Travel, Retail Shares Coming Under Pressure Again As Virus Cases Spike In Parts Of U.S.

(Thursday Market Open) Is this rally running out of steam? More catalysts might be needed to sustain the positive flow, but most of the news this morning is negative. That includes reports of spiking virus caseloads in parts of the U.S. and a bearish initial jobless claims report.

It goes back to what we’ve been talking about. Can progress on reopening match investor expectations? Right now, with increased hospitalizations in about a dozen states, there’s fear it could take longer for those states to move out of the various phases of reopening they’re in, and that could be an impediment for any return to normalcy. Restaurants, stores, and offices could take longer to get to the next stage, slowing economic progress. The market has been penciling in a V-shaped recovery, but is the optimism trade too fast for reality?

For the first time in weeks, the initial jobless claims report Thursday showed a rise. A 1.5 million gain was above analysts’ average estimate of 1.35 million. The market might not show too much reaction to this, however, because the May payrolls report set expectations that the jobs picture is improving. One week of higher than expected claims probably won’t be enough to offset that positive sentiment.

Despite yesterday’s setback and another tick lower in pre-market trading today, the major indices remain on pace for a positive week. Even if the fierce rally doesn’t return today and tomorrow, a weekly gain would contrast with the nearly 5% drop for the S&P 500 Index (SPX) last week. That was its worst weekly performance since March. 

Though the major indices pointed lower ahead of the opening bell, there was some positive news from overseas. The Bank of England is adding more stimulus and Beijing seems to have a recent spike of COVID-19 cases under control, news reports said.

China’s progress contrasts with parts of the U.S. The travel stocks are under pressure again in pre-market trading, and retail is also getting bruised. 

Steak Loses Some Sizzle

Lack of fresh positive news on the COVID-19 and other fronts Wednesday helped slow the upward move with a whimper, not a bang like last week. There’s just not much on the table ahead that might move the needle. Earnings season is almost a month away, the next jobs report is a couple of weeks out, and we just had a Fed meeting. 

That means the market could be more likely to react with volatility to any headline news, especially if it’s virus-related. Spiking caseloads in parts of the southern U.S. appeared to get some investors’ attention this week. 

For the most part, though, it feels like people are responding to good news more than they’re selling off bad news. Many investors want to keep alive the idea of a V-shaped recovery, and there appears to be lots of cash still on the sidelines. The Fed also seems to have a habit of showing up with a new gadget every time the market needs repairs.

All this could make some potential bears less likely to try and be heroes by selling into positive sentiment. Look where that got them last time when the market immediately rebounded following last Thursday’s big selloff. Some analysts now see that selloff as a “bear trap.” That said, a well-known market pundit’s bearish words on CNBC Wednesday afternoon might have helped trigger some selling that ultimately pushed most major indices down for the day, research firm Briefing.com noted.

Can Wall Street Venture Back Outside Today?

One question entering Thursday is whether the market’s reopening optimism trade can make a quick reappearance. Wednesday wasn’t a very good day for the “outdoors” segment that’s led the long rally over the last few weeks after taking the baton from Information Technology. Airlines and cruise companies gave up some recent gains. So did Boeing Co. BA and Caterpillar, Inc. CAT, which had risen earlier this week when reopening optimism stirred up excitement. 

Meanwhile, Apple, Inc. AAPL and Amazon.com, Inc. AMZN both cruised to new highs Wednesday. The Nasdaq (COMP), which is loaded with tech names, actually rose a bit despite Oracle Corporation ORCL getting taken out to the woodshed as investors reacted negatively to its earnings. Small caps, which led earlier this week, hit the dirt yesterday. 

AAPL could remain in the spotlight ahead of its Worldwide Developers Conference starting next Monday. For investors, the conference often provides insight into potential tech innovations, so consider staying tuned. Some analysts think AAPL’s recent gains could partially reflect excitement ahead of the conference. 

Getting back to the bigger picture, Wednesday’s setback for the SPX and the Dow Jones Industrial Average ($DJI) could have reflected a little investor exhaustion. Things can’t just keep going up without a break. Technically, there may be disappointment that for the second-straight day, the SPX wasn’t able to hold onto early gains that took it above resistance at 3130. Wondering where support might be? It’s possibly shaping up at around 3090, and the bias remains positive above that level, according to research firm CFRA.

Speaking of CFRA, they say it might take sharp upward revisions to Q2 earnings estimates for the market to gain more steam. The firm’s note to investors late yesterday projected a 44.2% decline in Q2 earnings year-over-year after an 11.9% drop in Q1. Things do look better moving forward, CFRA said, projecting 30.2% earnings growth next year following this year’s expected decline of 24.2%. A lot of analysts have pretty much thrown in the towel on 2020 earnings and are now modeling based on their expectations for 2021. 

Wall of Worries

If you follow the markets at all, you’re probably familiar with the constant sense of worry that seems to accompany every rally. Investors generally operate with one eye looking out for what might go wrong. 

That’s not a bad thing, either, especially when we’re dealing with COVID-19 and stock indices that are this highly valued. Still, you could arguably take it too far. Deutsche Bank put out a note this week warning of possible global emergencies, MarketWatch reported. There’s at least a one-in-three chance, Deutsche Bank said, that at least one of four major risks will occur within the next decade: a major influenza pandemic; a globally catastrophic volcanic eruption; a major solar flare; or a global war 

One of the most interesting ones to contemplate is a solar flare. The last major one happened in 1858 and caused huge problems for telegraph operators back in the day. We’re way beyond the telegraph now, and a flare could conceivably cause massive power outages and communication disruptions, Deutsche Bank wrote. GPS systems could get fried.

That’s all possible, but you can’t live your life in fear of what might happen. While past isn’t precedent, it’s pretty amazing how well the markets have done over the last 100 years considering all the disasters that happened. That doesn’t mean long-term investors should be too sanguine, either, obviously. That’s why tucking some cash away in an emergency fund is an idea that probably makes sense for most of us. 

Also, it’s arguably worth educating yourself about precious metals and their potential role in a portfolio. Proponents of gold say the metal’s low correlation to traditional assets can act as a hedge against systemic risk, especially during periods of stress in the stock and bond markets. However, there’s a lot of risk with gold, too, and unlike stocks or bonds, it won’t pay you a quarterly dividend. As with any investment, tread carefully.

CHART OF THE DAY: NASDAQ STILL HANGING ON. The Nasdaq Composite (COMP—candlestick) reached an all-time high last week. But since then, COMP pulled back and broke below its upward sloping trendline (yellow line) for three consecutive trading days. But then the index made its way back to the trendline and looks like it’s trying hard to stay there. If COMP does move above the trendline, it could be an indication that the uptrend is still intact. Of course, it could go the other way. It’s something to keep an eye on going forward. Data source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

OPEC Awaited: Crude—which some view as a proxy for economic demand—rose a bit today as investors anticipated an OPEC meeting. The group, accompanied by Russia and Mexico, is keeping nearly 10 million barrels a day off the market, and it could be interesting to see if they decide to pull more barrels out of production. Crude prices in the U.S. have been below $40 a barrel since early March despite lower supplies from overseas and falling U.S. production. 

Cash Considerations: One thing that might be worth monitoring is what companies say they’ll do with their money if Q2 earnings come in better than expected. In the past, better earnings often meant rewards to investors through buybacks and dividends. If there’s extra money around, as unlikely as that seems now, the question is where it might go. A handful of companies have raised dividends despite the COVID-19 challenges, though that’s likely to remain scattered. Buybacks probably aren’t in the picture because of the potential bad optics. 

One possibility is that we could see more industry consolidation through mergers and acquisitions (M&A)—some of which are percolating already. That includes GrubHub Inc. GRUB merger with Just Eat Takeaway, a European food delivery service. More mergers in the leisure and travel sectors wouldn’t be all that surprising, either, considering the challenges those companies face. Health Care could be another segment to watch, especially in the biotech arena. Global M&A volume between March and May was down 42% compared to the same period last year, according to data from data firm PitchBook, however. That may be starting to change. 

Ready to Rumble? Maybe Not: While stock valuations are historically high, there doesn’t appear to be too much worry about that right now in the investor community. Instead, “Don’t fight the Fed” seems to be the bulls’ favorite phrase, and it’s worked for more than two months.

You could argue that much of the Fed’s recent balance sheet additions could eventually need to be drawn back, perhaps causing another “taper tantrum” like the market had in the mid-2010s when that very thing happened. Still, it’s hard to see the Fed backing up anytime soon considering its projections for no rate hikes through 2022.

Some note that the market rallied for 10 years during the Fed’s previous balance sheet bonanza after the 2008 financial crisis, so why not again? Keep in mind, however, that stocks are valued a lot higher now than they were in the depths of that period, so it’s hard to make an exact comparison. What does seem evident is the effect the Fed is having on gold—which remains near its recent highs—and on the dollar, which isn’t exactly weak but is well below its peak from earlier this year.

Good Trading,

JJ

@TDAJJKinahan

TD Ameritrade® commentary for educational purposes only. Member SIPC.