Element of Surprise: Market Puts on Rally Cap Despite China Weakness, Virus Spread

The focus this week is on earnings, as several S&P 500 companies open their books this week. This might have stirred some optimism among investors amid the coronavirus fears.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/wall street selloff
5 min read
Photo by Getty Images

Key Takeaways

  • China’s stocks crater, but U.S. stocks, fixed income, show signs of resilience

  • Alphabet (GOOGL) reports earnings this afternoon with focus on search, cloud

  • Several important risk signals not flashing red as of early Monday

(Monday Market Open) Stocks tanked in China this morning, but no real surprise. That market was closed all last week, so they’re playing catch-up as the coronavirus toll climbs. What does seem a bit surprising is what’s happening here at home early Monday as stocks stage a rally attempt.

For the moment, it looks like some investors are stepping back in. Whether it can last amid all the serious virus news over the weekend is a question, but it seems to indicate resilience and maybe some optimism that things can get better. It also could mean that some people thought Friday’s sell-off got a little overdone, as well as the fact that companies and individuals are taking great precautions to stop the spread of the disease.

The “horsemen of risk” are in a slow trot so far, not racing. The 10-year Treasury yield traded early Monday at around 1.54%, up from Friday’s low just above 1.5%. Gold and the yen—two other “safety” zones—both stepped back this morning.

Despite all the fear, volatility didn’t go too crazy last week. The Cboe Volatility Index (VIX) stayed below the psychological 20 level, suggesting that investors are worried, but not incredibly worried. At this point, VIX is hanging in there at 18.4, not showing signs at least for now of another major leg higher. That could change quickly, so it remains a metric to consider watching.

Crude managed to rise a bit on Monday morning after last week’s rough ride to four-month lows. OPEC might hold a meeting this week to discuss the possible impact, CNBC reported Sunday, and now there’s a report that Saudi Arabia might cut output. Both of those news items could be supportive.

Let’s keep things in perspective, too. Even after the beating it took last week, the S&P 500 (SPX) is only down 3% from all-time highs. Until two weeks ago, investor sentiment was pretty solid, as it’s been for a long time. That can change quickly, as we saw, but the “bones” of the market might still be healthy. Also, there was a lot of news over the weekend about how deadly the regular flu that we live with year after year can be, so that might have helped people assess the coronavirus fears a bit better. 

Still, developments over the weekend—with the human toll sadly rising and the first death outside of mainland China—don’t make it sound like this situation is ending anytime soon. On the business front, Apple (AAPL) is keeping its China stores closed until Feb. 9, and stocks in Shanghai fell 7% today.

Meanwhile, the earnings parade continues and people are gearing up for monthly payrolls this Friday. The Iowa caucuses are tonight, so if a candidate wins and investors interpret that person as bad for the markets, it could be another hill to climb.

Key Numbers Today: $1,600, 1.5%, and $50

Here are some key levels to keep an eye on as the week begins: Gold finished last week just under $1,600 an ounce and 10-year yields stayed above 1.5%. Crude held $50. Any sign of these levels getting challenged could indicate more virus-related anxiety. For now, however, they appear to be holding. 

Some analysts suggest that the shake-up we’re suffering wasn’t surprising considering how quickly things had risen. The virus, some say, could have been a good excuse for people to take profit. This school of thought argues that the SPX could fall to around 3150, about a 5% to 6% decline from the all-time high, before a “buy the dip” mentality re-emerges. That argument seems to be getting a challenge this morning.

It’s easy to forget after all the pandemonium last week, but some closely-watched U.S. economic data are about to hit the tape. It starts this morning with the ISM manufacturing index for January. The headline figure has been below 50% for several months, a sign of weakness in the manufacturing sector. It fell to 47.1% in December. Analysts don’t see any major turnaround for January, with a consensus estimate of 48.1%, according to Briefing.com. We’ll know soon enough, because the data come in right after the open.

By this weekend, investors could have a pretty good sense of how Q4 earnings ultimately shape up. The parade starts in a big way this afternoon when Alphabet (GOOGL) shares its numbers. The company missed analysts’ earnings projections in Q3, but beat on revenue. This time around, optimism ahead of earnings seems to be driven by search, YouTube, and the cloud.

Earnings Extravaganza Still on the Marquee

After last week’s crazy earnings bonanza, 60% of the S&P 500 companies have reported. If you think things could quiet down now, however, it’s unlikely. Some of the big names opening their books the first few days of February include Merck (MRK), Bristol-Myers Squibb (BMY), and Abbvie (ABBV), along with Alphabet (GOOGL), Walt Disney (DIS), Philip Morris (PM), and General Motors (GM) and Ford (F).  A total of 94 S&P 500 companies report this week, including two Dow Jones Industrial Average ($DJI) components.

By the end of this week, we’ll be around 80% of the way through earnings. At this point, earnings look decent but not spectacular, with a few notable exceptions like AAPL and Amazon (AMZN). The virus has some companies getting more conservative in their outlooks (see more below), and that’s put kind of a damper on things. 

So far, 69% of the reporting companies to date have come in above Wall Street’s estimates, according to FactSet. That’s below the five-year average. On the revenue side, 65% of companies have beaten estimates, FactSet said. That might sound decent, but many people might be used to numbers above 70% for earnings and revenue beat after seeing that happen a lot in recent years. 

On the other hand, enough companies are beating earnings estimates that FactSet now sees overall S&P 500 earnings in Q4 falling just 0.3%. That’s a lot better than the negative 1.6% it forecast back on Dec. 31, but still would be the fourth-straight quarter of earnings declines. That hasn’t happened since 2015–2016. 

Also, costs are a “rising” issue for some companies this time around, with Visa (V) the latest company hit last week with concerns on this front. AMZN also saw costs climb faster than many analysts expected. So it might be wise to look into this week’s numbers to see if other companies are having the same issue.

CHART OF THE AFTERNOON: LEADING INDICATOR? The Dow Jones Transportation Average ($DJT—candlestick) crossed below the Dow Jones Industrial Average ($DJI—purple line) in early December, and though it gained some ground after its pullback in late December, it failed to eclipse the industrials to the upside. The coronavirus outbreak, which has been hitting the airline and travel industries particularly hard, helped lead $DJT even lower relative to $DJI. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  


Does Virus Cloud 2020 Earnings Picture? Looking longer-term, investors and analysts appear worried about how the virus might cloud the earnings picture even more. Caterpillar’s (CAT) CEO warned Friday about “global economic uncertainty,” and that company is often seen as a good barometer for world industrial demand because of its huge global footprint. 

A bunch of companies reporting this week could provide more insight into the China picture. What will GM say about its huge business in the country? When will DIS re-open theme parks there? Will any of the biotech firms reporting this week give investors a better sense of how difficult a vaccine might be to develop? Will companies like GOOGL, GM and others do what some market heavyweights did last week and be more conservative in their outlooks until they know more about how this all plays out? Questions like these are why it’s so important for investors to look beyond the raw numbers on earnings reports, and perhaps tune in to companies’ quarterly conference calls.

Value Check: When earnings aren’t rising, people sometimes worry about the “P” side of the price-to-earnings ratio, which got pretty lofty at a peak of nearly 20 last month. Valuations did fall slightly last week, to around 18.75. Still, when you consider how quickly that rose from just about 14 a little over a year ago, some investors might be a bit less eager to jump in right now, especially with coronavirus worries still front and center. 

Another investor concern might be how the virus affects overall growth, which often factors into earnings. Analysts have already been lowering Q1 gross domestic product (GDP) and Q1 earnings growth estimates, but it’s unclear if those projections have more room below.

Tesla Swinging a Hot Bat, But Caution Helmets On: One of the few stocks able to keep its head above the water on Friday was Tesla (TSLA). It’s just been absolutely crazy over the last month, but a word of caution applies. Things may have gotten a little ahead of themselves with the stock price. One analyst speculated that TSLA might soon join the S&P 500, which would mean some of the recent buying might be on hope that fund managers would have to jump in if that happens. But that’s speculation and can’t be verified yet. Buying because of that kind of talk would be a pretty dangerous move.

In fact, trying to get in at these levels for any reason might be like jumping into a ring with a heavyweight champion. It might be better to let him fall to his knees before you jump in and take a shot, or you’re almost sure to get beaten. You don’t need to be the first or last to this party. On the other hand, it was good to hear CEO Elon Musk say last week that retail traders are the ones who “get” the company’s story, because it gives some well-deserved credence to a group that sometimes takes a few undeserved left hooks to the head.

Good Trading,

JJ

@TDAJJKinahan

Helpful Educational Content and Programming

  • Check out all of our upcoming Webcasts or watch any of our hundreds of archived videos, covering everything from market commentary to portfolio planning basics to trading strategies for active investors. You can also deepen your investing know-how with our free online immersive courses or by attending one of our live events. No matter your experience level, there’s something for everybody.

  • Looking to stay on top of the markets? Check out the TD Ameritrade Network, live programming which brings you market news and helps you hone your trading knowledge. And for the day’s hottest happenings, delivered right to your inbox, you can now subscribe to the daily Market Minute newsletter here.


TD Ameritrade Network is brought to you by TD Ameritrade Media Productions Company. TD Ameritrade Media Productions Company and TD Ameritrade, Inc. are separate but affiliated subsidiaries of TD Ameritrade Holding Corporation. TD Ameritrade Media Productions Company is not a financial adviser, registered investment advisor, or broker-dealer.

This week's economic calendar. Source: Briefing.com
Print

Key Takeaways

  • China’s stocks crater, but U.S. stocks, fixed income, show signs of resilience

  • Alphabet (GOOGL) reports earnings this afternoon with focus on search, cloud

  • Several important risk signals not flashing red as of early Monday

Related Videos

Call Us
800-454-9272

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.

Inclusion of specific security names in this commentary does not constitute a recommendation from TD Ameritrade to buy, sell, or hold.Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.

Asset allocation and diversification do not eliminate the risk of experiencing investment losses.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.

Scroll to Top