Powered by tech and energy, the Dow Jones Industrial Average ($DJI) enters Friday on a six-day winning streak. News is a little thin today, but retail earnings come into the spotlight next week.
(Friday Market Open) Today we’ll see if the market can roll a “lucky” seven as the Dow Jones Industrial Average ($DJI) enters Friday up six sessions in a row. It’s the first six-spot since last fall. Rising oil prices, high-achieving tech earnings, and even stock buybacks combined to help power the market higher this week.
Today’s open follows gains in Asia overnight but mixed results in European markets. No major earnings reports are due. Two Fed speakers take the microphone today: San Francisco Fed President John Williams and St. Louis Fed President James Bullard.
Sunnier May weather seemed to filter into the tech sector recently, and those warmer feelings in tech might be giving the entire market a new spring in its step. While info tech helped lead the major indices higher on Thursday, it was also encouraging to see other sectors play a role.
It’s often a positive sign when different sectors step up one after the other, because it could mean investors are feeling more bullish across the spectrum rather than in one or two specific areas. On Thursday, health care and consumer staples shined, but the day before it was energy. Financials haven’t been carrying the torch as much, but they had a good day Thursday. Every S&P 500 sector finished higher.
Energy continued its winning ways Thursday and rose another 0.8%. Friction in the Middle East, where Israel and Iran had a skirmish, could be helping bolster oil prices. While geopolitics plays a big role in the energy sector, keep in mind, too, that U.S. oil stockpiles are well below their year-ago levels, and this also plays into oil’s recent strength. Look today for the updated U.S. rig count number from Baker Hughes for insight into whether producers may be stepping up to catch the higher prices.
Oil is one big story this week, but it really feels like tech is setting the pace. That’s partly a function of strength from Apple (AAPL), the biggest of the tech stocks. Once again, AAPL posted new all-time highs Thursday. The AAPL rally began about a week ago, and that’s really helped change the psychology. Many investors still appear to take their cue from AAPL, and the rest of the so-called FAANG stocks quickly jumped aboard, too.
Besides the rally in tech, other reasons for the change in psychology from a week ago seem to be subdued inflation numbers that have some investors a little less worried about potential Fed tightening, a corresponding retreat in 10-year Treasury yields from the 3% level to around 2.96% early Friday, and the strength in oil that’s helping boost energy names and which some analysts see as a barometer of consumer confidence. All of this comes as earnings season continues to mostly impress, but another test comes next week when many big retailers start reporting.
The better than 1% jump in health care stocks Thursday came as a bit of a surprise, because the sector has been in the dumps most of the year amid worries about possible regulatory moves affecting drug pricing. The rally came before today’s scheduled speech on the subject by President Trump, so maybe it indicates that some investors decided to cover short positions ahead of Trump’s remarks. If Trump sounds a bearish tone for the big pharmas, a retreat might be on the prescription pad.
The S&P 500 (SPX) and $DJI were back in the green for the year as of yesterday’s close, and as stocks rolled along volatility beat a quick retreat. The Cboe Volatility Index (VIX) was trading just above 13 early Friday. Some investors view a lower VIX as indicating the potential for less turbulent trading, which would probably come as welcome news to those long-term investors who’ve patiently stuck with this market since it began tossing and turning in early February. But we’ll just have to wait and see what happens.
Crude moved slightly higher Thursday but wasn’t able to close above key resistance in the $71.90 a barrel area. The oil market traded both sides of unchanged early Friday.
Meanwhile, earnings after the close Thursday from Nvidia (NVDA) failed to help the stock much in pre-market futures trading despite the company beating Wall Street analysts’ expectations. Gaming revenue rose 68% year over year, which looks good considering it accounts for more than half of the company’s revenue. Sometimes when shares fall after a strong quarter, it could mean investors taking profits now that the news is out, or it might be reaction to the company maybe not meeting some of the “whisper” numbers people sometimes hear right before a report.
FIGURE 1: SPX OUTMATCHED BY SMALL-CAPS, TRANSPORTS.
The S&P 500 (SPX, purple line), eclipsed 2700 on Thursday for the first time in nearly a month. But it’s being outclassed by the Russell 2000 (RUT) index of small-caps (candlestick) and the Dow Jones Transportation Average (blue line). This isn’t necessarily a bad thing, as transport and small-cap strength can sometimes indicate a more powerful economy. Data source: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Will Rising Fuel Costs Be Passed Along? One question circulating after this week’s subdued inflation data is whether it can continue in an environment of rapidly rising fuel costs. It stands to reason that eventually airlines, shipping companies and other businesses that have to pay more to run their planes and trucks might eventually pass along those costs to consumers. Some analysts say these price increases are just being delayed, and might start showing up as inflation in coming months.
Another theory, however, is that companies today are much more energy efficient and less liable to see their margins get compressed as oil prices go up. As a recent Harvard Business Review article noted, companies like United Parcel Service (UPS), FedEx (FDX), and WalMart (WMT) have spent several years beefing up their fleets of electric vehicles, and for the first time, the electric trucks are expected to cost no more than regular diesel vehicles. The electric vehicles tend to get about five times more miles per gallon than traditional diesel vehicles.
Eyeing Info Tech Earnings: Earnings season has been good for info tech, and that’s showing up in the sector’s performance vs. the broader market. Since April 25, info tech was up more than 6% going into Thursday, compared with just 1.2% for the SPX, research firm CFRA pointed out. Though we’re still in the middle of Q2, it’s not too soon to start thinking about earnings for the sector this quarter, which CFRA projects to once again be solid at 19.8% year-over-year growth. The semiconductor and semi equipment sub-sector of info tech could have the strongest earnings growth in Q2 at better than 28%, CFRA said. However, comparisons get a lot tougher for info tech next year, with CFRA projecting full-year 2019 info tech earnings growth at 9%. That said, valuations have come down in the sector, though they remain above the historic average.
Another Type of Tech: There’s info tech, and then there’s the old technical indicators that sometimes pull or push stock indices. The widespread rally Thursday helped the S&P 500 Index SPX close above 2700 for the first time since mid-April. The 2700 mark was a round number that might have posed some technical resistance, but the SPX carved through it nicely and didn’t look back Thursday. It now seems like a while since we were talking about the SPX falling below its 200-day moving average.
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FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.
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