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.
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.
Week In Review
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.
Bright Spots
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.
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.
A Short Week
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 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.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
Photo by Ross Parmly on Unsplash
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