A Big Bet On Travel: United Announces Plan To Buy 200 Planes From Boeing

We’re almost halfway through 2021, and to celebrate, there’s a bunch of good news this morning after fresh record highs for major indices yesterday.

Almost all the major Wall Street banks are raising their dividends after passing the Fed’s stress tests last week. And United Airlines UAL is buying 200 jets from Boeing BA.

When you think about the start of the year, news like this would have been music to many peoples’ ears. Back then, the travel industry was struggling with the pandemic, and banks were wrestling with concerns about possible Covid-related defaults. In a way having this news all happen on the next to last day of the first half is symbolic of the progress made since then. 

Specifically for BA, it’s also news that would have probably seemed almost surreal on Jan. 1, when the company was still struggling with its 737 Max issue. The planes had just begun flying again at the end of December after being grounded since March 2019. The planes UAL is buying are Max jets. UAL also said the new planes would create around 25,000 new jobs, according to media reports. 

In another positive development on the transportation front, Ford F and General Motors GM both got upgrades as analysts touted what the two are doing in the electric vehicle space. This comes on the heels of a big Tesla TSLA recall in China. Remember, both F and GM are pretty good at distributing cars. They’ve done it a few times. 

Despite the positive early developments, major indices aren’t showing much of a response. Crude bounced back a bit overnight and the 10-year Treasury yield remains just below 1.5%. Bitcoin is back above $35,000. We’re in a bit of a data drought today, but that changes fast as the week advances. 

The big event this week is Friday’s June payrolls report, and trading might be a bit slow ahead of that as people await the numbers. We’re in a wait-and-see mode, but remember, in a news cycle like we’re in today with no fresh Fed, earnings, or data events, even small developments can sometimes send the market flying one way or the other. 

With the second half of the year looming after tomorrow, the S&P 500 Index (SPX) is on pace for its fifth-straight month of gains. It’s up 14% so far this year.

FAANG Party Jump-starts Tech’s New Week

Monday delivered some follow-through from last week’s climb to record levels for the SPX and Nasdaq 100 (NDX), but the Dow Jones Industrial Average ($DJI) hasn’t been able to snare any new highs since early May. This could reflect investors’ recent turn to more growth-oriented stocks, which continued Monday with Tech and Communication Services leading the way. 

The FAANGs, especially, got off to a hot start this week. Facebook FB seemed to get some traction out of a federal court dismissing antitrust suits by the Federal Trade Commission and state attorneys general trying to break up FB’s social networking monopoly. Washington publication Politico called the news “a massive blow to Washington regulators’ attempt to rein in Silicon Valley’s giants.” See more below on FB and the future of antitrust legislation. 

Since FB is far from the only FAANG stock to face regulators’ pressure, it’s not too surprising that practically everything in FAANG rose at least 1% yesterday, though Alphabet GOOGL didn’t really join the party. These stocks are so huge that when they do well it’s often enough to carry the entire NDX and even the SPX higher. You probably saw last week’s headlines about Microsoft’s MSFT market cap going above $2 trillion. Well, on Monday FB’s jumped above $1 trillion. 

It wasn’t just a FAANG story for Tech, however, because semiconductor stocks also got in on the upward move Monday, led by a 5% gain for Nvidia NVDA as optimism grew about its proposed deal to buy U.K. chip designer ARM—something that’s come under regulatory scrutiny.

Other chip-related companies off to a nice start this week included Applied Materials AMAT and Intel INTC. There’s a lot of possible reasons for the firmness here, but one major one could be concerns about new shutdowns as countries grapple with this new and more contagious form of Covid called the Delta variant. Chip and other Tech stocks performed very well last year when people were stuck inside with their laptops. 

Barring some sort of major jump in cases (which no one wants), the question is whether this surge in the Philadelphia Semiconductor Index (SOX) has any legs. It’s been a choppy year for the sector so far as reopening stocks stole some of Tech’s thunder. One sign that the chip rally could last is technical, because SOX has now pushed past its old 2021 high posted back in early April and now has registered a new all-time high. Sometimes when you see a major index break out of a pattern this way it can inspire more buying or some short-covering, though there’s no guarantee of either. 

OPEC, Covid Cool Off Sizzling Crude, Energy Sector

Strength in the chips and the FAANGs yesterday stood out in a market that otherwise looked a bit lackluster. The Energy sector really got whacked as crude prices sank below $73 a barrel ahead of the OPEC+ meeting scheduled for later this week. There’s a lot of scuttlebutt in the trade media about chances of the organization maybe deciding to unleash even more supply onto the market. They’ve already decided to loosen the pumps a bit starting in July. 

The OPEC+ meeting weighed on oil and Energy stocks, but the other thing bringing pressure was an old nemesis, the Covid pandemic. Fears of more shutdowns as countries face down the fast-spreading Delta variant weighed on crude and the Energy sector, while also pushing down shares of cruise and airline companies. This came despite the Transportation Security Administration (TSA) tracking 2.1 million U.S. passengers getting on planes two of the last three days. That’s down from the average of around 2.5 million for the same three days in 2019, but does tell you something about how eager people are to travel. Will it last if the Delta variant takes hold? 

There’s plenty of reason to be cautious, but keep in mind that the U.S. is far ahead of most other countries in vaccination rates. Anecdotally, people still seem very eager to travel and go out and enjoy themselves. Which fits in with the BA/UAL news this morning. 

Barometers To Watch: VIX And RUT

Despite the new Covid fears, volatility is hanging out near its post-pandemic lows. The Cboe Volatility Index (VIX) fell below 16 yesterday. It’s been down here several times over the last month, but has always bounced back toward 20. This raises the question of whether the 15–16 area has now become a natural bottom for VIX, when it had been 10–15 for a few years prior to Covid.

One thing to be careful about is that low VIX can sometimes be a contrarian signal for the market. If you see VIX climbing this week but stocks climbing, too, take note, because it might suggest that one of them is about to start going down. 

Another warning salvo came from the small-cap Russell 2000 (RUT) Index on Monday, which fell 0.5%. The RUT hasn’t posted a new high since March even while the SPX and NDX scaled fresh heights. Sometimes RUT can be a leading indicator for the market. Its failure to really thrive here suggests a bit more defensive trading might be taking hold, even though defensive Utilities and Staples are the two worst-performing sectors over the last month. 

Consider keeping an eye on the Financial sector the next few days, too, as major Wall Street banks announced new dividend plans now that they’ve passed the Fed’s stress tests. Morgan Stanley MS got things rolling late yesterday when it announced it would double its dividend. A lot of the bullish hopes already might be built into Financials, however, when you consider how well the sector did last week. Shares of MS popped about 3% in premarket trading after the news, so maybe there’s some more zip left.

CHART OF THE DAY:  MAKING A STATEMENT. After having a lot of ups and downs earlier this year and not posting a new high since early April, the Philadelphia Semiconductor Index (SOX—candlestick) posted a new all-time high Monday in a major rally. Though much of the strength came from one stock (NVDA), the chip sector might also be getting a boost from ideas that Covid may be reasserting its strength. The SOX is now well above the S&P 500 Index (SPX—purple line) in year-to-date performance. Data Sources: Nasdaq, S&P Dow Jones Indices.  Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.  

The Future Of Antitrust Laws? Yesterday’s dismissal of the antitrust case against Facebook FB gave the company and most of its FAANG compatriots quite a tailwind Monday. But while it was a decisive win for the tech giants, it could prove to be the latest battle in the larger war. To wit: The judge in the case gave the plaintiffs 30 days to file a new complaint, specifically to explain how FB’s social media presence constitutes a monopoly. The judge also panned the plaintiffs as having waited too long after FB’s acquisitions of Instagram and WhatsApp.

Although the door is still open for a refiling in this case, more headaches may lie ahead for Big Tech—specifically from legislators. For example, a House Judiciary antitrust subcommittee package of anti-monopoly enforcement bills looks to be advancing with bipartisan support. Many on the Hill have been calling for an update to those 100-year-old antitrust laws to help rein in tech platforms. Yesterday’s ruling could merely be fanning the flames of legislative action.     

Up Next: A Check On The Manufacturing Economy: Ask 10 economists a question and you might get 10 different answers, the old joke goes. However, one thing most economists likely agree on (and data bears them out), is that manufacturing is a much lower percentage of U.S. gross domestic product (GDP) than it once was. Even though that’s the case, it’s still interesting to check the ISM Manufacturing report every month for insight into the manufacturing picture, especially with so many companies and politicians talking about bringing more factory jobs back to the U.S. and these jobs typically paying more than service-economy ones. The next ISM report is due Thursday morning, and it’s been flying high the last few months. 

Analysts expect the headline figure for June to come in at 61%, down just slightly from 61.2% in May, according to consensus gathered by research firm Briefing.com. Remember, anything above 50% shows expansion, and 60% or higher has been rare historically. In fact, some analysts argue that this may be about as strong as the manufacturing economy can get, and reflects the acceleration of reopening demand from consumers that’s probably going to slow down a bit in coming months. Strength in the ISM data, if it continues, could mean good things for industries like aviation, automobiles, shipping, and Energy. With that in mind, keep an eye on companies like Boeing BA, F and GM, Whirlpool WHR, Caterpillar CAT and other firms that dominate the manufacturing sector, some or all of which could benefit from strength in the ISM or perhaps come under pressure if the number isn’t so hot. 

Taking Another Look: After tanking last Friday following its earnings report that showed higher expenses, shares of FedEx FDX arrested their slide Monday. With a story like this, it helps to have a longer-term perspective. If demand continues and revenue keeps going up for FDX, the rising expenses could even be looked at as a bit of a positive factor, even if they’re initially seen as a negative.

As long as revenue increases faster than expenses, it’s a positive story. In the market, it can take weeks or months for this to work itself out as investors start to realize over time that there may have been an initial over-reaction to the downside. Then people start to ask themselves, is this really a bad story? It will be interesting to see how this works out over time for the stock, but you could argue that last week’s data from FDX shouldn’t be seen as a huge negative over the long-term.

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

Image by Falkenpost from Pixabay