Todd’s Take on the Market
U.S. equities moved lower last week, following heightened tensions in U.S.-China relations, disappointing Q2 technology earnings, and an increase in jobless claims. The market continued to anticipate a ‘Phase 4’ fiscal stimulus in the U.S., though unemployment benefits and payroll tax cuts reflect sticking points.
The Dow fell 0.74%, the S&P 500 fell 0.27% and the tech-heavy NASDAQ fell 1.33%. For the year, through Friday’s close, the Dow is down 6%, the S&P 500 is positive by 0.62%, but the NASDAQ is up a scorching 16.10%. The NASDAQ has risen thanks to names like Google, Amazon, Microsoft, Netflix and Apple. If you look at the winners, it was the high cap tech stocks, which was thought to be somewhat COVID protected. The work at home stocks. The airlines got pummeled, taking the transports down heavily so there was some sign of a disappointment in the vaccine data.
Another key factor was that those high cap tech stocks, particularly the superstars had highly raised expectations of improved price-performance at some brokerage firms. Amazon stunningly added the value of Boeing in one night.
Nonetheless, I think it is time to be slightly wary here. You can play with the trend but we must be nimble and ready to adjust.
Speaking of being wary, I have taken a few calls and emails from some that are wary and question the run we have seen since the March lows. Here are some of the thoughts I shared.
- I believe that over the past couple of months, economic data, whether good or bad, has been irrelevant. Maybe not irrelevant, but traders and investors have looked past it because everyone expected it to be bad. Now, those same economic figures are going to be overlooked, unless they start to tumble. The election is what the focus will be on.
- Corporate earnings were expected to be horrible yet traders and investors have given many a “get out of jail free” pass. Some haven’t been as bad as analysts expected and they are having to ratchet up their estimates.
- The Federal Reserve has pumped massive amounts of liquidity into the markets with their bond purchases and stand ready to input more if needed. I like to call that a “FED put”. They aren’t going to let the markets tank; they are going to provide more liquidity.
- Fiscal Stimulus from our government has helped to shore up confidence and as the FED, they are working on doing more as we speak.
- Many money managers were very underweight stocks and as the rally off the March lows, they have to get cash invested.
These are some of the things I believe have propelled the markets to where they are now, still it’s hard to believe. We are cautiously optimistic at this point but monitoring the markets closer than ever.
Turning to the economy, after 15 weeks on the decline, the number of Americans filing for new unemployment ROSE last week to 1,416,000. An upward trend reversal is not what we want to see happening. Besides these unemployment figures, the data is starting to improve, but from an ugly base.
Chicago FED National Activity Index suggests economic growth increased further in June. Existing home sales surged, the highest gain on record, but once again, a low bar to cross.
In the fixed-income world, the flight to safe-haven assets continued this week following heightened U.S.-China geopolitical tensions coupled with concerns surrounding delayed state reopenings. The U.S. 10-year Treasury yield reached a 3-month low, declining to 0.59% on the back of a less favorable jobless claims print.
This week we will get a slew of corporate earnings that we will be monitoring. On the economic front, we will be watching what the FED has to say on Wednesday, following their 2-day July meeting. No one on this planet expects them to raise rates. We will see how this U.S.-China ordeal plays out and we will keep you posted.
Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
