Although stock markets have rallied strongly since a year ago when markets hit the Covid selloff low, investors remain cautious. Powell and Yellen take the spotlight today as investors await to hear their comments about the economy.
It’s a year since the bottom of the pandemic collapse and beginning of recovery
Fed Chairman Powell, Treasury Secretary Yellen addressing Congress on stimulus
Travel stocks come under pressure amid virus worries in Europe
(Tuesday Market Open) A year ago today marked the very bottom of the Covid selloff as the S&P 500 Index (SPX) plunged below 2200. That was down more than 35% from the all-time high just a month earlier, and things looked gloomy, to say the least.
If anyone then had told you then that in a year we’d see the SPX rise more than 75% to almost 4,000, you probably would have figured they had a bridge to sell you. Between the stock market’s amazing rebound and this huge rally in the 10-year yield, it’s been an incredible time for Wall Street, even if the economy as a whole continues to lag.
The question is how much of the reopening enthusiasm does the current market reflect? The SPX is approaching levels some analysts expected by the end of this year, though many think there’s more traction. One metric to watch is Q1 earnings starting next month. Q4 earnings surpassed average analyst estimates by a massive amount, and higher earnings would go at least part way toward justifying the current high valuations.
Today starts with stocks under pressure, volatility rising, and the 10-year yield falling sharply to 1.64%, down 12 basis points from last week’s high. Crude stumbled below $60 a barrel but is moving above that level this morning. It feels like virus worries, which retreated the last few weeks, are nipping at the market again and causing some investors to be more cautious. Travel stocks took it on the chin in pre-market trading amid worries about shutdowns in Europe.
If Fed Chairman Jerome Powell talks to Congress and the market hears nothing new, do his words make any noise that help or hurt asset prices? It remains to be seen.
Powell and Treasury Secretary Janet Yellen will be tag team champions today, testifying jointly in front of Congress about the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and its impact. Powell’s prepared remarks said the U.S. economy has recovered more quickly than generally expected and is strengthening. Powell is in a strange area. He wants to keep rates down but he’s also saying we recovered more quickly than expected, which has some people scratching their heads. He doesn’t want to pull support too quickly, but he’s threading the needle.
Treasury yields weakened slightly to start the week, possibly due to Covid concerns and also maybe reflecting trepidation ahead of some additional Treasury auctions scheduled this week— including a $60 billion auction of two-year notes today.
How demand shapes up for this new government debt could affect the short-term path of yields. Last month’s seven-year Treasury auction was a huge disappointment and might have played into the yield rally. It looks like investors might also be embracing bonds as a “safety play” amid virus worries, though no investment should ever be thought of as truly “safe.”
On the Covid front, the week began with more worries in Europe, where vaccination progress is lagging and some countries like Germany are shutting down. On Monday, concern popped up about a rise in U.S. cases as new variants make their way through various states. The Centers for Disease Control (CDC) warned of a possible surge and New Jersey paused its reopening. Early Tuesday, concerns came up about AstraZeneca’s (AZN) vaccine data, which a U.S. agency said contained “outdated” information.
You never want to hear about more people getting sick, and the new variants definitely raise concern. On the other hand, U.S. vaccination progress has been pretty amazing these last few weeks, recently surpassing two million a day. A growing percentage of the most vulnerable people have at least one vaccine shot already.
None of this is reason for Wall Street to dismiss case growth or for people to stop being careful, but arguably hospitalizations and deaths will tell the tale in the longer run—and those are lagging indicators. The reason we had lockdowns was to keep hospitals from overflowing. Clinical trials showed the vaccines prevented cases from getting severe and kept people out of the hospital. Now we’ll see if that’s the case against these variants. Keep an eye on the lagging indicators.
Thought stimulus was over? It’s a bit early for this, but April Fool! The Washington Post reported Monday that the Biden administration is preparing a $3 trillion infrastructure and jobs package, though it’s unclear how close it is to getting in front of Congress.
The infrastructure part of the plan includes hundreds of billions of dollars for repairing roads, bridges, waterways, and rails. It also includes funding for retrofitting buildings, safety improvements, schools infrastructure, and low-income and tribal groups, as well as $100 billion for schools and education infrastructure, the Post reported.
Both sides of the aisle expressed support in the past for infrastructure improvement, and if it comes to fruition it could be another boost for the Industrial, Materials, and Financial sectors. It’s not something that’s likely to have much impact on the market in the near term, but just knowing it’s being discussed might help put a floor under some of the major construction and transport companies. Many of those have had a good start to the year, anyway, thanks to reopening optimism.
Monday saw Tech stocks grab the lead back from those cyclicals, led by the semiconductor sub-sector of Tech. The Philadelphia Semiconductor Index (SOX) rose 2.2%, and money came back into some of the “mega-caps” like Apple (AAPL) and Tesla (TSLA). More on the mega-caps, specifically TSLA, below.
There were also some nice moves yesterday in the Staples sector, with both PepsiCo (PEP) and Dollar General (DG) getting boosts from analyst upgrades, Briefing.com noted.
Some of the move back into Tech might represent repositioning as the end of the quarter approaches. Even with some shuffling of the deck chairs going on, volatility shows signs of finally leaving the last 12 months of elevated levels behind. The Cboe Volatility Index (VIX) fell below 19 for the first time since mid-February 2020.
CHART OF THE DAY: WHAT A YEAR! This two-year chart of the S&P 500 Index (SPX—candlestick) and the 10-year Treasury yield (TNX—purple line) shows how the bottom fell out of both a year ago today before this blistering rally brought stocks to new record highs. Data sources: Cboe, S&P Dow Jones Indices. Image source: The thinkorswim® platform.
On the Home Front: Higher yields have the housing market on edge, and there’s a 1-2-3 punch of housing news this week. It started with existing home sales Monday, then new home sales today, and earnings from KB Home (KBH) on Wednesday.
KBH has a tough act to follow after rival Lennar (LEN) saw shares jump double-digits following its earnings report last week. KBH has one built-in advantage, mainly that its biggest market is on the pricey West Coast, where it enjoyed an average selling price of $640,000 in its Q4. Still, the company’s overall housing revenue fell more than 20% in Q4 from a year earlier as home deliveries dropped 27%. Profit margin has been rising for KBH, however.
Last time out, KBH pointed to a “robust” housing market with growing demand for single-family homes due to the pandemic. However, keep in mind that 30-year mortgage rates have really been tearing up the pea patch lately, rising 40 basis points from the start of the year to 3.34% by late last week, according to Bankrate. That obviously begs the question, what’s next for housing after a year of blistering gains?
Separating Tech from Tech: There’s been so much talk lately about Tech being weak as yields rise, but people tend to put the entire sector into one giant bucket. If you separate it out a bit, in periods of uncertainty it tends to be the so-called “FAANG” stocks like Apple (AAPL) and FAANG cousin Microsoft (MSFT) that people are probably still going to trust going forward. On the other hand, people are a little less sure what to do with newer Tech stocks that benefited during the pandemic, like Peloton (PTON), Zoom (ZM), and DocuSign (DOCU).
This doesn’t mean the FAANG stocks are necessarily a screaming buy when they’re down. Many analysts say they’re still pricey. Others say stocks like the PTONs and ZMs can continue to do well because people have gotten used to their products through the shutdowns, and “stickiness” means a lot. Once you’ve spent big bucks to bike in your basement, you’re probably less likely to invest in a gym membership, for example.
Don’t forget the middle-men of Tech either, old stalwarts like Intel (INTC), Oracle (ORCL), and Cisco (CSCO). These companies provide a lot of the underpinnings that keep global technology humming, and sometimes get overlooked because they’re not as sexy or exciting. These three have had some rough patches in the last year or two, but caught a bit of an updraft early this year.
Tesla Shares Running Weak: If there’s any company that epitomized the massive growth-stock rally of late 2020/early 2021, it’s arguably Tesla (TSLA). Some analysts continue to see major upside, but so far 2021 has been a bit of a disappointment. The stock, which had a nice start to the new week, is down 25% from an all-time high of $900 posted two months ago. Other high-flying “mega-caps” like AAPL, MSFT, and Amazon (AMZN) also remain under their early-2021 highs, but none are down as much as TSLA, and Facebook (FB) is on a major roll.
Obviously all these stocks march to their own fundamental drummers, but TSLA arguably hasn’t suffered worse news than the others. Instead, it might be getting victimized a bit more because so much of its anticipated growth still lies in the future. That means the prospect of higher rates down the road might be hurting it more than its better-established mega-caps with many decades under their belts. There could be a positive side to this (if you’re not heavily invested in TSLA, that is). “The surging 10-year has taken the wind out of the sails of highly-valued companies such as TSLA and Zoom Video (ZM), and quieted bubble talk for now,” Barron’s observed.
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