Materials Stocks See More Interest Amid Hopes for Federal Infrastructure Spending

The market seems to have regained a little confidence after yesterday’s late downward spiral, but the true test lies straight ahead.

A three-day weekend looms, with the markets closed Friday for the holiday. Typically, selling has accelerated into weekends lately as many investors feel shaky carrying long positions into a break. A three-day weekend might make people even more nervous. Over the next two days, we’ll see if there’s true conviction among buyers, but yesterday’s reversal after dramatic early gains arguably makes every rally suspect. 

Everyone is still trying to figure out what stocks are actually worth. That’s almost certainly why there’s so much volatility—people are trying to basically reprice the entire market at once in an unknown situation where we don’t know the magnitude nor the timing of the endpoint.

This morning a few positive developments are in the mix. The 10-year Treasury yield is ticking up a bit, which could help the Financial sector. Hopefully we can see that sector get going a little after it had a good morning yesterday. It’s kind of a mixed bag overseas, with Europe down amid weak gross domestic product (GDP) estimates for Germany but Asia up as Japan is talking about direct payments to households. 

Another positive is that the market didn’t continue spinning downward overnight after that disappointing finish yesterday. The futures market was flat to higher, which might reflect people thinking yesterday’s sell-off got a bit overdone.

Quick Recovery Far From Guaranteed

If you’re watching this dramatic and very quick rally from the late-March lows, it’s easy to get too optimistic. Investors should be careful to rein in their emotions here and remember that bear markets typically take a long time to recover, often retesting lows before marching forward.

Also, this bear isn’t like all other bears (to borrow a holiday analogy that’s maybe relevant tonight for some readers), because it depends so much on an outside actor that’s distinct from anything the market or companies can control. The extent and force of the virus is the most likely element to determine when and how quickly stocks recover.

If Tuesday’s final results actually reflected what happened over the course of the day, it would have been a nice break from all the volatility. Unfortunately, yesterday’s 0.2% dip in the S&P 500 Index (SPX)—the smallest daily gain or loss in weeks—disguised a session-long slide from an early 3% upward sprint that might have been a spillover from Monday’s huge rally. So as much as you want to say volatility is fading, it’s only light in comparison to the supercharged whipsaw stuff we saw a few weeks ago.

For more evidence, look at the Cboe Volatility Index (VIX), which stayed under 50 so far this week but remains well above levels investors would consider anywhere near normal. The crazy action on Tuesday provided another hint—in case you hadn’t already gotten it—that this isn’t a market for anyone to go “all in” on.

One disappointing outcome of Tuesday’s late selloff was the SPX’s inability to keep its head above the 2700 water level, which some analysts had seen as key resistance. The SPX spent a lot of time well over the water line Tuesday, but ultimately failed to hold on. Maybe some investors started to worry the rally was getting ahead of reality, where coronavirus shutdowns are likely to weigh on the economy significantly beyond the second quarter. 

That 2700 level also marked the place where things really began to fall apart in mid-March when the market first lost its footing. A close above it, which hasn’t happened in about a month, would still likely be seen as meaningful by many. A move above it and a close below it, like on Tuesday, tends to be a sign of technical softness.

Lack of positive participation from the Information Technology sector was a possible barrier Tuesday, even though Financials and Energy performed well. The Energy gains came despite another slip in crude oil, back below $25 a barrel. That’s the level you might want to watch in that market, with any close above it a possible sign of technical strength.

On the plus side, it was nice to see strength in some of the big Materials stocks like Dow (DOW), Freeport-McMoRan Inc. FCX, and Eastman Chemical Company EMN. As research firm Briefing.com noted, this could reflect hopes for an infrastructure component in the next fiscal stimulus plan.

Checking in on the longer-term trends, the SPX is up 24.7% from its 52-week low set March 23, while the Dow Jones Industrial Average ($DJI) has bounced 28% from its low. The SPX finished Tuesday down about 21% from the all-time high posted in mid-February.

Thursday is Powell Day

Fed Chairman Jerome Powell takes center stage tomorrow, giving an update on the economy via webcast at 10 a.m. It will be the Fed chair’s first public remarks since March 26. 

When Powell speaks, it could be interesting to get a sense of whether he thinks more needs to be done to address the crisis. Remember that like the rest of us, he’s not an epidemiologist and can’t forecast how long this might last. He might, however, be able to give investors a reading on whether the Fed’s initial monetary moves to blunt the impact of the crisis are having an effect yet, and also what else the Fed might have up its sleeve. 

Consider also listening for anything Powell says Congress might need to do on the fiscal side of the equation. Other Fed officials have said they hope for more stimulus, so we’ll see if Powell backs that up. Congress seems more willing this week than it did a week ago to consider this, judging from recent headlines.

Both the Fed and Congress have been getting praise for acting quickly and dramatically to address the situation. They seemed to have learned the lesson from 2008 that in a crisis, delay can make things worse both for the economy and markets. The initial market response has been pretty amazing, when you consider the gains from late March until now. 

Word is that liquidity remains pretty solid, and that businesses are getting most of what they need from Washington. How much more is needed might be the question, and Powell is likely to tell people the Fed remains ready to do more if necessary. That’s been his tone throughout the crisis.

Before Powell speaks, investors get a look at Fed minutes this afternoon, maybe providing more insight into the central bank’s recent emergency actions.

Jobless Claims Loom, with Huge Totals Expected Again

After spending most of this holiday-shortened week following the grim data around caseloads and death counts, investors tomorrow finally get a chance to see some economic numbers. The data, however, are likely to be sad reminders of the toll this crisis is taking not only on peoples’ health, but on the economy in general.

The biggest one people likely will watch is initial jobless claims. The last two weeks of reports didn’t just break records, they decimated them. Another record week is possible, analysts say. The analyst consensus is for 5 million, according to Briefing.com, which certainly wouldn’t be good news by any stretch of the imagination. The employment situation is probably going to be a lagging indicator that takes a long time to improve even once the crisis starts to (hopefully) level off. 

So far, markets have been looking past the data, in part for that very reason. The idea being once the virus numbers start to improve, the economic data would eventually follow. In the long run, that’s possible, but the short run might last longer than most people expect. Few analysts expect things to snap right back, partly because an “all-clear” signal might never sound. Who knows when people will start really feeling comfortable gathering in large groups or taking the commuter train to work.

Friday is a welcome day off for the markets as investors get a three-day break from the craziness. Remember to venture in carefully today and tomorrow, because people might get skittish ahead of a long weekend. Tomorrow will be more like a Friday than a Thursday, and Fridays have generally been awful for the market over the last two months. Not that the past guarantees the future, naturally, but it’s a trend to stay aware of.

Earnings Prep: Big banks lead off earnings season next week , but the schedule gets loaded up pretty quickly. A slew of the largest U.S. banks report next Tuesday and Wednesday, with their results bunched up in a way that’s the polar opposite of “social distancing.” Consider checking out some of those calls for executives’ thoughts on how the economic situation could develop as Q2 continues. 

Other major companies reporting next week include Johnson & Johnson JNJ, United Health Group Incorporated UNH, Abbott Laboratories ABT, Schlumberger Limited SLB, and Honeywell International Inc. HON. The ABT call might be more interesting than usual for any updates on its coronavirus test, while JNJ might also have updates on the vaccine it has in development. 

Going into earnings season, research firm FactSet expects Q1 earnings per share to drop 2.9%. If that’s how things end up, it will be the worst quarterly earnings performance since Q2 2016.

Why We Might Miss Buybacks: You might remember last week when we called buybacks “the dreaded B word” of 2020. That’s partly because companies might feel discouraged from conducting them in an environment where politicians are frowning on the practice. It’s also because companies need to maintain their liquidity in a crisis, so they might keep money on hand if they happen to enjoy decent cash flow. One problem with a drop in buybacks, as we pointed out, is that it means more shares remain on the market, potentially leading to slower earnings per share growth. Another challenge, as a Goldman analyst pointed out yesterday on CNBC, is that buybacks often come to the rescue when stocks hit a downturn. In a typical market, when stocks lose ground, companies often come in to buy at the lower prices. That kind of backstop might not be in place any more, meaning market slides could become more prolonged and volatility could remain elevated longer.

An Eye on the Consumer: University of Michigan sentiment for April and the March Producer Price Index (PPI) both bow tomorrow, and it’s probable that we’re in for more ugly numbers. The Briefing.com consensus is negative 0.4% for the PPI and a 79.3 for sentiment. That sentiment number would be down from over 100 earlier this year, but it’s not too surprising that people would lower their expectations in this environment. The sentiment data could continue to be worth following closely, since consumer spending comprises two-thirds of the economy and was holding up so well last year before all this happened.

Inflation would be expected to go down at times like these when not many consumers are out there chasing products. However, consider paying particular attention to the core PPI vs. headline. That’s because the headline number might be heavily influenced by the price of gasoline, which fell sharply in March. The core number strips out food and energy, and analysts expect it to fall just 0.1%, according to Briefing.com.