Taking A Breath: Jobless Claims Disappoint, But ECB Stimulus Greeted Positively

(Thursday Market Open) The stock market lately has acted like a boxer that takes punch after punch and comes back stronger after each round. The S&P 500 Index (SPX) just had its best 50-day rally in history right after COVID-19 shut down the world’s biggest economies.

Nothing goes straight up forever, of course, so it’s not too surprising to see the pause button get pressed Thursday morning. With a lot of potentially negative data to sift through today—including a slightly disappointing jobless claims read—and possibly tomorrow, some profit taking can’t be ruled out.

The SPX has climbed 11% since mid-May, a pace that’s hard to believe and probably even harder to maintain. If the stock market can have a day where it’s just down a bit, that’s not necessarily a bad thing, considering where we’ve been. 

Major indices started to climb back from their earlier overnight losses as the opening bell loomed, helped in part by news that the European Central Bank (ECB) today expanded its bond-buying program above $1.5 trillion. Markets in the U.S. have been rallying partly due to the old “Don’t fight the Fed” philosophy as the Fed throws money at things, and now the ECB is doing more of that, too. It’s hard to fade this in the short-term.

As the month continues, the rubber might hit the road thanks to numbers starting to come in on how stores and other businesses are doing with reopening. Investors are probably going to examine that data very closely to see if all the optimism was justified. 

One interesting feature this morning is that despite the overall weakness in stock indices, travel company shares are solidly higher in pre-market trading. Stocks like Boeing Co BA, United Airlines Holdings, Inc. UAL and Carnival Corporation & PLC CCL were among the gainers, and that suggests the reopening optimism trade isn’t necessarily going away. However, big bank stocks, which keystoned yesterday’s big rally, look mixed in pre-market trading.

Costco Wholesale Corporation COST shares moved higher in pre-market trading as May sales looked strong. Online sales were especially good, rising more than 100% over the four weeks of May.

Jobs Picture Takes Center Stage

A lot of the passion Wednesday had its roots in a private sector jobs report for May that showed more than 2 million jobs lost during the month. That’s awful news, of course, but in the context of analysts expecting 8 million job losses, the idea was it could have been much worse.

That bittersweet report led right into today’s weekly new jobless claims data. And tomorrow we get the May payrolls report. Weekly claims came in at 1.877 million, which was a little worse than expected by analysts but still down slightly from just above 2 million the previous week. Anyone optimistic about reopenings would probably want to see that number drop pretty steadily over the coming weeks, though it could take a while to get back to what had been the norm of below 300,000. 

Analysts expect tomorrow’s report to show 8.5 million job losses in May, down from more than 20 million in April, according to research firm Briefing.com.

Crude took a pause from its rally early Thursday. The recent crude strength has been lifting Energy shares and spreading hopes that firmer demand for oil might reflect a firming economy. So-called “safe-haven” investments like gold and the dollar both fell Wednesday and then ticked up slightly early Thursday, so consider tracking their performance as the day continues to get a sense of the risk appetite. 

Bonds are actually unchanged this morning, which could be a good sign.

Who’d Have Thought? Nasdaq Approaches New Record High

This year’s had a little of everything, and we’re not even halfway through. There’ve been record highs, mind-numbing 35% declines in a matter of weeks, horrible data worse than any since the Great Depression, tens of millions of job losses, and now, once again, a major index approaching a record peak.

Nasdaq (COMP) finished Wednesday at 9682, not too far below the 9838 record high recorded on Feb. 18 before COVID-19 really crashed the party. The more concentrated Nasdaq 100 (NDX—see chart below), is even closer to a new high. The strength in COMP and NDX reflects the heavy concentration of those $1 trillion FAANG stocks trading there. Most have been hardly scarred by the pandemic, and trade near or above where they were going in. 

This week, however, it isn’t really FAANGs and their cousin Microsoft Corporation MSFT leading the way. Instead, some of the long-suffering sectors, including Financials, started to sizzle. Financials took second on the leaderboard Wednesday, behind only Industrials—another sector that got beaten down by the virus and is reviving now as the economy reopens.

Financials, however, mean more, arguably, than many other sectors, mainly because big banks have so much exposure to all aspects of the economy. If the main banking giants like JP Morgan Chase & Co. JPM, Citigroup, Inc. C, and Bank of America Corporation BAC are struggling, that means it can be hard for a lot of other sectors to gain any traction. So what we saw yesterday as many of the banks gained 4% to 5% was pretty meaningful.

When you think back to JPM CEO Jamie Dimon’s comments last week, maybe that helped Financials stop spinning their wheels. According to Dimon, spending levels on debit cards are improving and revenues from the bank’s trading division remain similar to the huge levels posted in Q1. 

Financials are the fourth-best performing sector over the last week, and have risen more than 8% over the last month after taking one of the biggest flops of any sector when the pandemic first hit.

Main Street Keeps Up with Wall Street as Banks Rally

While it’s nice to see the biggest banks picking up some ground, you don’t want to overlook smaller, regional banks, either. These are the ones, along with Wells Fargo & Co. WFC, that tend to pick up a lot of the mortgage business, as well as meet local businesses’ needs. The smaller banks took it on the chin earlier this year, only to have some of them start to turn around in recent weeks.

Stocks like Fifth Third Bancorp FITB, Regions Financial Corporation RF, and M&T Bank Corporation MITB enjoyed solid gains Wednesday as regional banks’ performance continued to help drive gains in the small-cap Russell 2000 (RUT) index. The RUT is outpacing the SPX since the March lows. That’s potentially good news for the Main Street economy. 

The banking sector got some help Wednesday from what looked like a break-out in the 10-year Treasury yield, which posted seven-week highs above 0.75% (see more below). Whether this is a one-day jump or something more meaningful remains to be seen, but if the yield continues to put on weight, that could indicate more investor confidence and less caution ahead. 

Volatility Down But Not Out as Potentially Ugly Data Loom

Speaking of caution, the Cboe Volatility Index (VIX) fell again Wednesday and is nearing 25 on its long journey down from peaks above 80 in March. A VIX reading of 25 would normally be very high this time of year, and it would also normally be odd to see VIX at these levels when stocks are having such a party. This could tell you things remain volatile and we’re not out of the woods yet. 

That could be especially evident over the next day or two, with the May payrolls report Friday expected to show U.S. unemployment near 20%, according to Wall Street analysts. However, this report might get only a cursory look from investors, who may see it as old news. It’s possibly more important and useful to track weekly jobless claims, and also to wait for the June payrolls report to see if reopenings this month had a positive impact. 

The market’s come a long way in a short time. As an investor, you may want to make sure you’ve kept your portfolio well diversified during this unprecedented four months. There’s no guarantee, but diversification can sometimes help you be better situated to handle any quick moves one way or the other in any particular sector. 

There’s also nothing wrong with looking at other ways to potentially help mitigate risk and prepare for more volatility, including checking your balance of equities to fixed income and cash. No one needs to be a hero and go “all in” at these levels.

CHART OF THE DAY: CLOSE BUT NO CIGAR. While the Nasdaq Composite (COMP) is on its way to reaching its all-time highs, the Nasdaq 100 Index (NDX–candlestick) had a slight edge. NDX reached a high yesterday that was above its all-time record close but ended up closing just shy of that level. NDX has been trading above its 20-day exponential moving average (blue line) since April 6. Data source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results. 

Small-Caps May Have Trade Tensions to Thank: One thing to keep in mind about the Russell 2000 (RUT) small-cap rally is that it could reflect to some degree worries about the trade situation. When did RUT rally last year? When tariff talk heated up. When the economy is healthy, a lot of investors gravitate to the SPX and COMP where the bigger companies with more global exposure are found.

When tariffs take effect, however, the primary economy becomes more within these 50 states, and you’ll sometimes see the RUT draw more interest from investors. That’s when mid-sized banks, which are heavily represented in the RUT, have a chance to perform and get more business because there’s potentially not as much money going overseas. It’s here and favors U.S.-based manufacturing rather than depending on worldwide demand.

Through mid-week, the RUT was now up 47% from its March low. That’s better than the SPX rally of 40% from the bottom posted in late March. 

Bank Holiday: It seems like only yesterday when we were writing about the 10-year U.S. Treasury yield “marching in place.” Come to think of it, that was just yesterday. Things changed kind of abruptly Wednesday as the 10-year yield rolled up a big gain to reach an intraday high of 0.77%. That would have been an incredibly low level just a year ago, but considering it’s barely moved above 0.7% for months, the rally to seven-week highs looked pretty promising. Bank stocks, which tend to do better when yields move higher, because it can improve their profit margins, shot up Wednesday in response. It’s not often that you see a major stock like JPM put on a 5% gain in one morning, but that’s what happened as investors eyed what many hope could be better days for the economy. 

It’s hard to pinpoint exactly why the 10-year yield chose Wednesday to rally, except maybe investor reaction to the reopening progress and that private sector May jobs report which came in with far fewer job losses than analysts had expected. We’ll see if the vigor can last through today’s initial claims and tomorrow’s anticipated ugly payrolls data. The 10-year yield hasn’t done a very good job of consolidating gains recently or staying above 0.7%. Bond buyers have swooped in quickly almost every time the underlying price fell and yields rose in recent months. We’ll see if that changes now. 

China Cloud Hasn’t Gone Away: The international game of chicken between the U.S. and China continued Wednesday as the U.S. stopped allowing Chinese airlines into the 50 states, saying China hasn’t allowed U.S. flights. This skirmish directly flows from COVID-19 fears, but indirectly represents another round in the two countries’ fight over economic access. Earlier in the week, China appeared to mull a pause in imports of some U.S. farm goods.

The markets didn’t react much to the airline news, which raises the question of whether people are whistling past the airport, so to speak. This isn’t last year’s trade war. Neither country is on solid economic footing, and this is a dangerous time for the two superpowers to be having this battle. Airplanes and soybeans aren’t the only points of conflict. The Trump administration lined up with India this week in that country’s border standoff with Beijing. Meanwhile, China says it remains committed to the trade deal, and Bloomberg reports that China needs soybeans. One hope is that maybe Presidents Trump and Xi will pick up the phone soon to ease tensions.

Good Trading,

JJ

@TDAJJKinahan

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