Hope occupies the driver’s seat this morning as investors around the world eye the latest virus numbers and seek light at the end of the tunnel. However, it’s important not to get carried away by all this exuberance.
These rallies are amazing, but the key is keeping it in perspective. U.S. cases continue to grow, and reports say we’re still on the “uphill” side of the virus count. Let’s not get too excited until we’re definitely on the “downhill” side of things. It’s not uncommon to see sharp but short-lived rallies in a bear market.
U.S. stocks look poised to build on Monday’s steep rally, following the lead of markets in Europe and Asia as bulls grip the wheel for the second day in a row. The major U.S. indices are closing in on 20% gains from their March lows, and Treasury yields are on the rise.
Stock futures reversed early losses to climb sharply before the opening bell. Crude oil looks like it could be building a base and getting away from those low-$20s readings of March. It’s hard to say here if crude is driving stocks or vice-versa.
Overseas, the virus numbers looked a little better early Tuesday, especially when you hear about no new deaths in China, and Spain and Italy reporting lower fatalities. New York State’s data show signs of deaths plateauing. All of this is playing into the market’s early strength, but investors might want to be careful about being swept up in the frenzy.
This is still a volatile market that could move sharply in either direction depending on the latest headlines. Anyone thinking of trading might want to keep trade sizes lower than usual and remember the importance of dollar-cost averaging.
We’re between major earnings and data releases, which sometimes can mean more volatility as people have little to focus on other than the latest virus headlines. Still, the light schedule isn’t necessarily a bad thing for now, considering that earnings and data are likely to remind investors how much economic damage transpired over the last quarter or so. In just a week the schedule gets a lot busier when big banks approach the earnings season starting line.
Dollar Gains as British PM Enters ICU
The U.S. dollar gained ground late Monday in what looked like a response to news of British Prime Minister Boris Johnson being moved to intensive care for coronavirus. The pound tanked against the dollar last month as investors flocked to the greenback in the first phase of the economic crisis, but had been clawing back a little over the last week.
The dollar index moved back above 100 last week after burrowing below it for a few days in late March. Despite all the U.S. fiscal and monetary stimulus that would ordinarily weigh on the currency, it’s still attracting investors trying to find solid ground, apparently. Gold also rallied early Tuesday, a possible sign of caution.
The sad news about Johnson’s illness didn’t seem to spook U.S. stocks much, though. They powered higher Monday in another huge rally, led in part by semiconductors and the Utilities sector. Semiconductors climbed more than 10% Monday amid rallies for some of the big names there including Nvidia Corporation NVDA, Advanced Micro Devices, Inc. AMD and Micron Technology, Inc. MU.
Semiconductors also got help from a couple of upgrades, including one to Intel Corpoation INTC and another to Lam Research Corporation LRCX. Right now, semiconductors seem to be acting like kind of a leading economic indicator. When they do well, it’s probably a sign of investor confidence in a quicker economic recovery. That’s because these chips are components in so many of the electronic devices everyone uses all the time. Bigger demand for them is like a canary in a coal mine.
Semiconductors weren’t the only stocks getting a lift yesterday. Boeing Co. BA gained more than 19% to lead the Dow Jones Industrial Average ($DJI) higher. Raytheon Company RTN, American Express Company AXP, and Visa, Inc. V rose more than 11% each. Retail stocks, including department and clothing stores, also rose sharply.
On the other side, Consumer Staples lagged the rest of the Street on Monday. Stocks like The Kroger Company KR and The Clorox Company CLX rose, but trailed the cyclical sectors. As we’ve seen often through this volatile stretch, it’s the Staples that people cling to when they’re worried, but those stocks get less popular when a “risk-on” day like Monday happens. That risk-on/risk-off psychology changes like the weather. You never know what you’re going to get on any given day, and it’s a very headline-driven market.
The Cboe Volatility Index (VIX) has descended dramatically from highs above 80 last month to around 45 by the end of the day Monday, so that’s a hopeful development for anyone tired of these wild moves.
From a technical standpoint, you could call Monday’s gains constructive. They took the S&P 500 Index (SPX) above a resistance range between 2630 and 2640 that had been in place for almost a month. The closing level was higher than any in almost a month, and now you can see another channel of resistance up a little higher at 2700. That’s not just a psychological level. It also isn’t far from a 61.8% retracement of the rally from the December 2018 low to the February 2020 high.
If you’re thinking 200-day moving average, maybe don’t get too excited yet. At 3,019, it’s still more than 300 points above where the SPX closed Monday. The market has to learn to crawl before it can run.
Retail Investors Have Their Say
According to the Investor Movement Index® ($IMX), a proprietary, behavior-based index created by TD Ameritrade to indicate the sentiment of retail investors—TD Ameritrade clients were net buyers of equities last month. Much of the buying, however, was away from high-beta stocks and into large-cap SPX stocks with healthy balance sheets.
Some of the stocks showing inward flows included Exxon Mobil Corporation XOM, The Walt Disney Comapny DIS, and Ford Motor Company F (which is a low-priced stock, so perhaps a cheap "take a shot" stock). There was also some interest in Boeing (BA). Interestingly, clients were net sellers until mid-month, when it was as if they flipped a switch and turned to net buyers.
Overall in March, retail traders tracked by IMX were attracted to companies that have previously weathered storms. Looking ahead, there’s a lot we don’t know, from the continued impact of the COVID-19 pandemic to the potential lift provided by the recently passed economic stimulus package.
After the last quarterly options expiration, many clients didn’t re-up on their hedge trades. Perhaps they were taking some of the froth off the VIX. They may have been waiting to see before reinitiating hedge trades. With VIX as high as it’s been, the cost to hedge is quite high.
Millennials were among the first to move back into cruise lines like Carnival Corporaiton & PLC CCL and Royal Caribbean Cruises Ltd. RCL, and also into Uber Technologies, Inc. UBER. That age group might be the first to jump back into these places (as consumers) once the coronavirus pandemic abates. But net, Millennials seem to have scaled back some risk. Remember: This is the first real pullback many of them have seen in their investing lives. But since they're long term investors, many understand the need for equity exposure.
Final Thoughts on Jobs Data
Last Friday’s jobs report already seems like ages ago, but it’s not too late to make a few final observations to tuck into your pocket and glance at again when the next one approaches.
It’s no shock that leisure and hospitality lost jobs. However, the one that was a little surprising was seeing job losses in healthcare and social services. Why would these sectors see declines? It’s probably the social services side of it more than healthcare because they probably just had to shut down, where we know healthcare is an essential need in this crisis. The health and social services sector could be an interesting one to watch in the April report to see if all those people coming back into healthcare from retirement caused job growth there.
On another note, some people might have been confused to see overall average wages rise across the economy, considering the current situation. That’s not surprising when you consider that restaurant and bar jobs are gone and those tend to have lower wages more reliant on tips.
Small businesses create most of the jobs in the economy, and they could get help from a Fed move announced Monday. The Fed announced the establishment of a facility that will purchase small business loans that are guaranteed by the White House’s Payroll Protection Program (PPP).
CHART OF THE DAY: WAVING THE YELLOW FLAG: The S&P 500 Index (SPX–candlestick) may have veered off course from forming a classic pennant pattern (yellow triangle) but it looks like it’s back on track. SPX just broke out of a short-term resistance level (horizontal yellow line). If SPX continues moving up and stays above this resistance level, there’s a chance resistance could turn to support and SPX could bounce off the 2630 level. But there may be caution ahead–something to look out for. 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.
Fasten Your Seatbelt: Hopefully you did that a while ago, with your tray in the upright position. This bumpy ride has probably felt even more nauseating if you boarded it with some airline stocks in your portfolio, and smooth air might be a ways off, even with some travel shares bouncing Monday. The airline sub-sector of the SPX starts reporting pretty early in earnings season, and the predictions look about as bad as you might think. For instance, research firm CFRA put out a note Monday that projects Q1 airline earnings per share to nosedive nearly 211% from the same quarter a year ago. Of all the sub-sectors, only department stores and copper-mining companies are seen doing worse. On a related note, Delta Air Lines, Inc. DAL said Monday it expects Q2 revenue to be down 90%.
If you’ve held onto your airline shares through this rough weather, is there any hope? Well, think of it like this. Airlines are part of our country’s infrastructure, and it’s not in the country’s best interest to let these companies fail. We need them to do business, so they’re going to continue to be supported by the government. If you’re in it for the long-haul and not looking for a “quick pop,” major travel companies, including airlines, eventually could conceivably recover a bit from the stall they’re in. Still, people may stay home longer than expected, so there will be volatility in the short-term. Eventually, though, the stay-at-home-orders are going to come off.
How to Determine Value Here? It’s Complicated: One confusing thing that’s likely added to recent wild market swings has been figuring out a fair way to value stocks as earnings suddenly stand on shaky ground. That makes it hard to put a number on 2020 earnings per share for the S&P 500, but many analysts now seem to think no growth or slightly negative growth from a year ago is likely. Research firm FactSet, for instance, now sees 2020 earnings per share (EPS) falling 1.2%, compared with its initial estimate for 10.4% growth. If EPS is ultimately down from a year ago instead of flat, there could be more room to move lower in the SPX from a valuation standpoint.
That’s not what people necessarily want to hear. Since we’re stressing the positive, let’s note that at the current SPX level, and assuming unchanged 12-month forward EPS, the SPX has a price-to-earnings (P/E) of around 16. That’s near historic averages and down from nearly 20 at the recent all-time highs, which many analysts thought looked pricey. So a lot depends on the crisis not lasting long enough to punish earnings more than they’ve already been.
Looking Backward to Look Forward: Another way to check value is to look back to previous years of earnings instead of relying on unclear 2020 forecasted earnings. Before Monday’s sharp rally, the so-called cyclically adjusted price-to-earnings (CAPE) ratio—which measures real stock price divided by a 10-year average of real earnings—was significantly lower than it had been earlier this year. While still historically high at 23, it was down from 31 in January, according to an article in Sunday’s New York Times by economist Robert J. Shiller. The historical CAPE average since 1881 is 17. “From this perspective, the market looks on the expensive side, but not inordinately so,” Shiller wrote before Monday’s big gains. “When the CAPE has been at such a level, it tends to show moderate positive, not disastrous, returns over the next 10 years.” Still, Shiller says he worries that current investor anxiety could ultimately lead people to become more risk averse, causing lower valuations for stocks in the long run.
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