Futures are flat premarket but overall it has been a really solid week for investors. The rally has broadened out a bit, which is a necessary ingredient for us to get increasingly bullish. For the week, the Dow Jones and S&P 500 are up 3.3% and 2.9%, respectively, while the NASDAQ is up 2.4%. The important move occurred in the equal weight S&P 500, which is up 5.4% before today. When the average stock starts acting better than the FANG dominated averages, it is a decent sign of strength. However, much more work needs to be done going forward to increase our confidence.
This week was chock full of retail earnings reports as the bulk of the traditional consumer companies posted their quarterly earnings calls. It went about as well, and as bad, as expected. Stores that were ahead of the game from an omni-channel perspective posted decent results in a very difficult environment. This includes Walmart#, Home Depot#, Lowe’s#, Best Buy and Target. Online sales showed upwards of 140% growth while customers were stuck at home. These leaders have shown the unique ability to maintain store fronts and provide Amazon-like service online at lower prices.
However, the market always looks forward. Buy the rumor, sell the news. Even with great reports, these stocks were not able to hold on to their highs. As more and more reports come out on successful re-openings of states and a slow increase in the number of people leaving their homes, investors are looking for the next phase of the recession, namely recovery. This is different than these stay-at-home winners.
TJ Maxx is a good example. They are the opposite of omni-channel, with minimal online presence. They depend on people entering their physical stores and ruffling through discounted clothes. The company missed Q1 earnings, had negative margins and a loss in operating income. Q2 isn’t going to be any prettier. However, they noted some semblance of pent-up demand. Stores that have opened are seeing some traffic. That was enough to send the stock up 7% yesterday. Part of this is short covering, as “buy the rumor, sell the news” works both ways.
Just this week, we’ve seen L Brands jump 33%, United Airlines +30%, Expedia# +18%, Schlumberger +14% and Ross Stores +14%. All have warts and are still down substantially from their highs. Short covering has played a large role in these moves too as they sold stock at higher levels and are booking profits. However, if vaccine news is as positive as some hope and the money printing presses keep running, the long-term upside in a lot of beaten down areas is substantial. That is a big “if” at the moment.
The likelihood of this overall market rally continuing is dependent on news events like the Moderna trial data. Even though it is way too early to call their vaccine a success, capital is looking for a home with upside when we feel safer to venture out. Notions of businesses resuming is taken as a huge positive. At this point, the dollar value of sales doesn’t matter too much, only the direction. Eventually the revenue number will matter.
It will be difficult for the indices to make new highs unless Financials, Industrials and beaten down travel related names catch up. This week was positive on that metric but hardly conclusive. More positive trial data and consumer movement out of their homes is not guaranteed by any stretch.
The downside risks remain tied to a second wave of infections, business traffic remaining subdued, consumers fearful of leaving their homes, an ending of unemployment benefits and cash shortfalls at local states and municipalities. There are other scenarios as well, but these seem prevalent at the moment.
The continual wild card resides at Pennsylvania Avenue. Trump has ramped up the rhetoric with respect to China, blaming them for the virus outbreak and going back after Huawei. Tweets like these are not positive for market action:
- “China is on a massive disinformation campaign because they are desperate to have Sleepy Joe Biden win the presidential race so they can continue to rip-off the United States, as they have done for decades, until I came along!”
- “Spokesman speaks stupidly on behalf of China, trying desperately to deflect the pain and carnage that their country spread throughout the world. Its disinformation and propaganda attack on the United States and Europe is a disgrace…. It all comes from the top. They could have easily stopped the plague, but they didn’t!”
This has a political slant to it. As things stand today, the election will come down to the 101 electoral votes up for grab in the hotly contested states: Michigan, Pennsylvania, Wisconsin, North Carolina, Arizona and Florida. Three of those are in the manufacturing-based middle of America. Jobs have been shipped overseas for a couple decades now. Any semblance of getting them back is a positive for those voters. These are critical states that no one thought Trump could win in 2016. He will need these voters to come out on Election Day to stand a chance as many voters are not happy with his style of governing.
Pressing China is considered to be a political positive for Trump as he opines that Biden has been bullied by them over the years. At least that’s how he is positioning himself. This is not good for the equity markets.
Another executive action targeting Huawei, which closed some loopholes from the original plan, is going to be met with resistance and a response from China. The Republican controlled Senate also passed a law designed to limit investments into certain Chinese companies. All of this creates new headwinds for the economy as we try to rebound. It is the wrong time to be escalating a trade war. A rapidly declining stock market is sure to put an end to the skirmish as Trump grades himself by the latest performance numbers.
The last political battle is with the next stimulus package. Nancy Pelosi and the House passed a sweeping to-do list totaling $3T. This is dead on arrival and more of a wish list that puts many Democratic hot buttons on display for their constituents. The vote was primarily by party line aside from 14 Democrats. 13 of them are up for reelection in Republican leaning districts. They can’t afford to offend too many independent voters. The other no vote claimed the bill didn’t do enough. The Senate Bill will be a lot smaller and will take more time to hash out.
The markets are closed on Monday. Enjoy the long weekend. Here’s hoping the weather holds off so we can enjoy time with friends & family, outdoors, socially distant and with some good food & drink on hand.
“I pity the fool” who doesn’t know Mr. T turns 68 today.
James Vogt, 610-260-2214