A comeback rally enters its third day, with equity indices flashing green in the early going, and crude oil looks set to enter its 6th up day in a row. But data from ADP confirmed what most investors already knew—payrolls contracted sharply in April. How might this seeming dichotomy play out?
Crude rally continues, potentially providing early lift for stocks
GM and Beyond Meat Earnings top analysts’ estimates, underpinning shares
Disney down early after weak quarter hurt by crisis impact on theme parks, cruises
(Wednesday Market Open) If the stock market has a catalyst right now, it’s arguably crude.
That volatile commodity rose for the sixth-straight day, raising hopes of improving demand as economies reopen. Meanwhile, major overseas indices are mostly higher again, and bond yields firmed but aren’t migrating much from where they’ve camped out for weeks.
Economic reopenings continue to raise hopes in both the stock and crude markets. This could be a fickle metric because the virus doesn’t seem to be taking a break, judging from recent statistics. The ADP survey of private businesses out today showed April job losses of more than 20 million, which could steer attention toward the government’s payrolls report this Friday. However, it might not give too much insight into Friday’s data since that includes government jobs, too.
Earnings season shifted into high gear this morning with General Motors (GM) checking in following reports after the close yesterday from Disney (DIS) and Beyond Meat (BYND). Shares of DIS clung to tiny gains in pre-market trading, while BYND rode better than expected results to double-digit overnight gains.
GM swung higher in pre-market trading, too, after the company beat analysts’ estimates on earnings and revenue despite a previously reported 7.1% drop in vehicle sales during Q1. It could be interesting to monitor that company’s call for word on how business is doing in China as that country reopens.
Earnings from DIS were kind of a mixed bag. The earnings per share number missed the Street’s average estimate, while revenue was pretty much what analysts had expected. The company said it’s confident it can get through this crisis. What’s incredible is how the stock came back overnight after falling 2%. This recovery suggests the market is amazingly strong.
Probably to the shock of few, the theme park and cruise businesses really suffered in Q1, though that doesn’t tell the full story because theme parks in most of the world were open in January and February. It’s the current quarter where DIS might see things get worse, with questions still surrounding when its signature U.S. theme parks and hotels might reopen. The company has started taking online reservations for its theme parks for dates beginning June 1.
Continued subscriber adds to streaming service Disney + represented a positive side of the quarter for DIS. The company reported 54.5 million paid subscribers as of early May. The timing of that launch last fall seems impeccable when you look back, though obviously DIS didn’t know what was about to come.
DIS’s cruise business is really a separate story from theme parks, because it’s hard to believe many people would necessarily want to board a cruise ship right away even if the virus situation improves. The exception might be millennials, who have been buying cruise ship stocks in recent months, according to TD Ameritrade’s Investor Movement Index® (IMXSM). The IMX is TD Ameritrade’s proprietary, behavior-based index.
Some cruise lines have said they’re going to launch boats again in August if the government gives permission, and millennials might hop back on if the price is right. They seem to be the population that’s most likely to come back, while elderly cruisers might be more hesitant. Travel companies might have to cut their margins to get people to come back on board, and that could be tough for the industry—and the airlines in particular—because their cost structure is so high.
Another part of the travel business, hotels, showed a little more strength Tuesday with Marriott (MAR) leading the way. That came after MAR raised $920 million by amending its co-branding credit card agreements with JP Morgan Chase (JPM) and American Express (AXP), according to MarketWatch.
The revised agreements helped scoop up some much-needed cash for MAR, and the Street seemed to like it. Shares rose more than 1%. It’s a good story because you’re seeing companies get creative to find financing that doesn’t raise debt. Creativity really can pay off at times like these, and this could help MAR until hotel rooms start filling up again.
Data is a little light today as investors await tomorrow’s weekly jobless claims. T-Mobile (TMUS) reports after the close, with subscriber numbers in focus.
Crude had an amazing day on Tuesday, rising double-digits again as signs of demand continued to show up and investors anticipated more traffic as states start to reopen. It’s also a bullish sign to see that many futures market participants are already rolling from the June into the July contract. That hopefully means there’s no repeat later this month of that supply glut that helped send futures into negative territory as the May contract expired. The weekly supply and production report this morning could get a close look from many investors.
With demand starting to re-emerge, some of those stockpiles can move out of storage and free up more room for future supplies. And let's not forget, U.S. oil rig counts—as measured by Baker Hughes (BKR)—have been in steady decline for the past 6 weeks, so storage space is getting a little breathing room from the supply side as well.
Why did stocks give up a lot of their gains late Tuesday? Part of it could have been technical disappointment among traders seeing the S&P 500 Index (SPX) unable to break above 2900. It ended the day in the middle of a technical resistance band that stretches from 2856 to 2882. The area up around 2940 might be another tough resistance spot because the SPX couldn’t close above it last week and it represents the old autumn 2018 high from right before all the air went out of the market that year.
It’s also possible the SPX is hitting its head a little at these levels with the price-to-earnings ratio now near 20, a historically high number. Some economists said Tuesday that many of the major tech stocks, which led once again Tuesday, look like they’re priced for perfection.
Most of the big tech stocks, including Apple (AAPL), Microsoft (MSFT), and Amazon (AMZN) rose 1% or more yesterday, and these companies have a heavy influence on the SPX and Nasdaq (COMP) due to their huge market caps. Meanwhile, influential sectors like Financials continue to struggle, and the key Industrial and Material sectors also lagged the overall market yesterday. It would be better if there were more coordination and less dependence on any one sector.
This impressive performance from Information Technology and also from biotech, which both have huge representation in the COMP, help explain why that index is nearly back to where it started the year. The COMP is only down about 1.8% year-to-date, and is actually up 7% from a year ago. Back on March 22, the COMP hit an intraday low of 6631, putting it down 26% from the end of 2019. It’s been an incredible comeback.
Fed Vice Chairman Richard Clarida, interviewed on CNBC yesterday, said he thinks a recovery can begin in the second half, but it’s contingent on the virus situation. He also warned that the unemployment rate is going to surge to levels not seen since the 1940s.
That’s likely to be the focus over the next day or two heading into Friday’s April payrolls report, and concern over that, along with some negative headlines about the virus, might also have helped trim the market’s big gains by the end of Tuesday’s session.
There won’t be anywhere to hide from the economic horror show Friday when the government delivers a payrolls report unlike any that people have ever seen. Analysts expect April job losses of 21 million, according to research firm Briefing.com.
That’s like taking last year’s approximately 180,000 jobs a month average growth and subtracting it from the economy 116 times. That means even if jobs immediately picked up next month (not likely) and averaged 180,000 a month from then on, it would take nearly 10 years to get back all the positions lost in April alone.
CHART OF THE DAY: APPROACHING EQUILIBRIUM: It seems amazing to think, but the Nasdaq (COMP—candlestock)) is down less than 2% year-to-date, as this chart shows. That’s way better than the S&P 500 Index’s (SPX—purple line) 12% loss since the end of 2019, and reflects the heavy COMP population of tech and biotech stocks whose businesses were either slightly shielded from the pandemic’s impact or actually might have benefited, in the case of some biotech companies. Data Sources; S&P Dow Jones Indices, Nasdaq. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Balance Beam: For the next few weeks, some U.S. states are open and others aren’t. Some countries like Sweden and New Zealand are back to almost normal as far as reopening, but the U.S., Canada and much of Europe are shut down. So it’s kind of a bifurcated situation that’s likely to test companies’ abilities to operate across geographies, whether that’s managing overseas vs. domestic or in a scenario where a company has plants in different U.S. states. There’s never been a challenge like this, and that could help explain why so few companies decided to give any kind of Q2 guidance.
From a market perspective, a lot of the hills and valleys ahead once earnings season slows down could be determined by statistics from states that have reopened. Consider monitoring some of the following things over the next few weeks: Are people going back to stores and restaurants, and in what numbers? Are companies in those states able to get their workforces back? Are virus cases ticking up in places that reopened?
Q3 Growth Trajectory in the Hot Seat: That last question is huge, because these states have basically become canaries in the coal mine. If they can’t reopen safely and have to go back to stronger social distancing measures, the market probably won’t like that. Any signs of a hiccup as far as getting things restarted—whether it’s increased case numbers or less than expected consumer demand—could potentially work their way into what remain analysts’ bullish gross domestic product estimates for Q3. The average GDP estimate for Q3 is now in the mid-teens. While many analysts expect a big comeback for Q3 GDP after projected double-digit Q2 losses, others project low single-digit growth. They say the recovery can’t be as quick as more bullish investors think. If the bears are right, it might have an impact on Q3 earnings. That in turn could weigh on stocks, which at this point seem to be trading based on hopes for a quick economic recovery.
Running in Place: Economic indicators haven’t moved much early this week. The 10-year Treasury yield remains steady, while the dollar index is in the 99-handle. Volatility eased a little on Tuesday after last weeks’ gains. Continued stability in these three metrics could ease some of the choppiness in stocks. Any major decline in the dollar might reflect investor concern about U.S. government borrowing and the Fed’s swelling balance sheet. A stable dollar at its relatively high current level, however, probably means worries about this unprecedented debt are relatively muted.
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