energy MoM (May) is expected to have contracted by -0.1% after shrinking by -0.3 in April.  The year over year figure is expected to show an annual increase of +0.4% compared to last month’s read of +0.6%.

- Initial Jobless Claims (June 6) is expected to show 1.55 million first time unemployment claims, down from last week's 1.877 million.

- Continuing Jobless Claims (May 30) is expected to show 20 million claimants down from last week’s 21.487 million.

- After the bell we will get earnings announcements from Adobe and Lululemon Athletica.

daily chartbook 2020-06-11