This elevator ride keeps zooming higher, almost like the market is scrambling to get back to where it was before the crisis began. We’re up more than 40% from the late-March lows, and stocks have a firm tone again this morning as reopening optimism continues.
Remember there’s no reason to go “all in” at times like these. Enthusiasm is definitely high right now, and the market has obviously come a long way. On the other hand, things are really rough around the U.S. economy and a lot of people have lost their livelihoods. This is a very tough situation and there’s no guarantee the market won’t make another move lower at some point. Jobs data due tomorrow and Friday are bound to be ugly (see more below).
The general consensus seems to be that people think the economy will get back to normal as COVID-19 looks to be somewhat under control for now. Having some of the stores in major cities destroyed by civil unrest could slow that somewhat, but people are thinking cities will rebuild.
Markets in Europe and Asia rose in the early going today, and European stocks are up nearly 30% from their March lows. So the rally isn’t just here.
Volatility is pulling back, with the CBOE Volatility Index (VIX) now starting to flirt with 25. That’s down from above 80 at the peak of the crisis.
It wouldn’t be surprising to see Financial stocks come strong out of the gate today as the 10-year yield climbed to 0.72% this morning. The safety of bonds is getting sold and rates are inching higher.
Midweek Data Watch
Two key numbers to consider watching as today’s session moves along are April factory orders and the May ISM non-manufacturing index, both due soon after the opening bell.
On Monday, manufacturing ISM moved up a bit from April, providing a little solace to people worried about the economy. Analyst consensus for non-manufacturing ISM stands at 45%, which would be up from 41.8% in April, according to research firm Briefing.com.
Analysts look for factory orders to have declined 13% in April vs. 10.3% in March, but this will likely be dismissed as a backward-looking data point.
A private payrolls number out this morning showed job losses continued in May but at a much slower pace than in April. It also was far better than analysts had expected, but still showed major losses in the manufacturing sector. That could be a category to consider watching in the government’s report Friday for any signs of improving economic conditions.
The payrolls report this Friday is almost certainly going to be hard to digest, but it may not hold as much weight as usual because people know it’s going to be a disaster. Wall Street’s consensus is for job losses of 8.5 million in May, according to research firm Briefing.com. That would be an improvement from 20.5 million jobs shed in April, though it’s still horrible to imagine the pain and suffering of so many represented by that one number.
It’s important to keep an eye on the weekly initial jobless claims data out tomorrow ahead of the payrolls report to get a better sense of whether the needle is moving back in the right direction as the economy reopens. The consensus is for new initial claims to jump another 1.8 million in tomorrow’s report, down from 2.1 million the previous week, Briefing.com says.
Turning to earnings for a moment, it was a nice looking quarter that Zoom Video Communications Inc ZM reported after the close yesterday. They beat Wall Street’s expectations and raised guidance. So what happened? The stock initially fell in after-hours trading, though it did engineer a slight comeback ahead of the opening bell.
The takeaway behind the initial weakness could be that ZM shares have come a long way very quickly (tripling so far this year) and this could be a case of buy the rumor, sell the news. It’s also possible people could be worried about ZM’s prospects now that people are coming back out of their homes and may not need the product as much as during the full shutdown.
Draw Play Keeps Working
It’s been the same story for weeks: If the FAANGs can’t do it, some other sector steps up and says, “Hey, how about a lateral?”
We saw that yesterday when all five FAANGs and some of the chip stocks yielded the floor early on. That paved the way, not for a setback in the major indices, but instead another rally led by some of the big banks and travel stocks. Goldman Sachs Group Inc GS, Morgan Stanley MS and Wells Fargo & Co WFC advanced, and so did Boeing Co BA, United Airlines Holding Inc UAL and Delta Air Lines, Inc. DAL. Keep an eye on the payment companies and the package delivery industry, too, which seem to be gaining steam as economic hopes improve.
The less the major indices rely on FAANGs for big gains, arguably the more positive for the overall market. Some of the FAANGs, including Apple Inc. AAPL and Amazon.com, Inc. AMZN, along with Microsoft Corporation MSFT, have $1 trillion market-caps and exert huge influence on the direction of the S&P 500 (SPX) and Dow Jones Industrial Average ($DJI). A more balanced rally featuring stocks of companies that would benefit from reopening is probably something more investors can hang their hats on, as it reflects a wider cross section of the economy.
That said, even most of the FAANGs recovered by the end of the day as the Nasdaq (COMP) came back from early losses. The small-cap Russell 2000 (RUT) also made solid strides. Yesterday basically had something for almost everyone, and it was encouraging to see the markets really put on the afterburners in the last hour of the session. That’s been a pattern lately and likely speaks to investor enthusiasm.
Instead of being nervous about going into the evening long, people are making bids ahead of the closing bell in a time slot that some called the “witching hour” back in March. We’ve seen some of the same enthusiasm on recent Fridays, compared with heavy selling on Fridays earlier this year as people seemed nervous heading into the weekend with long positions.
Cyclicals that depend on economic reopening outperformed the so-called “stay at home” stocks, for the most part, reflecting investor optimism. Some of the late push higher yesterday might have reflected a positive news report related to vaccine progress. Headline news of this sort is likely to continue being a key factor, whether the news is good or bad. People are still closely attuned to any progress or lack of it in the fight against COVID-19, which almost goes without saying.
Three-Month Highs to Start Day
Tuesday’s solidly higher close for the SPX means it went into today at its highest level since the March 3 close, exactly three months ago. It’s still down 9% from the Feb. 18 intraday high, but down just 4.6% for the year. Who’d have thought we’d be back at this sort of level so soon when back on March 23 when the SPX fell below 2200 and was down 35% from its high? It goes to show what a huge response by the Fed can help do, namely attract investors to the stock market.
Still, June could bring a reckoning as we get further into the month. The major indices trade at historically high valuations, though many analysts have basically written off this year’s horrific earnings and are comparing stocks to projected 2021 financial results instead.
The Atlanta Fed’s GDP Now indicator projects a shocking 53% cratering of GDP this quarter, though Fed Chairman Jerome Powell has said he expects things to start improving in the second half. He’ll probably be asked about the Fed’s projections for economic growth a week from today in his press conference after the June 9-10 Fed meeting.
CHART OF THE DAY: FALLING THROUGH THE TRIANGLE BOTTOM. The U.S. Dollar index ($DXY–candlestick) was moving within a triangle (yellow lines) for about two months before breaking down from its lower boundary. Theoretically, after price breaks out from a triangle to the downside, it could go as low as the distance of the widest part of the triangle (blue dashed line) from the breakout point. If this were to happen, we could potentially expect $DXY to go as low as 97, which could act as its next support level. Data Source: ICE. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
The Immovable Object: With the next Fed meeting around the corner next week (June 9-10), almost no one in the futures market is looking for a rate move. Chances are around 96% of the Fed holding its benchmark rate at between zero and 25 basis points, according to Fed funds futures listed by CME Group (CME). That pretty much stands to reason when the Fed is still trying to power up the economy with as much stimulus as it can muster. At this point, it’s way too soon to figure out how long this effort can last, and it depends more on the virus than on anything under the Fed’s control. Anyone hoping the Fed can put the brakes on this easy policy any time in the near future isn’t going to find much to write home about looking farther into the futures market, either. Even when you get to next March, odds remain below 3% of rates being any higher than they are right now.
Glimmer of Hope? Which leads us to another “immovable object” that’s tied pretty closely to the Fed’s benchmark rate: The 10-year Treasury yield. It’s been stuck roughly between 0.6% and 0.7% since late March. It traded at 0.68% at Wednesday’s close, about where it was two months earlier. The S&P 500 Index (SPX) has rallied nearly 40% since then, which could reflect that old saying, “Don’t fight the Fed.” In other words, when the Fed is trying to make things comfortable for corporations by keeping its interbank lending target near zero and by buying Treasury and corporate debt, some investors see that as a green light to jump into stocks—not only as an alternative to low-yielding fixed income securities, but also as a de facto backstop (the so-called "Fed put").
What’s interesting, however, is action in the 30-year yield, which is up about 14% since late March and hit 1.5% yesterday for the first time since March 20. The premium of the 30-year yield to the 10-year yield reached 83 basis points on Tuesday, up from 66 at the end of March. When you see the yield curve steepen this way, it could be another sign—like the stock rally—of investors hoping for better economic times ahead (or it could simply reflect more investor interest in the short end of the curve that’s getting so much help from the Fed’s buying program). Still, maybe it’s more helpful to “mind the gap” between 30- and 10-year yields for a sense of where the economy might be going rather than just watching the 10-year yield march in place. Any narrowing of this premium, by the way, could give you an early sense that there may be more bumps in the road ahead. So we’ll continue to keep an eye on it.
Dollar Yields: Another benchmark to consider watching is the dollar index, which has slipped lately after posting nearly three-year highs back at the peak of the COVID-19 shutdowns in late March (see chart above). At that point, the dollar index ($DXY) had risen well above 100. Then the dollar traded between 98 and 99 for a couple months before dropping below 98 on Tuesday for the first time since mid-March.
While you wouldn’t want to see the dollar drop too far because that might be a sign of investors starting to see cracks in the U.S. model and also kindle inflationary worries, a slight ease could be a healthy development. It might mean fewer people are panicking, and also provide evidence that some international economies like Europe are starting to gain a bit of traction. Remember, U.S. multinational corporations sell huge amounts of their products to Europe and Asia, and a really strong U.S. dollar can slow down that demand. It’s arguably good for the U.S. if our trading partners experience improvement in their economies. A rising tide lifts all boats, as the old saying goes.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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