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Sunburnt sector. Stocks slipped again on Friday led by technology shares which have been running hot. Geopolitical tensions are rising as Washington and Beijing play tit-for-tat with embassies.
N O T E W O R T H Y
One PFD per passenger.
With “PFD" I am not referring to preferred stock in that tagline, but rather the boating terminology for a “personal flotation device”, AKA a lifejacket. I am not using boating terminology to open a discussion of how boats have been unexpectedly in high demand with inventories diminishing (check out how well Brunswick stock has done through the pandemic, who’d a guessed). No, I am simply suggesting that turmoil in the markets has picked up and rough seas are likely to be upon us in the week ahead. Here are the things that we need to be thinking about.
Earnings. Earnings season is peaking with at least 152 S&P500 companies releasing their second calendar quarter results. Not just ordinary companies either. At least 4 of the FAANG+ stocks will release earnings this week, which incidentally represent 4 out of the 5 largest cap stocks on the S&P500. Those stocks, in case you were wondering, are Apple, Amazon, Facebook, and Google. Earnings are always important and contain lots of information not only about how a company performed in the past quarter but also about how they expect to perform in the quarters ahead. I am sure I don’t have to say that in this current environment, more information is better. Markets react differently to earnings during different times, sometimes buying on weak results, sometimes selling, and sometimes ignoring them altogether. What is important to note here is that investors are paying very close attention to earnings this quarter. Expectations have been set very low as companies are in survival mode attempting to ride out the pandemic. Because of this, earnings misses are being punished… so far. Interestingly, earnings quality is being closely looked at as well. Even companies that beat expectations are being punished for underwhelming investors. Low bars mean high expectations. Finally, what a company says about their earnings and near-term prospects is also being closely analyzed. All of this can only mean one thing: volatility. Remember volatility works both ways.
Headlines. Today’s world is one of uncertainty, thanks to a global pandemic with no currently available cure. COVID has wrought havoc on the global economy as well as a social sense of well-being that is critical for economic stability. Unemployment remains high, new virus flair-ups are occurring, and guess what… Presidential Elections are less than 100 days away. All of this makes markets particularly susceptible to headline risk. Headlines affect markets in two ways. Systemic: Overall, positive and negative reports affect the mood of traders… and market performance. Idiosyncratic: Reports from individual companies or sectors impact a market on edge. Examples include Intel’s (INTC) delay announcement which caused its stock to sink by -16.25% in Friday’s session (its chief rival AMD, rose +16.5% on the news) and Apple (AAPL) which slipped by -4.55% on Thursday on reports that it is being investigated by some state regulators. Examples of sector headline risk include virtually the whole tech sector slipping along with Apple and Intel’s bad headlines or Pharma being knocked down in response to President Trump’s executive orders aimed at lowering drug prices. To be clear, these types of risks exist every day in the investing world but have an enhanced effect in the current environment of uncertainty.
Geopolitics. Just because some lawmakers are working from home doesn’t mean that politics is on vacation. Let’s start with local politics. Republicans are expected to reveal their version of CARES 2.0 today, just days before unemployment benefits run out for the tens of millions Americans who are out of work. Getting to this second package, expected to be around $1 billion, was a surprisingly long and circuitous path which exposed the still-very-present differences in the parties’ approaches to the economy. Let’s hope they can come together on something in the next few days. On the global front, the war of words between the US and China has moved beyond talk as both countries have shut down embassies threatening to cause a new political standoff. This, as a Phase One trade deal with freshly dried ink was supposed to usher in a new era of economic cooperation between the two largest economies in the world. With elections on the horizon we can expect more rhetoric in the weeks ahead.
In conclusion, there are lots of market stimulants floating about these days. A heightened sense of fear brought on by the pandemic only accentuates market reactions. We have a big earnings week ahead of us, plenty of headlines lining up, and geopolitics is sure to throw some curveballs. Life jackets are optional but always highly recommended, especially when seas get rough.
THE MARKETS
Stocks sold off on Friday led by technology as investors took some of their profits off the table. The weakness in stocks led to the S&P’s first negative week in the last four. The S&P500 fell by -0.62%, the Dow Jones Industrial Average slipped by -0.68%, the Russell 2000 dropped by -1.52%, and the tech-heavy Nasdaq Composite Index sold off by -0.94%. Bonds slipped and 10-year treasury yields climbed by +1 basis point to 0.58%. Gold hit another high, rising +0.77% to $1902.02.
NXT UP
- Durable Goods Orders (June) may have risen by +7.0% compared to the prior month’s increase of +15.7%.
- Dallas Fed Manufacturing Activity (July) is expected to come in at -4.9, slightly better than last month’s -6.1.
- This morning, Hasbro missed and Albertsons beat. We will hear from F5 Networks after the bell.
- The week ahead is chock-full of earnings and economic releases including housing numbers, regional Fed reports, Second Quarter GDP, Consumer Confidence, University of Michigan Sentiment, and the FOMC meeting along with its all-important press conference. Please refer to the attached economic and earnings calendars for details.
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