(Thursday Market Open) There’s the old trader adage, “buy the rumor; sell the fact.” But the last 24 hours have been more like “buy the rumor, buy the fact, sell the aftermath,” as we start the day with a touch of weakness.
Equities staged a decent rally yesterday, which advanced after the Fed meeting and press conference ended with no real fireworks. The same could be said across town at the Capitol, where big-tech CEOs mostly stuck to the script despite some tough grilling from the House Judiciary Committee (see more below).
Some of the early pressure today could reflect Congress seeming far from any new stimulus deal. Those extra unemployment benefits that helped prop consumer demand a bit over the last few months might be gone soon. Tomorrow is when the enhanced COVID-19-related $600 a week unemployment checks expire.
That means focus could again be on Washington today and tomorrow as investors keep an eye on the Capitol to see if legislators can huddle up and deliver a last-minute “Hail Mary” pass that might be a stopgap for the benefits. Right now, that seems pretty unlikely, judging from media reports.
Another thing people have on their minds is data. This morning brought two key numbers: Weekly initial unemployment claims and the government’s estimate of Q2 gross domestic product (GDP). Claims of 1.434 million were just a hair above last week and a bit below some analysts’ expectations. Still, it’s disheartening to see the number so high and not coming down more quickly.
GDP plunged a record 32.9%, a bit better than the -35% analysts had projected. Look closely, because hopefully none of us will ever see a quarter this bad again in our lifetimes.
A little earnings action started the day, with Eli Lilly and Company LLY shares up a bit in pre-market trading after the company beat Wall Street’s expectations and raised guidance.
Another interesting thing this morning: Gold has been up nine days in a row, but now it’s stepping back slightly. It’s a bit interesting to see gold showing weakness on a day stocks are down.
Another Busy Afternoon Ahead as FAANGs Awaited
It was originally supposed to be “triple-A” time this afternoon with Apple, Inc. AAPL Amazon.com, Inc. AMZN, and Alphabet, Inc. GOOGL GOOG basically at once. That’s three of the five “FAANGs.”
Then Facebook, Inc. FB added a curveball by saying it’s not reporting earnings till Thursday afternoon, either, because of the congressional hearings on Wednesday (see more below). So this afternoon might be a good time to pop some popcorn and watch the earnings unfold.
All four will have their respective calls in about a two-hour stretch after the close. With so much straight ahead, it wouldn’t be surprising to see some choppy, low-volume trading today as investors prepare for an earnings onslaught from four of the most highly valued stocks out there.
AAPL is the most widely-held stock at TD Ameritrade, according to TD Ameritrade’s Investor Movement Index® (IMXSM), so its earnings are likely to get plenty of scrutiny. Investors have quite a task trying to wrestle together all the different elements of AAPL’s quarter, including iPhones, store openings and closings, services, and wearables. It’s definitely a financial buffet. Guidance will also likely be closely scrutinized.
GOOGL, like FB, depends a lot on the uncertain advertising environment. AMZN is going to be a double-header, with focus on both cloud service revenue growth and how it did in online product sales during the stay-at-home environment of Q2.
Considering their executives were in the hot seat in front of Congress Wednesday, the FAANG stocks didn’t do too badly.
The Information Technology sector can’t figure out which way it’s supposed to be going so far this week. It was up big Monday, down sharply on Tuesday, and then back up 1.5% on Wednesday as the Washington hearing took place. The market dominance of the four FAANGs at the hearing came in for some heated questioning, though it’s unclear what, if any, action Congress might take.
There were no friendly questions from either side of the aisle, according to The Wall Street Journal. That could suggest issues of internet privacy and alleged anti-competitive practices aren’t going away for big-tech anytime soon. Some analysts wonder if Congress might eventually really start taking action against these firms instead of just jawboning. If people were worried about that, it didn’t show up in the stocks’ performance yesterday.
Coincidentally, the only FAANG stock that didn’t rise Wednesday was the one who wasn’t at the hearing: Netflix (NFLX). All the rest were up 1% or more. NFLX is also the only FAANG that’s already reported quarterly earnings.
Fed Gives Market a Wednesday Tailwind
The entire market seemed to get a second burst of energy yesterday afternoon after the Fed kept rates unchanged and hinted at optimism. The lack of a Fed move wasn’t unexpected, but some of the updates in the Fed’s statement looked a little better than last time regarding the economy.
During the press conference from Fed Chairman Jerome Powell after the decision, a note of humor appeared as Powell reinforced his comment about future rate hikes, saying the Fed is “not even thinking about thinking about thinking about raising rates.” That’s an extra “thinking about” from two at the previous press conference. Will he add a fourth in September? Stay tuned.
It was mostly serious, however. Powell said the recovery shows signs of slowing as cases spike in July and the Fed would await employment and retail sales data to see by how much. Still, his cautionary words weren’t really enough to slow the market. Every sector finished higher on Wednesday, led by Energy. Generally, the reopening stocks had kind of a mixed day, while the Techs were led by semiconductors.
That particular sub-sector has been grinding higher for months, with some pauses here and there. Advanced Micro Devices, Inc. AMD led the way yesterday on some amazing earnings, though remember it followed a few days after Intel (INTC) got clobbered following its earnings. This remains a pretty volatile area.
The earnings theme for Q1 was arguably companies declining to provide guidance. Under the circumstances, they could hardly be blamed. The pandemic simply creates so much uncertainty. Even in the current Q2 earnings season, some CEOs say they don’t want to adjust guidance because the future seems so hard to predict.
Just 28 of the 128 S&P 500 companies reporting through the end of last week provided EPS guidance for FY 2020 or FY 2021, FactSet said. That was up 40% from the same point in Q1 earnings season.
CHART OF THE DAY: NASDAQ STILL HOLDING ON. The Nasdaq Composite (COMP—candlestick) has been rallying strongly mostly on the strength of big cap tech stocks. There have been pullbacks but they appear to bounce off the uptrend (yellow line), an indication that the uptrend is probably intact. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Gold and the Real (Yield) Deal: One of the prevailing storylines of mid-2020 has been the persistence of the gold rally—specifically how the rally kicked into overdrive just as the consumer price index (CPI) began its descent to multi-year lows. Isn’t gold supposed to be an inflation hedge? The short answer is a qualified “yes” but the long answer is a tad more complex, involving an assessment of the “real”—adjusted for inflation—interest rate.
With yesterday’s announcement, the Fed punctuated its intention of keeping rates low for a long time. The futures market has priced in a 100% likelihood of the Fed funds rate staying in its current range of 0 to 0.25% at least until the middle of next year. Meanwhile, the stock market still seems to be pricing in something close to a “V-shaped” recovery—Monday’s durable Orders number came in strong, as have recent housing and consumer confidence data. So even if inflation is tepid by historical standards, if it stays well above zero—implying a negative real interest rate—the bullish case for gold could remain intact.
And Speaking of Inflation: According to a Barron’s report earlier this week, history shows that when the dollar was at an extremely pessimistic level and gold prices were at an extremely optimistic level (similar to what we’re seeing now), the dollar rallied over the next three months approximately 77% of the time. Past isn’t necessarily precedent, obviously, but that’s an interesting statistic that might have some relevance. Another catalyst for the dollar could be inflation. We’re not seeing signs of that right now, but it may be a good idea to keep an eye on crude oil prices. If we see crude break out above $50 a barrel then the dollar might get traction.
The next key inflation data to consider watching comes Friday, when June Personal Consumption Expenditure (PCE) prices come out. The Fed says it looks at these data very closely as it monitors the price environment, and PCE barely budged in May, rising just 0.1%. Analysts expect a much bigger jump of 0.4% for PCE in June, according to research firm Briefing.com, but the core rate, excluding food and energy, is seen rising just 0.2%.
A Snapshot in Time: It was a “moment” to remember for Eastman Kodak KODK Wednesday. The venerable photography pioneer saw its shares rise more than 300% after the U.S. government awarded the company a $765 million loan to produce pharmaceutical components in an effort to combat the coronavirus pandemic. Shares had already risen 200% on Tuesday. Market capitalization leaped from $115 million to $1 billion this week.
This is a stock whose shares had gone from $32 back in 2014 to under $2 earlier this year. Now they’re above $40 again. Any time a stock has this big a move, it’s going to draw attention, especially one that was a household name. However, people have to be careful here. There were a number of trading halts in the stock due to volatility yesterday. Caution should be the operative word.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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