Investors returning to the market this morning to start off a holiday-shortened week seem to still be grappling with how to price in a resurgence in domestic coronavirus cases as the V-shaped stock market recovery seems to be under threat.
The coronavirus continued to dominate headlines over the weekend, but Wall Street seems to have halted the selling from last week. With investors perhaps thinking they’ve sold enough for the time being, they seem to be watching to see how the pandemic continues to play out.
In corporate news, shares of Boeing Co BA were up more than 6% on news that Federal Aviation Administration flight tests on the 737 Max could begin as early as today. While this is good news for BA, it looks like it will still be a while before the Max returns to the sky. Airlines are carrying only a fraction of traffic due to the coronavirus—the Transportation Security Administration (TSA) reported its June screening numbers are running at about 17% of what they were a year ago. The thousands of U.S. planes sitting in storage might mean carriers Southwest Airlines Co LUV, American Airlines Group Inc AAL and United Airlines Holdings Inc UAL—the airlines with the largest fleets of 737 Max jets—might not be in a particular hurry.
In other corporate news that could bear watching, Facebook, Inc. FB shares are under pressure after Starbucks Corporation SBUX joined a growing list of companies, including UNILEVER N.V. UL and Coca-Cola Co KO, that have announced advertising suspensions on the platform amid concerns about hate speech and misinformation.
Because Independence Day week tends to be a heavy vacation week, market participants may see volume start to wane until Thursday morning’s jobs report. It’s worth remembering that light volume can exacerbate volatility.
A look at S&P 500 Index (SPX) sector performance on Friday was a little bit like looking at a fire engine – lots and lots of red.
Communication Services, Financials and Energy led the 11 sectors lower, with plenty of pressure coming on banks after the Fed said it will temporarily not allow big banks to do share buybacks or raise dividend payments in light of coronavirus pressure on the economy. Keep in mind that a lot of the banks had eliminated buybacks for the rest of the year.
But the main pressure on the market during the week’s last trading session seemed to come from worries that rising coronavirus cases in the United States might derail the economic recovery.
Texas has closed bars while Florida has said those establishments can’t serve alcohol for on-premise consumption amid a resurgence of the virus in those states. Arizona has also been hit hard.
The pessimism outweighed some green-shoots news that personal income in May fell less than expected while personal spending rose more than forecast and inflation actually ticked up a little bit. (See more on inflation below.)
It seems like investors and traders were thinking some of the economic reopening momentum we saw in May may not continue as strongly because of the surge in coronavirus cases.
That sentiment also seemed to raise questions about demand for oil, with the U.S. benchmark oil futures price declining more than 3% on the week. Even though a bright spot for oil might be the boom in interest in RV and automobile road trip vacations, with the domestic and global economy still very much on the back foot, black gold continues to face demand headwinds.
With coronavirus news front and center, it’s unsurprising that volatility increased. Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) on Friday rose more than 7.7% to 34.73.
But an interesting thing to note about the VIX last week is that, despite the increased nervousness among investors and traders, the measure didn’t rise above 40.
That seems to indicate that although nervousness has been on the rise along with coronavirus cases, market participants may be thinking that there is less uncertainty now than when the outbreak came to the fore earlier this year.
Despite the rough week, there still were some stocks that did well, including Peloton Interactive Inc PTON and Spotify Technology SA SPOT, which are part of the stay-at-home trade and rose more than 14% on the week. Apple Inc. AAPL also managed to gain more than 1% even though it is re-closing some stores, as it seems that momentum from its developer conference helped the iPhone and Mac maker.
Another potentially positive indication is that even though the SPX closed below its 200-day moving average it still closed above 3000 for the week. We’ll have to see if that level holds. If it doesn’t, the chart is starting to look more like a W is forming.
Looking ahead, this is a short week. Because Independence Day falls on Saturday, many people get to take work off on Friday. But between now and the holiday break are several pieces of economic data and a smattering of earnings releases.
Economic reports include June consumer confidence, the manufacturing index from the Institute for Supply Management, and June nonfarm payrolls.
In corporate news, FedEx Corporation FDX is expected to open the books on its latest quarter after the close tomorrow. The company has helped enable an increase in online shopping as the coronavirus forced people to stay at home and kept shops closed. So it could be interesting to see if executives talk about how that trend is going. It could also be interesting to see if they say anything about their outlook on the economic reopening.
CHART OF THE DAY: SLIPPING YIELD. Demand for government debt has been on the rise as re-opening fears have mounted, with the Cboe 10-year Treasury Note Yield Index(TNX) falling 10 basis points last week to 0.64% (the index reflects 10 times the yield on 10-year Treasuries). Yields fall when purchases of bonds increase, as often happens in times of economic uncertainty when market participants look to Treasuries for their relative safety compared to equities.Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Surprise Inflation: May inflation data last week may have surprised some investors. A Briefing.com consensus had expected the core personal consumption expenditures price index—which is the Fed’s preferred inflation gauge—to come in flat. Instead it nudged up 0.1%. Sure; one-tenth might sound like a rounding error in the context of such small numbers, but considering GDP contracted 5% in the first quarter according to Thursday’s report by the Bureau of Economic Analysis, it’s good to see prices hanging in there.
In some contexts, inflation can be a bad thing. But we’re not living in a time like that right now. Some inflation is actually a sign of economic health. So it seems like this news is one more quiver in the green-shoots narrative of economic recovery. What remains to be seen, however, is whether the resurgence of coronavirus in many states will crimp the reopening enough to erase inflationary gains.
Choppy Seas and Turbulence: With the coronavirus resurgence the overarching story of last week, it’s probably not a surprise that stocks that are part of the reopening trade didn’t do so well. American Airlines Group Inc AAL and Carnival Corp CCL fell 22.62% and 11.5% on the week, respectively. There seems to be a pretty direct correlation between the travel industry and the progression of the pandemic. But it seems that investors might have gotten in front of their skis when it comes to optimism about the travel industry, building in room for the stocks’ recent fall as the reopening hits turbulence. The Dow Jones U.S. Airlines Index (DJUSAR) as well as CCL, Norwegian Cruise Line Holdings Ltd NCLH, and Royal Caribbean Cruises Ltd RCL all saw a spike higher earlier this month only to fall back as the month has progressed and reopening worries have intensified.
A Room For the Night: One thing investors might want to keep in mind is that hotels are part of the travel industry and may not get as much press coverage as other parts of the travel industry like airlines and cruise lines. Yet stocks like Marriott International Inc MAR, Hilton Hotels Corporation HLT, Host Hotels & Resorts Inc HST, and Hyatt Hotels Corporation H are ways to get exposure to the ups and downs that the coronavirus is subjecting the industry to. And there may be signs of green shoots in the hotel industry. In May, the monthly average revenue per available room for U.S. hotels came in at $26.35, according to Statista. While that’s more than 71% below what it was a year prior, the May figure represents an increase from April’s $17.93, the first monthly bounce since the coronavirus began hobbling the domestic hotel industry. But, like the inflation data, the numbers are from May, and we’ll have to wait and see whether the resurgence in coronavirus cases pulls June hotel room revenue lower.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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