Early Strength Seen In Many Stocks Tied to Reopening, Including Airlines, Casinos, Autos

As this amazing rally keeps gaining steam, the market seems as divorced as a celebrity couple from the rise in coronavirus cases.

This dichotomy isn’t guaranteed to last, but for now, investors appear willing to look past the troubling surge in virus numbers here and focus instead on overseas strength, especially China. After putting in a solid performance last week, the new week begins with the futures market posting big gains on the back of some incredible overnight performances in Europe and Asia. 

Stocks in China threw a major party Monday with nearly 6% gains for the Shanghai composite. Analysts there couldn’t point to much fundamental news, according to media reports. Instead, they talked about bullish sentiment and technical strength, along with hopes of more government stimulus. 

The talk about China’s economy ramping up could have implications here at home because they’ve generally been six to nine weeks ahead of us through this whole crisis. The thinking around Wall Street seems to be that if China can get past this current hump in virus cases without a second lockdown—which appears to be the case now—maybe fear of a lockdown here this fall might start to fade.

Stocks gaining ahead of the open included many whose fortunes are tied to economic reopening. Casinos, airlines, and automakers were some of the companies rising in the premarket hours, and Uber Technologies Inc UBER got a lift from a Bloomberg report that it’s reached a $2.65 billion deal to buy a food-delivery app Postmates. The company hasn’t confirmed that yet.

It’s not just reopening stocks doing well. The Nasdaq (COMP) continues to be an absolute horse as technology names like Apple Inc. AAPL and NVIDIA Corporation NVDA registered pre-opening gains.

In another positive development early on, the crude market continues to hold $40 a barrel. It’s a level that people might want to consider keeping an eye on because the market’s had a lot of trouble holding there. 

On The Green

Although stocks pared their gains heading into the close on Thursday—the last trading session of last week—all three of the major U.S. indices were able to maintain their green status for the day and the week. Almost every sector rose Thursday and over the last five days. Energy and Financials stayed soft recently, but everyone else joined the party.

The jobs report coming in well ahead of expectations helped boost sentiment on Thursday. The report showed that 4.8 million jobs were added in June, well above the Briefing.com consensus expectation of 3.5 million. The unemployment rate fell 2.2 percentage points to 11.1%.

Meanwhile, a separate report showed that weekly jobless claims continued their downward trend. Although the 1.427 million new initial claims during the week ended June 27 were ahead of the 1.355 million expected in a Briefing.com consensus, they were below the prior week’s upwardly revised 1.482 million.

The market had decent momentum coming into payrolls as investors and traders had been cheered by progress on the coronavirus vaccine front and stronger-than-forecast manufacturing data. More generally, Wall Street has tended to remain optimistic about the economic reopening even as a resurgence of the coronavirus in the United States has worsened.

Jobs Report Encouraging, But Clouds Remain

Although stocks are performing relatively well, it’s still worth remembering that even after the decline in unemployment we saw Thursday, that 11.1% jobless rate is still high. 

And it’s an open question as to how quickly that level might continue to decline. It’s an important question because it affects consumer spending, a big underpinning of corporate America’s health.

While some employers may have been rehiring workers who remained relatively attached to companies—essentially low-hanging fruit when it comes to adding jobs back to the economy—those who were more drastically separated from employers may spend more time among the unemployment ranks.

There seems to be another potentially concerning aspect to the labor market. Although it’s great that the leisure and hospitality category added a whopping 2.1 million jobs, and retail added a respectable 740,000, many of those positions are lower wage jobs. That means the pay component of the monthly payrolls reports might not revive as quickly. There’s nothing wrong with jobs in retail like bartending and food service, but we also need to see growth in the higher-paying industries.

One more note on the jobs report: The June data reflected a solid month of gains associated with the economy reopening. If things are shutting down again in states like Florida, California, Texas, and Arizona, the July report could be likely to reflect that bad news. Consider keeping a close eye on the weekly claims numbers, because if they start creeping back up it could tell us the new surge in cases is having an economic impact.

Looking Ahead

The S&P 500 Index (SPX) held the 3000 area and managed to close higher every day last week. But with the coronavirus continuing to be the main story, it remains to be seen whether that upward trend will take us back to the high from early last month. 

Volatility, as measured by Wall Street’s main fear gauge, the Cboe Volatility Index (VIX), has been pulling back, but it’s probably worth remembering that Wall Street seems to remain on edge amid the resurgence. 

This week’s economic calendar is relatively light, but investors will still probably want to tune in for weekly jobless claims numbers on Thursday and producer price index data on Friday. (See more on the PPI below.) 

In earnings news, Bed Bath & Beyond Inc. BBBY and Walgreens Boots Alliance Inc WBA are among the relatively few companies scheduled to open their books this week before the earnings season kicks off next week. It could be interesting to see whether BBBY executives share any thoughts on the economic reopening and consumer demand. Also, WBA earnings could give some insight into the pharma sector since WBA is a key intermediary between the consumer and big pharma. 

CHART OF THE DAY:  VIX FIX: Although the Cboe Volatility Index (VIX) is substantially below where it spiked to during the coronavirus selloff in the stock market, there seems to be enough angst among Wall Street participants to keep the index elevated from pre-pandemic levels. As long as coronavirus headlines continue to dominate the trading narrative, it seems like volatility could remain elevated. Data source: Cboe. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Will “Service Economy” Show Expansion? At 10 a.m. Eastern time today, the Institute for Supply Management is scheduled to release its non-manufacturing index. The measure of the services portion of the economy has been in contraction for two straight months, and a Briefing.com consensus expects another month below the 50 mark, which is the inflection point between contraction and expansion. Last week we saw the institute’s manufacturing index surprisingly move into expansionary territory, and it would be a welcome sign if its non-manufacturing counterpart could pull off a similar upset. With services accounting for some 70% of U.S. gross domestic product, a return to expansion would be another step in the right direction for the battered economy. 

GDP Estimate Inches Up: On Thursday, after the stronger-than-expected jobs report and other economic reports, the Atlanta Fed’s GDPNow model estimate for Q2 gross domestic product inched up. The newest estimate for seasonally adjusted annual real GDP growth came in at -35.2%, up from the prior reading of -36.8. The new number is the same as a July 1 average economist estimate of -35.2% for the annualized GDP percent change from CNBC and Moody’s Analytics. We’ll have to wait until July 30 for the government’s first official estimate of Q2 GDP. Arguably, Wall Street has already been pricing in Q2’s expected mammoth hit from the coronavirus. But with the virus resurging in June, that could cloud some expectations for the second quarter, not to mention the third.

Inflation Data on Tap: Later this week, investors are scheduled to get another reading on inflation in the form of the producer price index for June. Last month’s reading of 0.4% marked the first increase in this inflation measure since January as the coronavirus pandemic ravaged the economy. A Briefing.com consensus is estimating the new reading will show a monthly 0.4% rise, with core PPI rising 0.1%. It could be interesting to see whether the actual figure comes in higher than that. If so, that would likely feed into the green-shoots mentality of some market participants who are tending toward optimism about the economic recovery despite difficulties associated with a resurgence in coronavirus cases. Recent inflation data for May might have surprised some investors. A Briefing.com consensus had expected the core personal consumption expenditures price index—which is the Fed’s preferred inflation gauge—to come in flat. Instead, it nudged up 0.1%.

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

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