Apple And Amazon Up To Bat this Afternoon As Investors Ponder Microsoft, Facebook Results

Earlier in April, stocks had their best week since 1974. Barring a major setback today, they now have a chance for the best month since 1974.

It’s amazing to think we’ve had gains not seen in 46 years when just last month was the kind you hope doesn’t happen for at least another 46 years. Stocks have a weaker tone this morning as investors contemplate another awful jobless claims number, however (see more below).

Who would have thought on April 1 that the S&P 500 Index (SPX) would rally like this over the next 29 days when it had just fallen 4% to start the new month after one of the worst months in its history? As it turned out, the April 1 low just under 2450 was the low for the calendar page as April recorded nearly 14% gains from the end of March through yesterday’s close. 

A lot of this likely reflects what appears to be a pretty solid floor put under the market by the kind of fiscal and monetary policy response not seen in any previous crisis. Congress and the Fed arguably deserve a lot of the credit for this incredible turnaround. Hopes for a virus treatment also play into the April optimism. 

Yesterday’s Fed meeting underscored what obviously continues to be a really impressive effort to lend the economy some belts and suspenders in this unprecedented situation. The meeting concluded without a policy change but with the Fed pledging to keep rates at zero until the U.S. is back on track toward full employment and inflation. The way things are going, that could be a long time, something Fed Chairman Jerome Powell made clear in his press conference. 

Amazon, Apple Step Into Batter’s Box

It won’t be a long time, however, before investors get a look at quarterly results from two of the most closely followed stocks on Wall Street. Apple, Inc. AAPL and Amazon.com, Inc. AMZN both report after the close today, potentially giving a closer look at how supply chains in China and consumer demand for the latest electronic gizmos and home shopping are doing in the time of coronavirus. Today is the busiest earnings day of the busiest earnings week of the quarter. 

Investors are likely to closely monitor details of Amazon Web Services (AWS), a business of AMZN’s that seems tailor-made for the internet-centric work-and-play-at-home economy. AAPL was among the hardest-hit firms when coronavirus began to unfold starting late last year. It’s lost significant revenue with stores closed in the U.S. since early March. Consider watching closely for any iPhone updates, particularly for signs of supply chain delays hurting production.

Earnings news didn’t stop last night after the close. Microsoft Corporation MSFT, Facebook, Inc. FB, and Tesla, Inc. TSLA all saw shares move higher as investors surveyed their results. MSFT’s cloud business flourished in its latest quarter, which could bode well for AMZN later today. The company’s Azure cloud services revenue rose 59%. TSLA managed to surprise with a small quarterly profit, and FB easily beat Wall Street’s estimates as ad revenue held up well despite the economic crisis. 

The shutdown took a toll on McDonald’s Corporation MCD, however. The company missed analysts’ earnings projections and same-store sales fell more than 3% in Q1. Revenue did beat Wall Street’s estimates, but shares fell about 1% in pre-market trading. MCD more than most companies showed the dramatic effect of COVID-19. The CEO said they were off to a great year after a really good 2019 and had a lot of momentum before the virus pulled the floor out from under them.

Twitter, Inc. TWTR shares went back and forth between this morning in pre-market trading as investors pondered mixed news from the company’s earnings report. Recently shares fell nearly 5%. Ad revenue fell once the virus hit, but user data looked good. The company wants to build infrastructure to keep up with demand, which is great, but supply chain constraints could affect the build-out. 

In other morning developments, the European Central Bank (ECB) kept rates unchanged despite a 3.8% drop in economic growth in Q1. The ECB already delivered a ton of stimulus earlier in the crisis.

U.S. weekly new jobless claims reached 3.84 million, higher than the average analyst estimate of 3 million. This could seem to be putting a damper on some of the leftover enthusiasm from yesterday’s rally. More than 30 million Americans have lost their jobs since this crisis started. It’s an unbelievable number that speaks to the human toll of this pandemic.

Personal spending fell 7.5% in March, the government said this morning, the worst drop since records began in this category back in 1959. Personal consumption expenditure (PCE) prices fell 0.3% in March. This is the Fed’s favored inflation gauge. 

Trust but Verify

As we noted recently, investors are looking for any “light at the end of the tunnel.”  While it’s nice to be optimistic, basing your investment strategy on “hope” isn’t necessarily the best idea.

Take yesterday’s news of positive results in trials of Gilead Sciences, Inc. GILD drug to treat coronavirus. The first headlines came out minutes before the market opened, and the Dow Jones Industrial Average ($DJI) quickly bounded higher when trading started. The futures market had indicated gains of about 200 points, but the GILD news helped send the $DJI up more than 500 shortly after the opening bell. There was no other major news at the time that could have explained this quick shot higher. 

This shot in the arm for the $DJI speaks to euphoria about possible good news, and investors can’t be blamed for getting excited. That said, if you know how medical trials work, it’s not necessarily the panacea some might think. A lot more studying is still ahead, though it was good to see data presented yesterday from the National Institute of Allergy and Infectious Diseases that showed the mortality rate trended “towards being better” among patients who took the drug vs. those who didn’t.

If you’ve traded biotech stocks in the past, you probably know the winding path these trials sometimes go through before a drug becomes widely used. This situation is a little different due to the nature of the emergency, so it’s possible remdesivir could have a more immediate impact. The lesson here for investors is to trust but verify, as President Reagan once told Soviet leader Gorbachev. 

Most of Market Riding the Rally Train

The positive drug trial news yesterday, along with hopes of economic reopening, injected optimism as once again, small- and mid-cap stocks outplayed the large-cap ones to finish higher on the leaderboard. Yesterday’s rally was widespread across most sectors and included the vast majority of stocks in the SPX. That’s what bullish investors want to see more of if it’s truly a healthy rally, rather than having just a few heavyweights take the indices higher while most stocks tread water.

Not to burst any balloons, but today is the last day of the month and sometimes that can mean profit taking. Investors might want to consider taking a bit more care than usual venturing into the market with the end of the month looming. Also, you could argue that the stock market has come a very long way, very quickly. There’s still a chance stocks could start getting tripped up by all the negative data as the new month gets underway.

From a technical standpoint, the SPX is approaching its 200-day moving average again. That key resistance point lies just above the 3000 mark, a level where the SPX hasn’t traded in nearly two months.

CHART OF THE DAY: BIOTECH’S RIDE. The Nasdaq Biotech Index (NBI–candlestick) are among the leading market segments during this one-month rally as investors gravitate to these stocks amid hopes for coronavirus treatments. As trials for drugs and vaccines show hope, biotech stocks have gained some attention. NBI broke above its resistance level (yellow line), one the index has struggled to cross above since December. In fact, NBI is approaching its all-time high of around 4195, which it hit in July 2015. Data Source: Nasdaq. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Moving Out: Despite more dreadful housing data yesterday, homebuilding stocks have a lot of sizzle this week. D.R. Horton, Inc. DHI and Lennar Corporation LEN were among shares putting on additions Wednesday. Some of this relates to general positive market sentiment, but DHI’s shares got a special boost from better than expected earnings that it reported Tuesday featuring better than expected numbers. Though DHI withdrew guidance and warned of slowing sales and more cancellations in April, there’s one coronavirus-related trend that might work in homebuilders’ favor.

Consider the sudden concern people have about being in big crowds or commuting on the subway. This could go against the two-decade trend of people moving toward central cities, maybe raising demand for isolated homes built on the outskirts of metro areas. That, along with cheaper crude prices that might make commuting by car cheaper in the near future, could help raise demand in the places homebuilders have the biggest presence in coming years: The “exurbs.” It’s a long-term story and still in the realm of educated speculation, but could help explain some of the investor interest lately in homebuilders.

Looking for Payouts? Something to carry away from the Fed meeting is that rock-bottom rates can be tough on bank stocks (which tend to make their money by borrowing at lower rates and lending at higher ones), but may be a nice little assist for dividend-paying companies. Last year, as the Fed began to lower rates for the first time in a decade, dividend-focused sectors like Utilities and Staples got some of the benefit (see more below). 

Dividend yields slipped a bit over the last month as stocks rallied, but the SPX has an average yield of 2.15%. That’s far better than the 0.6% you’d get investing in a 10-year Treasury note, and could help steer investors out of fixed income and into equities if they’re feeling more like taking some risk. The question is, where will they go for those dividends? 

Through Tuesday, 83 U.S. companies and public investment funds, like real-estate investment trusts, have suspended or canceled their dividends, The Wall Street Journal reported. That’s the highest number in data going back to 2001, according to S&P Global Market Intelligence. General Motors Company GM and Ford Motor Company F are among the best-known companies to suspend their dividends, and other companies are cutting dividends. It’s this uncertainty that could keep fixed income more of a force this time around vs. past times when the Fed kept rates down. Investors tend to hate uncertainty, and worrying about losing a dividend might be the last thing they want right now.

Service Break: Tomorrow morning, the Institute for Supply Management (ISM) is expected to report a truly dreadful number for its manufacturing index—39 according to consensus compiled by Briefing.com—down from 49 a month ago (and remember 50 is the dividing line between economic expansion and contraction). As bad as that sounds, it's worth noting that the manufacturing index has been trending down for over a year, and until a couple months ago, the market had been humming along nicely. Why? One major reason is that manufacturing's share of the U.S. economy has been in slow decline for several decades, with the majority of the workforce shifting to services—a number that now stands at 77% according to the Labor Department.

But that sword has a double-edge, as it’s been service-based jobs that have borne the brunt of the coronavirus lockdown. How long will it take to get these service jobs—servers, stylists, office staff, and the various clerks and agents—back up and running? And will the demand return once they do? Alternatively, might we see a bit of a shift back to manufacturing? Remember, the virus has been a huge disruptor to global supply chains, one that might have nations and companies considering a partial reversal of the outsourcing trends of the last few decades. The future of work has gotten quite fuzzy over the last couple months.   

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