Financials Sector Could Be In Focus Today As Treasury Yields Tick Higher

Key Takeaways

• Oil prices rise on expectations of economic reopening, extended output cuts
• Zoom reports after the bell today, Slack later in the week
• Space X launch seems to help Tesla shares; both companies share a CEO

(Tuesday Market Open) It seems that investors and traders are remaining positive about economic reopening. That optimism seemed to outweigh concern over simmering tensions between Washington and Beijing as well as the nationwide protests that have led to city curfews and National Guard activations.

Adding to the narrative of optimism about a reopening economy, oil prices have been moving higher as traders expect major producers to agree on extended production cuts. That’s boosting prices amid a continued outlook for improved air and ground travel as the economy gets back on its feet.

And with focus on the reopening, instead of continuing protests around the nation, demand for safe-haven U.S. government debt was waning, pushing yields higher, which could help the Financials sector today. Meanwhile, the Cboe Volatility Index (VIX) was elevated, but remained below the 30 level, perhaps suggesting that investors are slightly on edge about the national unrest but not overly concerned.

Wall Street’s relative calm about the protests perhaps is indicative that investors and traders are thinking they won’t lead to long-term economic damage. Still, they are coming just as many cities and states are taking steps to reopen their economies after coronavirus lockdowns.

With quick economic recovery from the coronavirus largely already priced into the market, the national unrest that is causing some shop owners to board up their storefronts at least raises the question of whether stocks are priced accurately if the looting and curfews continue. It’s hard for the economy to recover when people can’t open their businesses—whether because of a virus or threat of violence.

On Zooming and Rocket Propulsion

For some companies, stay-at-home orders have been a boon, such as Zoom Video Communications Inc ZM, and Slack Technologies Inc WORK. ZM reports after the close today, and WORK reports after the close on Thursday.

With people working from home, educational institutions offering classes online, and fitness classes going on the web, ZM and WORK find themselves in the spotlight. Both may have benefited immensely from the lockdown as people, businesses, and schools relied on their platforms to go about their day-to-day operations.

But as with all stocks, there is a risk. Take ZM, for example. The company went public about a year ago. Its current price to earnings ratio is well into four figures, so even though the shift to remote work has paved the way for growth, ZM earnings have a long way to go to catch up to the current price.

Also, it remains to be seen whether the heightened demand for virtualization will last. Investors might want to listen carefully to the companies’ respective earnings calls for the chance to learn more about how they plan to position themselves if and when the economy returns to normal.

In other corporate news, Tesla Inc TSLA shares far outpaced the S&P 500 Index (SPX). It seems that the successful launch of human astronauts into space aboard a rocket built by SpaceX may have helped the electric car maker.

While they’re different companies, both have Elon Musk as CEO, and a very public victory for SpaceX may be encouraging investors about his leadership of Tesla despite recent coronavirus reopening issues. Plus, the SpaceX success reflects positively on the overall brand (and in a way, it’s been a marketing tool for Musk and TSLA). And if past forays into space exploration are a guide, the research and technological advancements required for space travel helped pave the way for innovation in things closer to Earth—and to consumers’ pocketbooks.

Manufacturing Measure Moves Up

Economic news was largely encouraging on Monday.

The latest manufacturing index from the Institute for Supply Management showed less contraction in the space than the previous month. In May, the index rose to 43.1. While that was below the 44 a Briefing.com consensus had expected, it still marked the first uptick since January.

That data reinforces the market’s view that the economy is recovering. But there could still be bumps along the way.

Other data showed construction spending declining by 2.9% in April, which was much less of a drop than the 6% expected in a Briefing.com consensus.

Although the April construction spending number is still bad, we generally already knew that April was a terrible month for the economy because of the coronavirus.

CHART OF THE DAY: INSURANCE AND THE CORONAVIRUS. Despite moving up Monday, the Dow Jones U.S. Property & Casualty Insurance Index ($DJUSIP—candlestick) has been a bit of a laggard for the past couple of months relative to the S&P 500 Index (SPX—purple line). On the one hand, less interaction and fewer passenger miles traveled could mean lower claims for auto and property insurers. But the fate of some COVID-related expenses is up in the air. Plus, as a whole, investment returns on insurance premiums are a major component of industry profitability, so record low-interest rates and stock market volatility can certainly be a headwind. 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.

Insurance A Mixed Bag: The protests that have spread though many U.S. cities don’t appear to be too disturbing to shareholders of many of the large property and casualty insurance companies. But there could be some cause for caution ahead. The Dow Jones U.S. Property & Casualty Insurance Index ($DJUSIP) was up 0.49% on the day—the Financials sector, in general, did pretty well as Treasury yields ticked higher. Progressive Corp PGR, Allstate Corp ALL, Travelers Companies Inc TRV, Cincinnati Financial Corp CINF, First American Financial Corp FAF, and The Hanover Insurance Group Inc THG all outperformed the market on the upside on Monday. But Chubb Ltd CB and CNA Financial Corp CNA were down markedly considering the broader market was higher. Alleghany Corp Y was down a bit but basically flat. There may be some question about how much exposure the insurers actually have to damages sustained in civil unrest.

Meanwhile, yesterday marked the official start of hurricane season (though two “named” storms already jumped the gun down in the Atlantic). Last week NOAA’s Climate Prediction Center released its Atlantic hurricane outlook, which predicts a 60% chance of an above-normal season, a 30% chance of a near-normal season, and only 10% chance of a below-normal season. So there’s something else to put on the (Doppler) radar screen.

Valuations Historically High: Although historically June can be a pretty mild month for the market (see more below), this June, in particular, is starting with some pretty serious headwinds. Despite being in a general uptrend, nationwide protests could go on longer than expected, the coronavirus pandemic is continuing and efforts to re-open the economy may be slow, and tensions between Washington and Beijing continue to simmer. On top of that, stocks may be overvalued. According to S&P Capital IQ estimates provided by CFRA, the SPX is trading at 23.9x earnings per share estimates for the next 12 months. That compares with 17.6x and 14.6x two months following the bear-market bottoms in 2002 and 2009, respectively, according to CFRA. “Should the S&P 500 experience an above-average tumble this month, investors could point to valuations as the catalyst for the correction,” CFRA said.

Calm in June? If history repeats itself, June may be a fairly calm month for investors and traders. Since World War II, the SPX has had the fourth weakest average monthly price return, according to investment research firm CFRA. The month is also tied with August as having the second-lowest frequency of rising on the month, CFRA said. “That said, while advances have been meager, so have declines,” CFRA said. As always, the past is not necessarily precedent.

According to the Stock Trader’s Almanac, in the postwar era, returns on the $DJI average 7.3% between November and April, but just 0.1% in May through October. It’s where the phrase “sell in May and go away” is derived. But it’s far from universal; some years see the best returns in the summer months. And besides, if 2020 could be summed up in one word, that word might be “atypical.”

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

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