Can You Feel It?

Can you feel it?  Stocks rose again yesterday on optimism that the country will be open for business again… soon.  The Dow Jones Industrials rose 4 straight days in a row, its longest winning streak since February.

 

N O T E W O R T H Y

 

What on earth are they thinking?  Yesterday was a pretty good day for stocks.  It was a relatively broad rally, which means many stocks participated in the rise.  Despite the recent positive moves in the indexes, not all stocks have participated in the recovery.  Take for example the S&P500 which has rallied +28.6% from its March low.  If we look at the composition of the capitalization weighted index, we note that some 1/5 of the index’s weight is made up of tech heavyweights Microsoft, Apple, Amazon, Facebook, and Google. You probably are not surprised to learn that these stocks have been relatively resilient throughout this most tumultuous period.  The general thesis is that the tech stocks are less exposed to the prolonged economic slowdown caused by the virus lockdown. There are plenty of flaws in that thesis as Apple has forecast slowing sales while, once untouchable,  Facebook and Google have acknowledged a slump in advertising revenues as advertisers cut their budgets. Still, it has been those usual-suspect growth stocks that have led the way higher for the most part.  Over the past two sessions, a new optimism has entered the market zeitgeist as some corners of the country begin to re-open. The Dow Jones Industrial Average’s performance in yesterday’s session provides us with a little insight into what investors are thinking.  The index is made up of just 30 well-known stocks, so spotting the pattern is not too tough.  In yesterday’s session, the Dow’s top performers were Walt Disney Co, 3M Company, JP Morgan Chase, and Dow Inc.  All of these stocks have been beaten down in recent months as Disney (DIS) shuttered its parks, banks (JPM) were faced with non-performing loans and lower interest rates, and the industrial sector of the economy ground to a halt affecting materials suppliers (MMM, DOW). See the pattern yet?  Here is some more for you.  The Dow’s worst performers yesterday were Procter & Gamble, Walmart, Johnson & Johnson, Microsoft, Boeing, and Verizon.  Boeing doesn’t count here as its problems, which have been exacerbated by the virus, began long before the lockdown.  The rest of the biggest daily losers have been the mainstay beneficiaries of the lockdown economy as home workers/learners leaned on technology to communicate (VZ, MSFT), everyone scrambled to stockpile consumer goods / healthcare products (PG, JNJ), and the nation turned to mega-retailers for just about everything (WMT).  So it appears that investors are anticipating the re-opening of the economy as restrictions across the nation are slowly eased.  Optimism is a good thing and so is less volatility, and we got some of that too with the VIX pulling back to levels not seen since early March (it is around 31 this morning).  Hopefully the surge in optimism will be sustainable as there still remain many pieces of evidence that point to a slow drawn-out recovery.  One notable data point came from a Pricewaterhouse Coopers survey of CFOs in which only 52% thought that they could be back in business within 3 months or less if the COVID-19 crisis ended today.  That number is down from the 61% that voted yes just a few weeks back.  We can conclude that more and more CFOs are starting to believe and prepare for an extended U-shaped recovery compared to the most optimistic V-shaped recovery we all hope for.  We will hear much more about that in this earnings-packed week as executives provide their commentaries on states of their businesses.  For now, let’s try to sustain the optimism.

 

THE MARKETS

 

Stocks rallied yesterday as restrictions begin to ease at one level or another throughout the globe.  The S&P500 rose by +1.47%, the Dow Jones Industrial Average climbed by +1.51, the Russell 2000 surged by +3.96%, and NASDAQ Composite Index advanced by +1.11%.  Bonds pulled back and 10-year treasury yields climbed by +6 basis points to 0.66%.  Crude oil suffered another difficult day as WTI futures dropped by -24.56%.  The price drop in the June contracts was caused by investors selling it and buying longer expiration dated contracts as supply continues to build confronted by low demand with storage remaining in short supply.

 

NXT UP

 

–  S&P Case-Shiller Nation Home Price Index (Feb) is expected to show a +4.10% year over year growth compared to the prior month’s +3.92% expansion.

– The Conference Board’s Consumer Confidence (April) is expected to be 87.0 down from March’s 120.0 level.

– Richmond Fed Manufacturing Index (April) may have fallen to -42 from the prior reading of 2.

– This morning Pepsi, Southwest Airlines, 3M, DR Horton, Merck, and Pfizer beat estimates, while Polaris, Xerox, and UPS missed. After the bell we will hear from Ford Motor, ONEOK, Akamai, iRobot, Advanced Micro Devices, Alphabet (google), and Starbucks.

daily chartbook 2020-04-28