Super Tuesday Begins As Investors Eye Earnings From Kohl's, Target, And G7 Disappoints

The market got something from finance ministers this morning, but not quite what it expected. 

Hopes that the Group of Seven (G7) finance leaders would come riding to the rescue with specific policy measures faded away Tuesday. Instead, kind of like the Fed last Friday, the G7 said it’s ready to support the economy amid the virus, Reuters reported, but didn’t outline anything specific. 

Maybe this means they’ll eventually harness their combined power to provide stimulus, but the market didn’t appear to like this lack of present action. It sold off initially but now appears to be hanging in there. 

Even if G7 doesn’t take specific steps, investors expect the Fed to. As of this morning, Fed Funds futures are pricing in the likelihood of a 50 basis-point cut in March and another 25 basis points for the April Fed meeting. The Fed meets two weeks from today, but nothing says it can’t do something before then if it wants to. 

Meanwhile, there were more signs of life early Tuesday following Monday’s historic gains as crude oil made up ground and the 10-year yield ticked up to 1.14%. Commodities in general look firmer, which is a little opposite of what you might expect with yields going up, but people are trying to find an equilibrium. Things are likely to stay volatile right up until the Fed meeting. 

As virus fears keep growing, Americans seem to be having a wide range of actions. Restaurants still are crowded, but people are buying every roll of toilet paper they can find.

Super Tuesday Is Here

For the first time in weeks, something besides coronavirus might grab the financial news headlines today and tomorrow. 

It’s Super Tuesday in the Democratic primaries. By tonight, we’ll have results from 14 states holding nominating contests to pick someone to run this fall against President Trump. As noted yesterday, this isn’t a political column and doesn’t express any political views or favor any particular party or candidate. However, we can’t pretend today’s set of elections don’t matter for the market.

Some analysts think if Sen. Bernie Sanders starts to pull away with a large delegate count, it could weigh on stocks because many investors consider him unfriendly to business. The market impact could be worse for certain industries like pharmaceuticals, defense contractors, and the Energy sector, based on policies Sanders advocates. 

On the other hand, strong showings from Sanders’ main competitors who have more moderate reputations might help lend stocks a boost. It’s going to be interesting to watch, whatever the outcome. It’s even possible that one aspect of yesterday’s rally reflected what some investors might have seen as improved chances for former Vice President Joe Biden after two other moderates left the race.

Shifting Out Of Reverse?

Getting back to financial news, yesterday’s sharp reversal from last week’s sell-off either marked the start of a new trend or just was another wild day in a volatile market that won’t mean a whole lot in the long-term. Either or neither might be the case, and it’s not something anyone can know right now with so many questions outstanding about the virus as cases and deaths grow.

It’s important to remember no one day is a trend. Yesterday definitely changed the tone, but the question is for how long? A lot could have to do with the fortunes of the biggest stocks in the market, including Apple Inc AAPL, Microsoft Corporation MSFT, and other FAANG and semiconductor stocks. 

The other crucial element is the bond market, which despite yesterday’s sizzling stock market remains near recent record highs with yields at record lows. Until bonds back off and yields start coming back, it’s hard to imagine a sustained stock market recovery.

At the end of the day, people are still buying bonds. People want rate cuts but they also are buying stocks, so we have a bifurcation going on. At some point, that likely has to decouple, but for now it’s driving the market.

Technical factors are another thing to consider watching. As we noted yesterday afternoon, the S&P 500 Index (SPX) pushed through some key resistance near the 200-day moving average of 3050 yesterday and looks much more positive on the charts than it did two days ago. 

At the heart of things, the virus isn’t going anywhere fast, it seems. The market is going to probably stay volatile for a while, and could be very reactive to headline news. The Cboe Volatility Index (VIX) remains above 30, a historically high level. Volatility doesn't just die after things like this. It takes a while to work through the system.

Retail Reports

Major retail earnings news is out this morning with results from Target Corporation TGT and Kohl’s Corporation KSS. Shares of TGT headed slightly lower in pre-market trading after beating analysts’ estimates for earnings but coming up a little short on revenue. Like other retailers, TGT suffered during the holiday season from soft toy sales, but total same-store sales rose 1.5%. That was in line with expectations.

Better news on the retail floor came from KSS, which beat earnings and revenue estimates from Wall Street and got a 4% boost in pre-market trading. In a press release, the company said it’s “encouraged by the acceleration of traffic and new customer acquisition in our stores and online.”

Earnings calls from TGT and KSS could be interesting if executives discuss the virus impact on supply chains or if they talk about what they’re seeing as far as current store traffic. The retail sector had a mostly solid day Monday as some stocks benefited from reports of customers stocking up on supplies in case the virus gets worse. 

Manufacturing Stays Positive—For Now

Some of the support yesterday might have been a reaction to pretty decent manufacturing PMI for February from the Institute for Supply Management (ISM). It showed the headline figure dropping to 50.1%, down from 50.9% in January and a little worse than the average analyst estimate gathered by Briefing.com.

The good thing is PMI stayed above 50%. That’s the level that marks the line between contraction and growth, and it was the second month in a row of expansion after several months of contraction late last year. The positive read came despite concern voiced by some of the respondents about the coronavirus in February, and also follows some disappointing services data last week that added to Wall Street’s struggles.

February auto and truck sales represent the only major data on the calendar today. It’s unclear how much these data reflect the virus impact in the U.S., but March sales might be more useful for figuring that out.

What’s Hot; What’s Not

In a positive sign on the virus front Monday,  the illness seems to be pretty well contained in China. Businesses like Starbucks Corporation SBUX and AAPL are back to operations there, and hotels are reopening. China is one of the big reasons AAPL and MSFT had big jumps yesterday, and whenever you see stocks like MSFT, AAPL, AT&T Inc T and Visa Inc V having a good day, that’s encouraging.

Back home, construction spending rose a solid 1.8% in January, which is a huge number considering the virus outbreak and hints at a robust housing market. The problem with data coming in is that most of it was gathered before the virus fears really took hold. This includes the February payrolls data coming up Friday, much of which was collected in the first half of February. It might be better to look at the four-week moving average of weekly jobless claims due Thursday for a better sense of how these fears affected hiring more recently.

Consumer Discretionary stocks Walmart Inc WMT, Costco Wholesale Corporation COST, Amazon.com, Inc. AMZN, and Target had great days in part because they can deliver the staples people need and might be stocking up on. Colgate-Palmolive Company CL and Clorox Co CLX—two companies heavily involved in the "keeping you clean and sanitized" department—are doing well, too, because their products are distributed by those big-box stores. COST reports Thursday, perhaps providing an up-close view of that stock-up trend.

CHART OF THE DAY:  WHERE NOW DOW? Last week, the Dow Jones Industrial Average ($DJI–candlestick) broke below 26,700 (yellow horizontal line), which if you look back to early 2018, acted as a strong resistance level. The index had a tough time breaking above that level until October 2019, when $DJI managed to break out above that level and continue to rally higher till it reached its all-time high. Yesterday, $DJI closed at 26,703, right about at that yellow line. Will 26,700 go back to acting as a strong resistance level or will $DJI quickly break above it?  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.

Transports and Tesla: A real mystery is if or when travel and transport-related stocks might get a boost. They’ve been getting the worst of things ever since this situation began. There was no relief for most even yesterday. If the transports, hotels, and casinos start to recover, that could really be a good sign for the broader market.

Analysts upgraded Tesla Inc TSLA and Advanced Micro Devices, Inc. AMD today, citing lower prices as an opportunity to jump in. However, investors should consider being extra careful with these stocks, which were running red hot before the virus hit. They’ll probably continue to be volatile. Also, a couple of stocks in the energy services sub-sector got downgraded.

Historic Comparisons: Many analysts compare last week’s shellacking to the fall of 2008. It was the worst week since that scary autumn. However, the better comparison might be an earlier autumn, in 2001. That’s because the confusion and abrupt economic crisis posed by the coronavirus is more like the shock of 9/11 than the bank and housing crisis of 2008. The 9/11 attacks and their aftermath put investors into a state of confusion similar to the one now, where no one knew what might happen next and answers to the problem of terrorism (like the virus) were well outside the market’s hands. 

The crisis of 2008 was a financial one. While it was scary, the central banks and governments ultimately found ways to address it, sometimes using traditional fiscal and monetary policy and sometimes by getting creative (quantitative easing). This time is more like 9/11 because there’s a sense the Fed and maybe even the government can’t do much to help. As former Fed Vice Chairman Alan Blinder told CNBC Monday, any kind of rate cut here would probably be psychological more than anything else, because rate cuts can’t really address a supply shock. He noted that in the 1970s, the Fed wasn’t very effective at addressing the oil supply issues that hurt markets and the economy. The Fed can help stimulate demand, but it can’t reactivate frozen supply chains or stock empty shelves.

Analysts Bottom Picking? If you follow the upgrade/downgrade list to see which companies might be "turning it around," for better or worse, following analyst movement can be helpful. But if you look at this week's list of upgrades, you might be surprised at some of the names on it, including AAPL, JP Morgan Chase & Co JPM, and Verizon Communications Inc. VZ. These aren't necessarily companies that have made material changes to their business in recent days, but rather had price moves that may have overshot the mark. Sometimes, when such a company sees a big drop—perhaps by following the rest of the market down—an analyst will flag it as underpriced relative to its fundamentals, and issue an upgrade.

Of course, each of these stocks had a good day Monday, though AAPL led the way with a whopping 9% gain. Still, if you're interested in using analyst ratings to help inform your trading, the daily list is available on the TD Ameritrade website under Research & Ideas >  Markets > Calendar > Ratings Changes. You can also set up ratings change alerts for any stock in your portfolio or on any of your watch lists.  

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy.

Image by Michael Bußmann from Pixabay