The market is likely looking in two directions today, with one eye focused on Fed Chair Powell’s testimony to Congress and the other focused on what appears to be a slowdown in the coronavirus.
Coronavirus is still front and center, but anxiety lessens as new cases slow
Fed Chairman Jerome Powell begins his testimony to Congress today
Under Armour shares tank as company reports surprise loss, weak guidance
(Tuesday Market Open) With one eye on China and the other on Washington, investors continue to send stocks higher ahead of Fed Chair Jerome Powell’s testimony to Congress Tuesday.
Even though coronavirus remains a huge factor, there appears to be growing confidence in the market that China—the epicenter of the illness—is doing a decent job containing it. That doesn’t mean things can’t get worse, but the number of new reported cases is slowing, according to the latest data. This might help explain why most Asian markets rose Tuesday and U.S. stocks built on Monday’s gains in pre-market trading.
That said, coronavirus and other factors helped send Under Armour (UAA) shares got smacked this morning. The stock fell more than 15% in pre-market trading after UAA reported a Q4 loss and said sales will fall in 2020. Revenue and earnings missed analysts’ estimates, and UAA is just trying to find its way. Like some other companies reporting recently, UAA cited coronavirus as one factor hurting sales in Q1.
On just about every earnings call now, investors might want to listen for coronavirus updates. It’s like tariffs last year, a theme that nearly every executive gets asked to address. If companies start lowering their guidance based on the outbreak, analysts might have to start pulling back their own estimates for overall earnings growth in Q1.
That said, Q4 earnings season approaches the finish line with a little more muscle. Last Friday, FactSet forecast 0.7% earnings growth in Q4, up from its original estimate for a 1.7% decline. Expected revenue growth of 3.5% is also slightly better than the firm originally thought. These still aren’t great results by any stretch of the imagination, and coronavirus could take a bite out of Q1 numbers. So it’s probably too early to put a lot of optimism into the earnings picture.
Earnings are kind of light this afternoon, but Wednesday morning brings CVS Health (CVS) and Trivago (TRVG), followed that afternoon by Cisco (CSCO) and MGM Resorts (MGM).
There’s more deal news today, with shares of Sprint (S) surging more than 60% after The Wall Street Journal reported that its merger with T-Mobile U.S. (TMUS) will be approved by a federal judge. These are the third and fourth largest U.S. wireless carriers.
Some of the defensive metrics remain elevated, but they indicate slightly less fear this morning. The 10-year yield climbed just a touch, and crude is back above $50 a barrel. Volatility eased, with the Cboe Volatility Index (VIX) tipping below 15. Still, there’s a struggle right now between the surging stock market and this sense of caution (see more below).
After Monday’s nice little rally, Fed Chair Jerome Powell steps to the podium today to take Q&A from Congress. Generally, the Fed has sounded more optimistic about the economy lately, and seems content to stay on the sidelines with rates. Powell would probably have to change his tone in a pretty big way to have much of a market impact today. There was nothing in his pre-testimony statement released early Tuesday to shake things up too much. The Fed is watching coronavirus closely, Powell said, and the big risk is China slowing down. That’s not surprising to hear.
While rate policy, economic growth prospects and the possible impact of coronavirus all could end up being front and center, other topics might also come up. For instance, consider listening for anything Powell says about U.S. debt, which continues to grow and has a chance to threaten all-time highs on a percentage basis in coming years, according to some analysts.
Powell might also discuss the potential economic impact of Boeing (BA) shutting down 737 MAX production last month. Many economists think the BA situation combined with coronavirus could make for some rough sledding this quarter in U.S. economic growth.
There’s also concern about how overseas economies might be doing, even beyond China. For example, a lot of people got spooked last week when Germany reported soft industrial orders data for December. What does Powell think of all this and its potential impact on the U.S., and does he see any signs of the Fed having to adjust policy if things get worse? Is he encouraged by recent stronger U.S. data?
If you haven’t already noticed, there’s a kind of tug-of-war going on in the markets, and it would be hard to find a better example than Monday. The cyclical Information Technology sector helped lead a rally on Wall Street even as the defensive unit gathered strength on the field amid gains in bonds and gold. The 10-year Treasury yield stayed below 1.6%. Crude oil lost ground, falling below $50 a barrel in another sign of possible demand worries before clawing back above $50 this morning.
This seems counterintuitive. If everyone’s so cautious about coronavirus, why would tech stocks be climbing? Is the stock market getting ahead of itself without enough people thinking about the risks, or are the bond and gold markets just not seeing what stock traders see?
First, it’s possible that semiconductor stocks—which helped lead the parade Monday with big gains for Nvidia (NVDA) and Advanced Micro Devices (AMD)—could actually be getting a lift from the virus. One school of thought says even though the virus might hurt these companies’ production chains in China, the resulting lower output could lead to higher chip prices which could potentially offset any losses from production issues.
Chips and the rest of the big tech stocks—which we’ll stretch to include Amazon (AMZN) since it’s well established as a tech player even if that’s not its official sector designation—could also reflect more of that “best house on a bad block” sentiment we’ve seen the last few years.
In other words, with things looking a little shaky around the world, investors might be seeking safety not just in U.S. bonds and the dollar, but also in some of the U.S. mega-tech stocks, Briefing.com noted. These shares also include Apple (AAPL) and Microsoft (MSFT), which both rose Monday. AMZN hit new record highs after a tough second half of 2019, and seems to be getting an extended boost from strong earnings.
Whatever the case, it’s probably a good idea to keep your eye on the semiconductor sub-sector, because it’s one of the most cyclical. You could argue that strength in the chips sends positive signals about the global economy because they go into so many everyday electronic products from games to phones. If they start to wilt, that could send the opposite signal. That’s also something that could possibly be said about cloud computing, where MSFT and AMZN compete with many other large tech firms.
CHART OF THE DAY: YIELDS VS. SOX: In this six-month chart, you can see 10-year Treasury yields (TNX—candlestick) descending toward last summer’s lows even as the semiconductor sector (SOX—purple line) maintains strength and approaches last month’s highs. This might seem counter-intuitive, because semiconductors tend to do well in a strong economy while bond yields tend to weaken when the economy is soft. Data Sources: Cboe Global Markets, Philadelphia Stock Exchange. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Mall Shopping: It's no secret that mall owners have been under pressure in recent years, as shoppers increasingly choose to shop and buy online, and as mall mainstays such as Sears Holdings, Carson's parent BonTon, and others file for bankruptcy. So it might be tempting to dismiss Monday's announcement by Simon Property Group (SPG) that it will be acquiring rival mall operator Taubman Centers (TCO) in a $3.2 billion all-cash deal as a defensive move in a deteriorating industry. But many see the move as a sign the mall space has turned a corner, with operators such as SPG as key players in an industry that's become a hybrid of retail and entertainment. And when you consider the acquisition price—a 52% premium over TCO's closing price last Friday and about double where shares were trading a week ago—it does look like a signal of strength.
Have you been to the mall lately? If not, you might be surprised to see that—aside from the ones that have shuttered completely—many have been evolving, from functional to experiential. In the olden days, the typical mall featured a few anchor department stores such as Macy’s (M) and JC Penney’s (JCP), flanked by boutique apparel shops, jewelry kiosks, and a food court. The modern mall, however, is an experience, with former anchor stores converted into movie theaters, escape rooms and, increasingly, theme park attractions. In other words, the mall has become a day of fun for the entire family. And while you're there, you may as well pick up some bric-a-brac, a soft pretzel, and one of those orange drinks.
Find a Job: We’ve talked about some of the things to keep an eye on with Powell’s testimony today. His assessment of the economy, projected growth and anything he has to say about future rate policy all go without saying. Other things shouldn’t be overlooked, however. For instance, last week’s January payrolls report showed strong job gains and low unemployment, both of which Powell’s likely to touch on. However, what about some other aspects of the data? For instance, the number of people working only part-time because they couldn’t find full-time jobs and those “marginally attached” to the workforce stayed stuck in January. Does Powell have thoughts on why?
He’s also likely to be asked about wages, which have been outrunning inflation but still aren’t rising as much as some economists expected (or as much as some politicians probably want to see as they hope for re-election). Is there a chance for wages to rise more steeply without threatening inflation? If not, what’s keeping wages from growing faster, and does Powell still think it’s important to let inflation move even higher than the Fed’s 2% goal if it can pull more people into the economy? What’s the limit on the inflation he’d be comfortable allowing?
Investors Jumped Back in Last Month: Getting back to the markets, the Investor Movement Index® (IMXSM) increased to 5.68 in January, up 2.34% from its December score of 5.55. The IMX is TD Ameritrade’s proprietary, behavior-based index, aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets. Equity markets reached all-time highs last month and investors responded by increasing exposure to U.S. markets, ending the period as net buyers of equities.
January ended with some uncertainty, and coronavirus worries still have volatility elevated. So we’ll see if investors change their stock market exposure in the next report. Meanwhile, in January, retail investors at TD Ameritrade net-bought popular names during the January IMX period, including MSFT, AAPL, BA, and Advanced Micro Devices (AMD). They net-sold AMZN, Netflix (NFLX), Twitter TWTR), and Intel (INTC). Millennial investors sold Tesla (TSLA) and jumped into shares of Exxon Mobil (XOM), which might seem surprising. However, they could be interested in XOM’s yield, and maybe also hope crude oil might bottom soon.
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