Our chief market strategist breaks down the day's top business stories and offers insight on how they might impact your trading and investing.
Jobless claims of 840,000 are down 9,000 from a week ago and near estimates
Yesterday’s strength in “cyclical” shares seen as evidence of economic hopes
(Thursday Market Open) If there were one word to describe market activity this week, it might be “shrug.”
From the on-again-off-again stimulus talks, to the president’s battle with COVID-19, to the big election (and a big earnings season) just around the corner, there’s a whole host of uncertainties and potential tailwinds. Yet the market seems to be shrugging it all off as it continues its march higher.
Things continue looking up early Thursday, with the S&P 500 Index (SPX) approaching its highest point in over a month ahead of the open. “Risk-on” continues to be in style, judging from how stocks are behaving, but a few of the risk meters edged higher early on. That included gold and bonds, both of which had been under pressure so far this week. Volatility appears to be in check, though. For the moment, anyway.
Though the election less than four weeks away continues to drive volatile trading, one aspect of those concerns eased this morning with President Trump saying he doesn’t plan to participate in the Oct. 15 debate. There was a lot of market turbulence ahead of the first debate, but for now, it appears investors won’t have to worry about a second one. “For now” being the operative phrase, as things tend to change fast in Washington these days.
New weekly jobless claims of 840,000 today don’t seem likely to move the market needle too much. Wall Street’s average estimate was 830,000, so the actual was right in the ballpark and seems unlikely to move the market much in either direction. The number also fell 9,000 from last week, representing some progress, even if it’s slow. Remember, these are hard numbers to predict, with states in various shapes of shutdown and the hospitality industry such a wild card.
However, one piece of news today might indicate more people are going back to work and maybe stopping at the drive-through along the way. McDonald’s (MCD) shares are setting the pace this morning, up about 1%, after the restaurant reported U.S. same-store sales up 4.6% in Q3. Some appeared to be due to a promotion, but it might also reflect people heading back to work and getting coffee or breakfast.
Crude oil is also having a good day, but not for great reasons. A hurricane bearing down on the Gulf of Mexico and a strike in Norway appear to be helping U.S. prices get back over $40 a barrel.
Do you get the feeling investors really seem to want a stimulus?
Yesterday’s amazing recovery basically erased Tuesday’s late losses, meaning we’re back to where we were earlier this week before President Trump’s unexpected Tweet temporarily dashed hopes. Now investors might need to decide if they’re OK with an a la carte stimulus, as CNBC labeled the possible next step, vs. a full banquet.
There’s still some doubt whether anything will happen, but that didn’t slow Wall Street down yesterday. There’s so much enthusiasm built in that any actual news might be almost anti-climactic. The buying on Wednesday flowed into almost every sector, but cyclicals—sectors like Financials, Consumer Discretionary, and Materials—that tend to do better when the economy performs well—were among those doing best on a day that saw the biggest gains since July.
The cyclical strength has some analysts wondering if “value” stocks are starting to surge past the FAANGs and other Tech stocks in popularity. This would probably be associated with hopes for improved recovery from the pandemic, and news Wednesday of Eli Lilly (LLY) seeking U.S. Food and Drug Administration clearance for its Covid-19 antibody drug might have played into those hopes.
Airlines, other travel stocks, and retailers looked lively Wednesday after many of them got slammed on Tuesday in this week’s whipsaw action. The market continues to appear headline-driven, so any new developments from Washington today could shape the coming hours.
Some of the sentiment today and tomorrow could depend on whether any developing package looks narrow or wide. If Congress and the president agree, let’s say, on legislation to help the airlines or to release money already allocated to businesses from last spring’s federal package, that might get less fanfare than a bill that puts money directly into consumer pockets. That’s not to minimize the importance of airlines or small business, only to say that consumer spending ultimately drives much of the economy. Airlines are only a small part of that.
As an investor, especially if you’re looking long-term, it’s important not to get too caught up in minute-by-minute headlines. If it looks like a lot of participants are jumping in and out of stocks based on what the government might or might not do, don’t feel you have to join the crowd. As we noted earlier this week, there’s risk, and there’s smart risk, so make sure you’re trading the second way, not the first.
Looking at the market from a technical standpoint, the SPX flirted with resistance near 3430 on Wednesday, and that could remain the level to watch today. Support might rest at the psychological 3400 level, or below that near the 50-day moving average just below 3370. The SPX hasn’t been above 3430 in almost a month, and any move through there could set up another test of 3500, which it topped in late August.
The Nasdaq (COMP) finished Wednesday approaching levels near 11,500, which, according to my fellow TD Ameritrade Network* contributor Kevin Hincks, Manager, Trader Contributor, TD Ameritrade, is a place where COMP has gotten range-bound and toppy on previous trips. That level isn’t far from where COMP peaked in early September, by the way. It hit an all-time high above 12,000 on Sept. 1.
Volatility took a breather mid-week as the Cboe Volatility Index (VIX) sank below 29 on Wednesday. That’s still high vs. historic levels, but the fact that it’s stayed mostly below 30 could suggest investors aren’t overly frantic about things with less than four weeks to the election. Some analysts also noted that volatility futures have flattened a little if you look ahead to November, which they say could be a sign there’s less concern about some sort of long-drawn contested election fight.
Stocks go up and stocks go down, but one constant lately is gold taking a beating. It sank nearly 1% yesterday and isn’t far off its two-month lows recorded in late September under $1,900 an ounce. Meanwhile, copper—sometimes seen as a barometer of industrial demand because of its use in so many products—is shining brightly and isn’t far from 2020 highs posted last month (see chart below). Copper is also a measure some investors use to assess China’s economic performance, so it could be giving us a hint of what’s going on there.
“Risk-on” trading, meanwhile, seems dominant here at mid-week on Wall Street. That’s pretty evident when you consider gold’s rush downward and VIX staying in check. It’s also there when you look at the bond market, where the 30-year/10-year yield spread recently reached four-year highs and the 10-year yield again is challenging 0.8%.
Yield Yin and Yang: Treasury yields popped back Wednesday, but if they can’t maintain traction it could be bad news for banks, many of which start to report next week. Low rates continue to weigh on the sector, though it’s a bittersweet situation for some because having rock-bottom rates can also increase refinancing and mortgage activity, research firm Briefing.com noted. This could be particularly helpful for banks like Wells Fargo (WFC) and Bank of America (BAC), as well as large regional banks that play heavily in the mortgage business.
Banks Up Next: Research firm FactSet predicts cumulative Financial earnings to fall 22.7% from a year ago. The good news is that those expectations look a lot sunnier than where analysts were back in June, when they predicted a Financials Q3 earnings cratering of 34.4%. That’s up significantly and might reflect healthy capital markets activity in Q3 that kept trading businesses hopping through most of the quarter, Briefing.com said.
Some look to the Fed for help if Congress and the White House can’t act on a stimulus. However, one school of thought is that things would have to get a lot worse for stocks and the economy before the Fed stepped in. The Fed is in a tough place. It can’t lower rates further without taking them into negative territory, where it’s shown no appetite to go. If rates went negative, people would actually lose money by putting it in the bank, conceivably spooking the country even more.
JPM to Get Ball Rolling: JP Morgan Chase (JPM) kicks off bank earnings next Tuesday morning. The company has what analysts on Wall Street call a “fortress balance sheet” that hasn’t protected it, necessarily, from steep losses this year along with the rest of the sector. Until last week’s yield rally, there just haven’t been too many positive catalysts in 2020. Banks tend to make money when people and companies are actively pursuing loans for things like homes and business expansion. As we all know, it hasn’t been the year for that.
The drop to zero rates and credit loss provisions hit the entire Financial sector hard in the first half, eating into their profitability. JPM put aside $15.7 billion in the first half, bringing its reserves to $34.3 billion—or 3.5% of its loan book—to cover bad loans, Barron’s noted.
JPM shares mostly rattled around between $90 and $100 over the last quarter, well below last year’s peak close to $140. That certainly makes sense when you consider that analysts expect the company’s Q3 earnings to drop nearly 21% from the same quarter in 2019, coming in at $2.13. Keep in mind, however, that if analysts are right, the Q3 number would represent a very nice rebound from $1.38 in Q2.
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