Goldman Sachs Blows Away Expectations As Trading, Investment Banking Boost Results

The market is continuing its rally this morning on promising coronavirus vaccine news and a better-than-expected report from a big bank, helping investors shrug off increasing tensions between the United States and China.

News of promising early-stage results from an experimental vaccine from Moderna Inc MRNA helped send the company’s shares up more than 17% in pre-market trading. More broadly, the news encouraged traders and investors about the possible vaccine’s potential to help the economy get its feet back under it.

Still, it should be noted that the news is from an early study involving a relatively small number of patients. Even though it seems there’s a lot more work to be done on the vaccine front, the strong reaction in the market shows how anxious investors are for a cure.

Meanwhile, earnings season continued as Goldman Sachs Group Inc GS opened its books. The bank earned $6.26 per share, far above a consensus estimate of $3.78. Revenue also surpassed expectations as the bank was helped by trading and investment banking activities. 

Despite the bumper quarter, GS, along with other financial institutions, has set aside a lot of money for potentially bad loans as the coronavirus takes its toll on the economy. But for now, investors are cheering GS’s bumper quarter, which is helping market participants look past some troubling news on the U.S.-China front.

The Trump administration has slapped sanctions on China for its treatment of Hong Kong and ended the special status the United States has long given to Hong Kong. China said it would impose sanctions against U.S. individuals and entities.

Turnaround Tuesday

The market was able to bounce back sharply yesterday from it’s Monday blues. All of the S&P 500 Index (SPX) sectors ended in the green, led by Energy and Materials. 

Although oil prices gained slightly and inflation figures came in a bit above expectations – arguably a good thing at the moment—it didn’t seem like those were driving factors in Tuesday’s rally. They were more like nice-to-haves.

There was some marginally good news from Florida and California on the coronavirus caseload front, but overall the narrative there—and for many other parts of the country—is worry about the economic reopening as virus levels keep climbing. 

It seems like the main driver for Tuesday’s rally might have been a buy-the-dip mentality that seems to have been emerging. The SPX hasn’t had two consecutive down days in more than a month.

It was interesting to note that the gains in the Information Technology sector put it in the middle of the pack Tuesday, and the Nasdaq Composite (COMP) lagged the other two main U.S. indices in percentage terms. 

Big tech stocks have been market leaders recently as investors have wanted to put money into the mega cap equities even if they didn’t want to bet the farm on other types of stocks. But on Tuesday, it seems that some of that money may have been rotating into other kinds of companies. 

Stocks Vs. Economy

The stock market isn’t the economy, and there were some signs on Tuesday that there’s still plenty of worry out there about the economic recovery.

Treasury yields fell as investors sought the relative safety of U.S. government debt, and gold prices also rose on similar safe-haven buying as coronavirus cases continue to climb. 

Amid the stock market’s sharp rebound after its coronavirus-induced nadir in March, a topic of discussion has been whether equities have decoupled from economic reality. It’s days like Tuesday, when gold and Treasuries rise along with equities in an atypical pattern, that can bring those questions to the fore.

It’s true that stocks are forward looking and market participants have been trying to price stocks to reflect what corporate America might look like once the country can truly get a grip on cases, or once a vaccine is developed. A pause in that rally appears largely to do with worries about the economy as the virus resurges in pockets of the nation.

While so much about the pandemic has been uncertain, Wall Street’s rally is seen by many as a gauge of sentiment—that things could be headed toward normalcy. But as the resurgence continues and states walk back reopening plans, it’s starting to seem like the uncertainty is taking on a bit of a new edge to it. We’re not at the levels of fear we saw in March, when the Cboe Volatility Index (VIX) hit a high above 85. But it doesn’t seem like anyone is getting totally comfortable either. Still, while 24 hours ago, the VIX was flirting with the mid-30s, this morning it finds itself back below 30. 

More Big Bank Earnings

Big banks, one of the main underpinnings of the economy, have been setting aside billions of dollars for loan losses in a big mark of uncertainty that perhaps helped push some investors into Treasuries and gold after JP Morgan Chase & Co. JPM, Wells Fargo & Co (NYSE: WFC), and Citigroup C reported results.

Loan loss provisions helped push WFC to its first quarterly loss in a decade and cut into the profit of JPM and C. Still, JPM beat Wall Street analysts’ estimates on its top and bottom lines despite overall earnings falling sharply from a year ago, as heavy trading volume in Q2 made a big difference. C also beat on top and bottom lines even though its profit fell substantially to 50 cents a share from $1.95 a year earlier. WFC—the laggard of the bunch—also announced a cut to its quarterly dividend.  

Big banks will probably start performing better when they don’t feel the need to set aside so much money for current and future loan losses. But even when that weight is off their shoulders, it seems likely that interest rates may continue to be lower, which is often a drag on bank performance. 

CHART OF THE DAY: VOL EBBS; GOLD HANGING IN THERE. Sometimes gold futures (/GC—candlestick) rise along with upticks in fear, as measured by the Cboe Volatility Index (VIX—purple line), and sometimes the two move in opposite directions. We’ve seen periods of divergence and correlation in 2020, but in recent days the general trend has been a slow easing of fear as gold marches higher.  Data source: CME Group, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Did Stimulus Last Into June? Many analysts saw the 17.7% rise in May retail sales partially reflecting those $1,200 government stimulus checks so many people got in the mail (as well as a really easy comparison to horrid sales in April). However, with reopening accelerating in June, it’s possible Thursday’s retail sales report for that month could be strong, too. Another double-digit gain might be tough, however, considering the difficult comparison after May’s surge. The other thing to think about is a couple of trends that began emerging in June. Namely, some states started to see an uptick in cases that’s now become a torrent in places like Florida, and also people might have begun worrying about their bank accounts as Congress seemed less willing to engineer another check-writing program. Did wallets close slightly in June after a free-spending May? If so, it could weigh on retail stocks as well as some of the mega-caps like Amazon.com Inc AMZN and Apple Inc AAPL, whose sales depend so much on consumers feeling like they have extra to spend on “fun” items beyond the usual staples.

Another thing to consider: Retail sales in May actually rose just over 12% with automobiles stripped out. Motor vehicle and parts sales surged more than 40% in May, and it’s hard to believe we’d see two months in a row of that kind of growth in this expensive category. That might have reflected people going out and using those $1,200 checks toward one big item.

Small Business More Optimistic: Consumer spending has helped to encourage small business owners, according to a recent survey, but while optimism may be on the rise, conditions are still far from ideal. The Small Business Optimism Index from the National Federation of Independent Business (NFIB) gained 6.2 points for a June print of 100.6. The biggest increase in the index came from expectations that sales will improve amid the economic reopening, with a net 13% of owners expecting higher real sales volumes. That may not sound like much, but it’s well up from the net negative 42% in April that marked the lowest reading in survey history. Still, the frequency of reports of positive profit trends fell.“We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels,” NFIB chief economist Bill Dunkelberg said in a press release accompanying the report. 

Hiring Problem: Prior to the pandemic, labor markets were tight, making it hard for small businesses to hire all the workers they needed. Ironically, some small businesses are still struggling to fill positions, even amid high unemployment. The NFIB said that the $600 unemployment supplement made total unemployment benefits higher than many lower-wage workers could earn if they returned to their jobs. That “made it more difficult for some firms to fill open positions,” the NFIB said. “Even with 5 million rehired in June, the number of unemployed remained at 18 million.” Those weekly $600 government payments are scheduled to end this month. It seems that might provide small businesses—which account for a big chunk of the domestic economy—with a larger pool from which to higher. But it seems it will also mean many lower-income workers will have less money to spend, bringing us back to the question of what’s in store for consumer spending.

Photo by Renan Kamikoga on Unsplash

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