After completing an August performance that was the best since the 1980s, what might September deliver as an encore? It's starting out as more of the same—red-hot technology shares while much of the market treads water.
August industrial reading awaited soon after open
Dollar weakens to lowest level since May 2018
Zoom shares in rally mode after strong earnings data
(Tuesday Market Open) After five straight months of gains, September dawns with the market mostly treading water and new catalysts looking a little thin.
It is nice, though, to see some of the major indices—mainly the Nasdaq (COMP)—up ahead of the opening bell on the first day of a new month following the strong August we just had. That’s a positive sign that there might still be some buying interest. Strength in 10-year Treasury yields also stands out this morning.
As we noted yesterday, it wouldn’t be too surprising to see lackluster trading in coming days ahead of the three-day Labor Day weekend and the employment report Friday. People might be getting ready to square positions and take profit with both those events looming.
Monday’s weak market, characterized by selling across a lot of the same “reopening” stocks that had climbed on Friday, shows the kind of bumpy and directionless mode we might find ourselves in for a bit.
The fallback seems to be Tech, as it’s been for a while. The COMP scooted up to another record high Monday even as the other major indices got pushed into the red. The COMP continued to look strong early today, while other indices traded a bit mixed ahead of the opening bell.
We’ve been warning for a few days about volatility, and the Cboe Volatility Index (VIX) jumped 15% to above 26 on Monday, meaning choppier times might be ahead. The VIX has never come back down to “normal” levels of 20 or below since the whole crisis began back in February, despite the stock market’s march to new record highs. The current VIX strength suggests to some analysts that investors might be bracing for a market correction, something we alluded to here recently.
Typically, a “correction” means a 5% to 10% pullback. Though no one likes losing money on their investments, a correction like that now might get viewed as healthy overall, perhaps causing some weak longs to exit the market. The other more long-term concern is that people might be getting nervous ahead of the election two months from now. That could be showing up a bit in dollar trading, with the dollar index falling this morning to new two-year lows below 92 (see more below).
After Monday’s empty data day, there’s a bit more news on the economic front straight ahead this morning with ISM manufacturing for August. The index has risen three months in a row and got back into expansionary territory above 50% both of the last two months. Sometimes these readings can move the market.
Analysts expect a 52.6% headline number for August, according to Briefing.com, and it might be a good idea to keep an eye on production and new orders. Both of those were very strong in July and it would be nice to see a repeat.
Auto and truck sales tomorrow give investors another chance to figure out whether the industrial economy continues to bounce back. Factory orders and the Fed’s Beige Book also come out Wednesday, so there’s plenty to chew on this first week of September.
If the data come in strong, that could potentially give the 10-year Treasury yield some traction after it slipped four basis points to 0.69% yesterday. It popped back to 0.72% this morning, showing signs it might be ready to break out of the long period of rangebound trading. Still, it’s extremely low historically, and might not be enough to help the Financial sector much unless it shows signs of going back toward 1.0%.
If you’re one of many people who’ve been stuck in Zoom (ZM) meetings a lot this summer, it probably came as no surprise that the company had a great quarter earnings-wise. Shares jumped more than 27% in pre-market trading after ZM easily beat Wall Street’s earnings and revenue estimates after the closing bell. That will happen when you grow revenue 355% and increase active users by 700%. Sometimes a company is just in the right place the right time.
One question people ask is whether ZM can keep this going once life gets back to normal, as it hopefully will someday. Looking at ZM’s positive guidance, it sounds like executives there think demand for its services can keep growing well into 2021.
More earnings are expected to come down the pike tomorrow with Macy’s (M) and Five Below (FIVE), followed by Campbell Soup (CPB) on Thursday.
Anyone who wanted an object lesson on how an Apple (AAPL) sliced into four equal parts would potentially affect the Dow Jones Industrial Average ($DJI) didn’t have to wait long. On Monday—the first day AAPL traded at its new split-adjusted level—shares rose nearly 5% at times and finished up 3.3%. To some, that might be a sign that investors are swooping in to buy the stock now that its sticker price is below nosebleed level, even if the market value of the company didn’t change.
Despite AAPL’s huge gains Monday, the $DJI itself dropped 0.8%. This partly reflects AAPL now having less influence in the price-weighted index. At its pre-split price, AAPL had been the top-weighted stock in the $DJI, but now it’s down in the middle of the pack, so a great day for AAPL doesn’t necessarily translate into a banner day for the $DJI. Weakness in JP Morgan (JPM), Boeing (BA) and Walt Disney (DIS) pressured the index Monday.
The other split story this week is Tesla (TSLA), which showed no sign of slowing down on its first day at the new price. Shares rose nearly 13%, though some analysts warn that it might be approaching overheated territory. TLSA’s market cap recently hit $400 billion after first reaching $100 billion in January.
Only seven companies in the SPX are worth more than TSLA. That kind of money ($400 billion) could get you 10.53 million of TSLA’s basic 2020 Model 3, according to a Barron’s article, even though in the real world TSLA only delivered 90,000 vehicles in Q2.
CHART OF THE DAY: FLATLINING CRUDE: Here’s something you don’t see too often. Crude prices (/CL—candlestick) are basically flat this summer between $40 and $43 a a barrel. To find such a sustained period of range-bound trading in crude, you might have to go back 15 years or more. Crude hasn’t been able to get much of a bid despite a persistently weakening U.S. dollar index ($DXY—purple line), which is also strange because crude often rallies in weak-dollar periods. Is this relationship going to normalize soon, and if so, will the dollar come back or crude move lower? Data Sources: Intercontinental Exchange, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Valuation Picture: People keep being puzzled when they see this amazing stock market rally, wondering how it could happen with double-digit unemployment and both S&P 500 earnings and gross domestic product dropping more than 30% in Q2. Remember, though, that stocks arguably reflect more what investors think about the future than what’s going on now. That means the market is looking ahead to GDP next quarter and earnings for 2021 and even 2022.
The SPX might be historically high now at a price of around 23 vs. earnings expectations for the next 12 months, but that falls to only around 18 if you compare it to some analysts’ early estimates for 2022 earnings. Of course, 18 is still high historically, but not that far above the long-term average near 16. Obviously, those price-to-earnings multiples (P/E) are far from carved in stone. A lot could happen between now and 2022, though one thing seems relatively certain: the Fed Funds rate is likely to stay the same. Some analysts don’t see any hikes from current levels until 2024, so that at least is one less wild card for investors to deal with.
Cost Cutting—the Good, Bad, and Ugly: One reason some analysts are optimistic about earnings —aside from hopes of the virus fading and life getting back to normal—is directly connected to the pandemic. Companies like CocaCola (KO) and American Airlines (AAL) recently became the latest to discuss cost-cutting in these tough times, including layoffs.
Layoffs—which no one wants to see, of course, with so many people already suffering—aren’t the only form of cost cutting a company could consider. With more people working from home and business travel likely to remain lighter even when the pandemic ends, companies could conceivably save money on office space, flights, and hotels. Some of the biggest U.S. firms recently extended work-from-home options well into next year.
That’s obviously not so great if you’re in commercial real estate or run an airline. There could be a negative ripple effect across various industries that depend on people traveling and working downtown, like restaurants, hotels, and real estate. Some of this has even further effects down the line as those companies in turn spend less on things, like advertising, marketing, and public relations.
For investors in cost-cutting companies, however, this kind of corporate frugality has its positives, because some of the money saved could ultimately end up in shareholders’ pockets through dividends and stock buybacks. Or it could help drive up stock prices as savings hit the bottom line. We’ll have to see.
...About a Weak Buck: As market watchers know, the U.S. Dollar Index ($DXY) peaked this spring at 103 and has been grinding lower ever since—and this morning crossed the 92 handle to the downside. On the surface, this move might play well with policy aims of bolstering the U.S. manufacturing sector, which has trended down as a percentage of gross domestic product for decades. But how likely is it that a weaker greenback will do the trick? To put it a different way: If an overseas nation has built its economy around producing for the U.S. consumer, is it more likely that it’ll respond to a lower dollar by restructuring itself as a net importer of American products, or by pressuring its own currency to keep the balance intact?
Many economists point to these so-called “beggar-thy-neighbor” policies as a reason to not pin too many hopes on a quick resurgence of export manufacturing. Remember: The virus-led economic shock has been a worldwide phenomenon, so the entire world is struggling to get the workforce back on the job. In other words, last year’s back-and-forth on tariffs and trade policy could continue to play a major role in the next recovery.
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