Daily Market Notes: 7-8-2020

The market finally ran out of upside steam yesterday after its historic advances of the past several weeks.

This has been the ongoing debate lately, namely the battle between those who think that everything is wonderful in terms of the economic recovery and those who think that the stock market is not in line with all of the problems that the country still faces, namely the sharp rise in new cases in many states and the fact that many businesses that were supposed to re-open such as restaurants and travel venues, have gone back in retreat. Then of course, we will start to get second-quarter earnings reports next week in what could be a historically bad period.

The Dow never had a chance because the financial stocks, which give a person one step forward and then two steps back, and ditto for the industrials, took it on the chin from the get-go with BA, GS, CAT, 3M all selling off along with UNH which is erratic day to day. Then the travel stocks like airlines and cruise ships, which give one up-day and then three lower ones, also came under pressure.

The old revenge of the bears went on full display as after a very late upside rush to start the week on Monday as described in yesterday’s Notes, the opposite took place yesterday as the Dow was down by 179 at 2pm. It then proceeded to slide lower into the close and as a result it finished off by 397 to 25,890.

Ditto for the S&P, which actually got to a gain of 5 points at 11am helped by the unrelenting advances in the heaviest-weighted tech giants like AAPL, MSFT, GOOG and AMZN, and then proceeded to do a downside number on its upside cheerleaders and ended with a closing loss of 34 to 3145.

Even the mighty Nasdaq, unstoppable for 15 out of the past 17 sessions, had the nerve to turn a new record-high price with an 86 point gain due to further advances in you know who, gave it up and then some which resulted in a closing decline of 90 to 10,344. Of course that loss did not stop TSLA, DOCU, MELI, SHOP and SPOT from making new highs, in addition to very strong performances in biotechs like NVAX and REGN on hopeful developments of new vaccines to fight the coronavirus.

The Russell 2000 Index sold off by 27 points as weak regional banks and utilities hurt its performance. And the VIX rose to 29.43 which explains its really strange performance on Monday when it had the nerve to go higher despite a really powerful day by the major indices, as if someone “knew” that things would sell off yesterday.

The sell-off snapped the S&P’s five-day winning streak. Optimism that the economy is on the mend as businesses re-open has helped drive stocks higher. But the recent surge in confirmed new coronavirus cases has clouded hopes for a relatively quick economic turnaround. Investors are also girding for what the next few weeks will reveal about the health of corporate America as companies begin reporting their second-quarter results.

The stock market has been churning over the last month, with big daily moves up and down keeping it roughly in place. It’s been a small-scale version of the market’s movements since the start of the year, when a nearly 34% plunge on worries about the pandemic-caused recession quickly gave way to a tremendous rally that brought the S&P nearly back to its record level.

Lifting markets higher on one end are reports showing budding improvements in the economy. The job market, retail sales and other economic indicators are all still well below where they were before the pandemic struck but they have stopped plummeting and have begun to grow again as governments relax restrictions meant to slow the spread of the coronavirus.

That has combined with unprecedented amounts of aid from central banks and governments around the world which has propped up the market and did start the week off strong on Monday, following up on a 4% rise the prior week, which itself helped cap the best quarter for the S&P since 1998.

But pulling markets lower on the other end are worries that the optimism is overdone. The pandemic isn’t going away, with infection levels worsening across wide swaths of the U.S. South and West, among other global hotspots. The concern is that spreading infections could keep households and businesses nervous and scare them away from spending. In the worst-case scenario, it could force governments to bring back some of the restrictions that sent the economy into its sudden recession.

Such worries spilled through markets yesterday after the European Commission unveiled its more dour economic forecasts for 2020 and 2021. The commission said the joint economy of the 27 nations in the European Union will shrink by 8.3% this year, before growing 5.8% in 2021. In the previous forecasts released in May, it had predicted that their economy would contract about 7.5% this year and bounce back 6% next year.

Underscoring the fragility, a separate report showed that industrial production in Germany rebounded by less than economists expected in May and remains far below levels from before the pandemic caused factories to close.

The yield on the 10-year Note slipped to 0.64% from 0.68% late Monday. Crude oil dipped by one cent to end at $40.62 and gold was able to maintain itself at the higher levels with a price of $1,792 an ounce.

The S&P trades at unknown profit figures for 2020, as the earnings number will be lower this year due to the virus, probably around $126. If that is the case, then the current P.E. multiple is a historically high 25.3. On the other hand, it is difficult to put a correct price/earnings multiple for 2020 at the present time because of the large variability in earnings predictions. First-quarter earnings came in at a decline of 13.5%. This was the biggest annual drop for the index since the third quarter of 2009 when earnings slumped by nearly 16%. The forecast for second-quarter earnings now stands at a decline of 43.8% which would be the worst since the fourth-quarter of 2008 when the number was negative 69.1%. Revenues are supposed to be lower by 11.1%. For 2021, the consensus is for $173 in earnings which means that the S&P is trading at an 18.4 multiple, higher than the historical average but not too much considering the record low interest rates currently in existence.

This week sees the following economic reports: yesterday  –  JOLT job opening and labor turnover survey for May showed a nice gain of 2.4 million to 6.5 million but there were also 4.2 million separations; Thursday – weekly jobless claims; Friday – June P.P.I.

Earnings reports include: yesterday  – PAYX lower; today LEVI lower; tonight – BBBY; Thursday – Dow component WBA. Next week will see the floodgates open with financials leading the way.

Donald M. Selkin

Chief Market Strategist

 

Disclosures

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.