The momentum turned higher early Wednesday after Tuesday’s closing skid. Strength came in part from Lowe’s and Target earnings, along with a rise in crude prices.
Two more solid earnings reports from Lowe’s and Target to start the day
FOMC minutes on tap this afternoon could provide insight into Fed’s thinking
Focus remains on reopenings, concern over vaccine study
(Wednesday Market Open) Yesterday’s close was all a dream. It never happened.
OK, it did happen, but it seems to be getting quickly forgotten by many investors as stocks drove higher in pre-market trading on the back of strong earnings and strength in the crude market.
Before we get to those things, it’s worth asking why markets continue to be so choppy this week. First of all, it’s best to get used to it. There’s still no cure for coronavirus and that makes for a lot of caution. Note that gold is at five-week highs and the dollar hasn’t given back much of its gains from March.
We have a mixed picture because people are getting back to work and no one knows how it’s going to turn out. You can’t be too positive in case of a spike in the caseload, but at the same time there’s a lot of money continuing to flow into stocks because at this point many investors see them as potentially offering the best return, and there’s a lot of hope.
Still, a lot of people say this entire recovery from the March lows is a “bear market rally”—or perhaps a so-called “bull trap”—that might not have a solid foundation, and could be keeping sellers ready to charge in whenever things move higher.
Getting back to this morning’s events, the day began with two more positive earnings reports— this time from Target (TGT) and Lowe’s (LOW). While TGT came up short on earnings per share, LOW beat analysts’ estimates on top and bottom lines and both companies killed it on same-store sales. TGT’s online sales also looked impressive. That theory about people staying home, stocking up on essentials, and focusing on home improvement projects apparently holds water as both companies’ same-store sales rose double digits.
LOW shares kicked into high gear in pre-market trading, up more than 6%, while TGT was only about 1% higher, maybe because of that miss on EPS. Hearing LOW say that momentum continued into May is probably a major reason things reacted so positively, and TGT said basically the same thing. We know people stocked up when the crisis began, so it’s good to hear that it wasn’t just a one-time spike.
The two solid earnings today really helped drive things after yesterday’s disappointing close. Overseas markets looked mixed as some investors focused on a steady drop in virus cases in Germany even as there’s still some concern about yesterday’s media report casting a bit of skepticism over the recent vaccine study results (see more below). All 50 U.S. states will be at least partially reopened by the end of today as Connecticut becomes the last to begin lifting some restrictions.
Consider keeping an eye on the big bank stocks, which took a dive late yesterday to give back their sharp gains from Monday. This is an important sector that just can’t get it going despite the market’s strong recovery overall from the March lows. Banks appear to be getting a little positive traction in pre-market trading.
There aren’t a lot of major earnings today after the close, so people might be more focused on tomorrow’s busy reporting schedule that includes Best Buy (BBY) and Medtronic (MDT) in the morning and Nvidia (NVDA) in the afternoon.
The chip sector stepped back just a little yesterday after starting the week on a roll. NVDA actually closed slightly higher yesterday even as the rest of the Information Technology sector took a breather. Shares of NVDA are up nearly 50% year-to-date and nearly 80% from their March low.
On the data front, consider watching the weekly U.S. crude production and stockpiles report due out this morning for any signs of increasing demand that might hint at the economy beginning to rebound. Crude inventories actually fell the previous week, so two weeks in a row (if it happens) might indicate that the drawdown wasn’t just a one-week fluke. Yesterday’s report from the American Petroleum Institute showed a weekly decline in supplies, so we’ll see if the government’s data match up.
June crude futures went off the board Tuesday with barely a whimper as prices remained pretty solid above $30 a barrel. Talk about contrasts. Last month was when the May contract expired and prices had an eye-popping collapse below zero due to over-supply of the physical commodity.
The Fed takes center stage this afternoon when Federal Open Market Committee (FOMC) minutes from the last meeting get released. This might be worth more than a glance considering the Fed is making its decisions in unprecedented times and Fed funds futures recently suggested the chance of negative rates in the near future. Anything the FOMC members said about that possibility certainly could be closely scrutinized, though Powell has stood solidly against that strategy. And for what it’s worth, the U.K yesterday sold its first negative interest rate bonds—a batch of 3-year securities that fetched an average rate of -0.003%.
There’s just one word to describe how yesterday’s session ended: Ouch!
Before the last half hour, it had looked like the major indices might finish flat or with slight losses after Monday’s incredible rally, but the bottom just fell out in the final 30 minutes, as Energy and Financials took the biggest beatings.
From a technical standpoint, it looked like a damaging close because it dropped the S&P 500 Index (SPX) below key support at 2940, which had been the old resistance line breached on Monday. But early action this morning finds index futures back above 2950. One thing about this market's choppiness is that it's been a challenge at times for technical traders to pinpoint support and resistance levels.
In general, it’s not too surprising to see profit-taking after a day like Monday, though it would have arguably been a real victory if the SPX could have held 2940. Some of the late selling apparently stemmed from a news report that raised a bit of concern about Moderna’s (MRNA) Covid-19 vaccine data that had gotten the market so excited Monday.
To put things in perspective, the article in Stat News didn’t refute anything MRNA had said. It mainly asked various experts what they thought of the results, and some said they hadn’t seen enough data and pointed out that these are very early findings so it’s too soon to judge.
The late selloff demonstrated that the market remains driven by headlines and can be a tough one to trade. With earnings season soon fading away, headline news could begin to exert more influence as corporate news quiets down. Just as a reminder, much of the recent rally took place during earnings. Anyone venturing in now should be ready for quick reversals in either direction, as we’ve seen so far this week.
Before the closing thud—led by drops in Walmart (WMT) and Home Depot (HD) despite impressive earnings from WMT and solid earnings from HD—the market was having a pretty good day. Weakness in those two companies might have represented some “buy the rumor, sell the news” kind of trading.
One thing that stood out before the late selloff and remains worth watching in days to come is housing. Everyone knew the April housing starts and building permits report early Tuesday would be a disaster, so the answer was out before the question was asked, so to speak. The surprising thing is how well homebuilder stocks did despite the bad news.
To understand why, it helps to put the data into context. This doesn’t look like a repeat of 2008 for housing, and that’s for a bunch of reasons. First of all, the supply of homes is far more limited than it was back then, and second, lenders have raised their standards for mortgages. They’ve gotten a lot more cautious.
Also, a bunch of signs point toward a rebound in housing demand after the initial crisis-related collapse in March and April. These include realtors talking about strength in some of the biggest markets including Dallas and Chicago even as mortgage rates remain rock bottom. In the meantime, shares of homebuilders Lennar (LEN) and DR Horton (DHI) saw their foundations get a little firmer on Tuesday and both are up pretty nicely from their lows back in March. Existing home sales for April are due tomorrow.
In another sector beaten down by the crisis, Darden Restaurants (DRI) had a decent day of their own Tuesday as the company reported that 41% of its dining rooms are now open. They expect that to increase significantly by the end of the month, and that’s a very good sign. Sales at some of their restaurants like Olive Garden have taken a big hit and the company didn’t have a great month overall, but shares appear to be trading on hope raised by some very positive words from the CEO. The company said customers are loyal and have stuck with Darden through the downturn.
CHART OF THE DAY: OUT OF THE FRYING PAN: Though the CBOE Volatility Index (VIX—candlestick) popped back above 30 on Tuesday amid a late selling spree in the S&P 500 Index (SPX—purple line), the VIX has cooled off momentously over the last few weeks and is down from above 80 during the worst of the sell-off. At a time when many market relationships have been off, this one (VIX falling as SPX rises) appears to be sticking to historic precedent—for now anyway. Data Sources: S&P Dow Jones Indices, Cboe. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Cash No Longer King? Coronavirus has put the term “money laundering” in a whole new light. If you’ve been to any grocery stores lately, might have seen a sign saying they don’t accept cash. Back in the day, maybe you remember your mother telling you to wash your hands after handing over a grubby dollar bill for a few packs of baseball cards. Why? Because money is dirty and germ-laden. Now the move away from cash, which already was going on before the virus, is getting accelerated in an effort to keep customer and merchant hands from being smeared with the virus. This only could be helpful for Financial sector firms like the big credit card companies and the Squares (SQ) and PayPals (PYPL) of the world that let you pay without getting your hands germy. SQ is up 24% year to date and PYPL is up 36%. It’s not all because of cash not being accepted, obviously, because a lot of the strength reflects a trend toward online sales with stores shut down. Still, it’s one more arrow in the quiver.
Another Way to Think About Valuations: We’ve talked a lot about how hard it is to price this market due in part to companies pulling or suspending guidance, as well as near-term earnings taking a huge hit from Covid-19. There’s always uncertainty, obviously, but this year takes that to new extremes. One analyst interviewed yesterday on CNBC made an interesting observation, saying that the current forward price-to-earnings ratio on the S&P 500 Index (SPX) is a historically high 23 vs. projected 2020 earnings, up from 14 at the peak of this crisis and up from around 20 before the crisis began. Never in history has the market been able to sustain such a high multiple for very long.
However, if you look at the P/E vs. projected 2021 S&P 500 earnings, it’s closer to 20, meaning basically that the market is looking past this year’s cratering earnings and pricing in hopes of an earnings rebound back to 2019 levels by next year. A lot of the current massive P/E run-up probably reflects the Fed’s incredible surge of stimulus that has pushed bond yields to all-time lows. This has the effect of convincing some investors that stocks could be the best place for them to find any kind of traction, though no such thing is guaranteed. That could explain why valuations are so high at the moment even as earnings are in the dumps.
Some say valuations can’t get much higher. On the other hand, keep in mind that a lot of money was extracted in March and still sits on the sidelines, meaning it could potentially go back to work if the virus ebbs or one of the many vaccines seems to work. Some of that “sideline” money might have gotten back into the game on Monday.
The New Defensives? When we think of defensive stocks we tend to think of Utilities, Consumer Staples, sometimes Real Estate—things that are often seen as recession-proof, cash-cow dividend payers regardless of which way the economic winds are blowing, or perhaps at times uncorrelated to the broader market. But like with many aspects of investing, the coronavirus pandemic might be changing how we view and define the word "defensive." Case in point: Netflix (NFLX).
On Monday—a broad-based rally day where the major indices rose several percentage points and investors flocked to "risk-on" segments such as the Russell 2000 Index (RUT)—shares of the streaming giant slipped. And though the Staples sector advanced along with the market, a few of the "stock-up" stocks such as Clorox (CLX) and Campbell Soup (CPB) didn't fare too well, with CPB falling some 8% in two sessions. Two companies that seemed to epitomize the "at-home" trend—Slack Technologies (WORK) and Zoom Video (ZM)—also slipped Monday. It's an important reminder that a reopening of the economy might be great for airlines, hoteliers, cruise lines, and consumers in general, but perhaps at the expense of those companies that cater to the quarantined.
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