Stocks Caught in Cross Currents?
U.S. stocks drifted mostly higher in thin trading as investors digested this week’s initial burst of corporate earnings, economic data and coronavirus news. The dollar weakened and crude oil fluctuated.Late Friday afternoon, markets are flat to slightly up, it's been a drifter day after a week where tech stocks pulled back.
The S&P 500 edged higher, led by gains in utilities, health care and real estate, while the communication services and energy sectors slumped. Trading volume was almost 30% below the average over the prior 30 days. Netflix Inc. sank as much as 8.2% after saying it expects to sign up just half the subscribers Wall Street expected in the third quarter. A University of Michigan survey showed U.S. consumer sentiment slumped in July, missing all forecasts, after the resurgent coronavirus nearly wiped out any emerging optimism around reopenings.
“There are a lot of cross currents,” said John Porter, chief investment officer of equities at Mellon Investments. “You’ve had such an incredible run in the growth stocks relative to value. It certainly sets the stage of a sell-on-the-news reaction. They seem to have almost unfulfillable expectations built into these prices short term. Every issue in the market, the answer to the problem seems to be technology.”
Investors are closely watching to see how the broader technology sector reacts to Netflix’s weaker outlook. The Nasdaq Composite has managed to go two months without posting back-to-back declines, but that’s now under threat as investors question the resilience of tech’s searing rally.
“We’re going to continue to see a bifurcated economy, bifurcated market, unless we get rid of this virus and everything goes away for some reason,” said David Yepez, a money manager at Exencial Wealth Advisors. “If we find a vaccine and, you know, that will be the point where value will start to outperform.”
In Europe, traders are holding out hope for policy makers to conclude a stimulus pact. German Chancellor Angela Merkel raised doubts on Friday that European Union leaders would be able to agree this week on a landmark 750 billion-euro ($855 billion) recovery fund to help their economies heal from the pandemic. Positive earnings from Daimler AG and Ericsson AB pulled carmakers and tech stocks higher.
Elsewhere, Chinese shares were steady after a more than 4% slide on Thursday, with investors assessing moves by policy makers to tame signs of exuberance.
Last Friday, I discussed whether another tech wreck is headed our way. Large mega cap tech stocks are way overbought, overvalued and were due for a pause. Moreover, there are clear signs of another bubble developing there:
Looking at past few years of NASDAQ 100 positioning shows how loved big tech has been ... net long positions as of latest @CFTC data at highest levels since 2017 @Bloomberg pic.twitter.com/41GsmmkNJ4— Liz Ann Sonders (@LizAnnSonders) July 15, 2020
Heading into yesterday’s weakness, NASDAQ 100’s Optimism Index (3m moving average) per @sentimentrader had hit highest level since tech bust @AxiosVisuals pic.twitter.com/HiewJbuGde— Liz Ann Sonders (@LizAnnSonders) July 14, 2020
What is driving all this nonsense? What else? The Fed cranking up its balance sheet and changing its policy to stay accommodative for a lot longer:
#Fed's assets started rising again after five straight weeks of declines as US CenBank kicks off Main Street lending but at a very slow pace. Bottom line: total assets rose by $38bn, which means the total balance sheet remained below $7tn. pic.twitter.com/rEMAzILDer— Holger Zschaepitz (@Schuldensuehner) July 17, 2020
The Fed's inflation target may soon be rendered meaningless, says Fed watcher @TimDuy https://t.co/3Dz7mNy7QC via @bopinion— Leo Kolivakis (@PensionPulse) July 17, 2020
To be blunt, the Fed wants everyone to keep buying risk assets and that's why you're seeing all Risk On trades dominating the financial landscape.
Tech stocks, emerging markets, commodity currencies, high yield bonds are all rallying as if the world is going to experience a V-shaped recovery.
It won't, there's an insolvency crisis headed our way:
Here is one of the simplest charts showing why there will be no V-shaped recovery. pic.twitter.com/xZUBHXaSIa— Morten Lund (@meremortenlund) July 17, 2020
Bankruptcies continuing to spike (this should NOT be your stocks-to-buy list) @SoberLook @scotiabank pic.twitter.com/JvkQ4Rla0Y— Liz Ann Sonders (@LizAnnSonders) July 16, 2020
Total number of energy-sector bankruptcies at 24 YTD, which matches same period in 2016 (worst year in past decade) … amount of debt at risk poised to expand by ~1/3 as companies holding $11B in debt skipped payments in past 24 hours pic.twitter.com/SpeZoYhQDH— Liz Ann Sonders (@LizAnnSonders) July 16, 2020
Sadly, the biggest V in town. 2.9M people w/ no job to go back to post #COVID19 layoffs. We haven’t seen anything close to these numbers since GFC. Last time we saw a print like this, equities sold off another 47% before the cycle low was in as the YC aggressively bull steepened. pic.twitter.com/YgSjQxjSuz— Julien Bittel, CFA (@BittelJulien) July 17, 2020
Moreover, the news on the health front continues to deteriorate:
California, Florida and Texas accounted for more than half of all new U.S. cases on Thursday, reporting a total of more than 38,700. https://t.co/ODSHRAuzez— CNBC (@CNBC) July 17, 2020
But there is some good news (hopefully) coming our way next week.
AstraZeneca's shares (AZN) rose this week after a report that a medical journal will release positive news on the coronavirus vaccine the company is developing with University of Oxford researchers.
Oxford’s Covid-19 vaccine, devised by Sarah Gilbert, is in human trials. AstraZeneca has lined up agreements to produce 2 billion doses. Now the world waits https://t.co/KWdqh6LAhv via @BW— Leo Kolivakis (@PensionPulse) July 17, 2020
It looks promising and the market loves vaccine news, especially positive vaccine news even if it's a rehash of old news.
And judging by the way some vaccine biotech stocks have been trading lately, I'd say Uncle Fed has succeeded in keeping animal spirits alive and well:
Your eyes aren't deceiving you, these spectacular gains are year-to-date during a global pandemic!
Greed is good, especially if you pick the right biotech stocks working on a coronavirus vaccine that are up 3,000% or 4,000% year-to-date.
This market is a joke, concentrated pockets of speculation in small cap biotech shares and overcrowding in large cap tech companies.
No wonder active managers are getting killed, if you're not picking speculative trash or chasing a handful of mega cap tech shares, you're severely underperforming the market.
Anyway, here is the performance of the S&P sectors this week:
As you can see, Industrials (XLI), Materials (XLB) and Healthcare (XLV) led the gains while Information Technology (XLK) and Consumer Discretionary (XLY) posted the biggest declines (Amazon makes up 24% of the Consumer Discretionary ETF).
Below, David Rubenstein, the co-founder of the Carlyle Group and host of "Leadership Live," joins "Influencers with Andy Serwer" to discuss whether the stock market can keep climbing, who will win the presidential election, and why private equity gets a bad rap.
Rubenstein warns against bullish near-term market expectations, citing a disconnect between rising equity prices and a sluggish economy. “It's a fool's errand to go into the market now thinking that it's a bottom and you're going to go up from here,” Rubenstein told Yahoo Finance on Tuesday. “I think there's going to be a lot of ups and downs.”
And Oksana Aronov, alternative fixed-income strategist at JPMorgan Asset Management, discusses the impact of global central bank policies on equity market valuations. She speaks on "Bloomberg The Open."
She warns: "Generally central banks continue to run the show and investors need to be really cautious here." And adds: "We are going into a much more difficlt second half and have a number of fiscal cliffs upon us over the next few weeks."
Third, long-time market bull Ed Yardeni is getting nervous for the first time since the March 23 rebound. He warns new risks from the US surge in coronavirus cases to renewed tensions with China could spark a 20% to 30% meltdown. "We've had a melt-up and that's very visible in valuation multiples. Stocks are not cheap," the Yardeni Research President told CNBC's "Trading Nation" on Friday.
Fourth, early-stage human trial data on a vaccine being developed by AstraZeneca and Oxford University will be published on July 20, The Lancet medical journal said on Wednesday.
The vaccine candidate is already in large-scale Phase III human trials to assess whether it can protect against COVID-19, but its developers have yet to report Phase I results which would show whether it is safe and whether or not it induces an immune response.
Let's keep our fingers and toes crossed and remember, this is just one of many vaccines being developed. The problem? It won't save the economy from the coming insolvency and unemployment crisis but it will give everyone something to look forward to in what has otherwise been a really miserable year.
Lastly, let me end with some more good news. Captain Sir Tom Moore has been knighted in the Queen's first official engagement in person since lockdown:
The investiture to honour the 100-year-old, who raised more than £32m for NHS charities, was staged in a "unique ceremony" at Windsor Castle.A well deserved honor for a truly great man, I'm very happy for him and his family.
He has been recognised for walking more than 100 laps of his garden in Marston Moretaine, Bedfordshire.
Capt Sir Tom, originally from Keighley, West Yorkshire, said it was "an absolutely outstanding day".
"I am absolutely overawed," he said,
"This is such a high award and to get it from Her Majesty as well - what more can anyone wish for? This has been an absolutely magnificent day for me."