Markets On The Fence: Vaccine Optimism Vs. Worries About Virus, Stimulus, Fed Lending

Investors this morning seem to be continuing to weigh competing forces. 

On the one hand, surging coronavirus cases and related state restrictions to curb the virus’s spread seem to be weighing on sentiment, exacerbated by news that California has banned nonessential work and gatherings between 10 p.m. and 5 a.m. Investors also seemed to be dismayed about the continued lack of a congressional stimulus package and fresh news that U.S. Treasury Secretary Steven Mnuchin said key Federal Reserve’s emergency lending programs would be allowed to expire. 

The decision from Mnuchin appears to have touched off a disagreement with Fed Chair Jay Powell, who responded with a statement saying the Fed should maintain its “full suite” of COVID-19 response tools. Markets seemed jarred by the exchange—futures on the S&P 500 Index (/ES) fell nearly 40 points in the early evening—but stabilized by morning and began the Friday session a little below the flat line. 

Treasury yields slipped a bit overnight, with the yield on the 10-year—which a week ago had been inching toward 1%—is back down to around 0.83%. A move under 0.8% would probably be a sign that people are hesitant about their investments and willing to settle for security despite the low yield.

Market participants seemed to be weighing the Fed/Treasury dispute and virus case count worries against optimism that a vaccine could help speed up the economic recovery by allowing businesses to get back to normal sooner. Pfizer Inc. PFE and BioNTech SE BNTX said they planned to submit a request to the U.S. Food and Drug Administration today for emergency use authorization of their coronavirus vaccine candidate. 

Amid the news flow, traders seem to not fully be in the risk-off or risk-on camp. Stock index futures were mixed, with those tied to the Nasdaq leading the way as investors apparently continued to favor tech-related stocks that might not be as adversely affected as other types of companies in the event of widespread lockdowns. Though the 10-year yield dipped and gold ticked higher, crude oil futures—often considered risky investments but also a sign of economic strength—were higher, and Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) was easing. 

Help From Stimulus Optimism, Tech-Related Companies

Resurging coronavirus cases have fanned worries about the economic recovery. Although there has been good news on the vaccine front, it seems likely that a vaccine won’t be widely available for some time. And another thing that might help ease investor worries—a government stimulus package—also hasn’t materialized.

With that backdrop, stocks started yesterday in the red. But each of the three main U.S. indices later entered green territory, helped by news that the Senate minority leader said the majority leader had agreed to start talking again about a government stimulus package. 

It was interesting that the tech heavy Nasdaq Composite (COMP) entered positive territory and maintained gains before the Senate news broke, indicating that Wall Street was also taking cues from tech-related companies. Microsoft Corporation MSFT, all the FAANG names, and the PHLX Semiconductor Sector Index (SOX) all outperformed the Dow Jones Industrial Average ($DJI).

The chipmaker index also got a helping hand Thursday from NVIDIA Corporation NVDA, which beat analysts’ earnings per share and revenue expectations pretty easily and delivered above-consensus guidance for the current quarter. But the company also predicted its current-quarter data center revenue would decline sequentially, helping keep gains for the day in check. 

Reopening, Stay-At-Home Tug Of War

It still seems odd to think about technology-related companies as a safe-haven play, considering the messy dot-com bubble burst and the notion that Silicon Valley startups are far from a sure bet. But the pandemic has changed so much. 

It seems that investors are thinking the tech-related stocks won’t be negatively impacted as much as other companies as the pandemic threatens the economic recovery. The mega-cap names like Amazon.com, Inc. AMZN, Apple Inc AAPL, and MSFT are far from startups, and their sheer size helps give investors a sense of assurance in these crazy times. Meanwhile, some companies, including tech-related ones, have been helped by the pandemic as more people work, learn and play at home, helping fuel the so-called stay-at-home trade. 

But as vaccine news has encouraged investors about the pace of the economic recovery, there has also been an emergent reopening trade that has sparked a move from growth stocks to value companies. 

However, the pendulum seems to be continuing to swing back and forth. It seems like investors are keeping one foot in stocks that could benefit from an economy that gets back to normal and the other foot in the stay-at-home trade.

CHART OF THE DAY: A SPARK OF ENERGY. The Energy Select Sector Index (IXE—candlestick) has been struggling most of this year, but in November the sector has trended higher. IXE looks like it’s trying to break above its 200-day simple moving average (blue line). It’ll be interesting to see if the index breaks out above the moving average or if it continues to bounce off it and move lower. 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.

Existing Home Sales Through the Roof: The housing market has been a bright spot as the economy tries to get out of its coronavirus slump. Strong demand for new homes has been helped by low mortgage rates and the tight supply of existing homes for sale. Data from the National Association of Realtors on Thursday showed October sales of existing homes rose to 6.85 million, well ahead of the 6.49 million expected in a Briefing.com consensus. The latest number marked the fifth consecutive month of sales growth and took the seasonally adjusted annual rate to 6.85 million, the highest level since February 2006. Demand for existing homes is constraining supply, “which is going to be a pressure point that feeds higher prices, shuts out an increasing number of first-time buyers, and bolsters the prospects for new home sales,” according to Briefing.com. We’ll have to wait until next week for data on October new home sales, but this week’s data on October housing starts slightly beat expectations while building permits came in slightly below a Briefing.com consensus.

Oil Prices, Producers Diverge: When oil prices falter, the stocks of companies that produce the commodity often slide as well. But that wasn’t the case on Thursday, and it seems like the divergence between producers and their underlying commodity might be a symptom of investors not being able to fully back either the stay-at-home or reopening trades. Yesterday, oil prices sank while investors fretted that new coronavirus cases would result in restrictions that would reduce demand for the commodity. But surprisingly the S&P 500 Index’s Energy sector rose 1.53%, making it the best performing among the index’s 11 sectors. That could be because investors, while remaining nervous about demand for oil, were also optimistic about the prospects of a congressional stimulus deal and a vaccine helping the economy get back to normal. 

A Look Ahead: In addition to new home sales numbers, next week’s economic calendar includes data on consumer confidence, durable goods, and personal consumption expenditures. The government is also scheduled to release its second estimate for third-quarter GDP. Meanwhile, although much of earnings season is behind us, investors might want to keep their eyes peeled when Deere & Company DE reports earnings on Wednesday. The company, best known for making farm machinery, also manufacturers construction equipment. DE is often seen as a good barometer of the farm economy and also of international trade and the dollar.

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

Photo by Robert Bye on Unsplash