Climate Change: Up And Down Pattern Continues As Week Advances And Powell Awaited
The market this week kind of resembles Chicago weather. If you don’t like it, wait a few minutes.
We were up big on Monday, down steeply on Tuesday, and up pretty sharply again Wednesday. Futures ticked lower early Thursday. That’s the score so far, reflecting a tug of war between hopeful optimism about economic reopening and worries that things could be moving too quickly without a real treatment for coronavirus in sight.
Still, it’s worth noting that going into today, the market has been up four of the last five sessions, so the overall pattern remains higher and the S&P 500 Index (SPX) is near levels last seen before Covid-19.
There’s not a lot of rhyme or reason for the slight drop in stock futures indices overnight, though it might reflect renewed tensions in the war of words between the U.S. and China. Major media outlets are calling the weak futures trading “a breather.”
If it’s a breather, it probably won’t last too long considering everything on the calendar today. It starts with weekly jobless claims before the opening bell. Then there are several Fed speeches to choose from, including remarks by Fed Chairman Jerome Powell. A lot of that happens early this afternoon, followed after the closing bell by earnings from chipmaker Nvidia Corporation (NASDAQ: NVDA), a company whose shares have received the red carpet treatment from Wall Street so far this year.
It would be shocking if Powell says anything market-moving today, considering he’s making public comments for the third time in the last week. Jobless claims have gotten a lot of attention lately, though as states reopen they could start to matter a little less.
Existing home sales and leading indicators are also due this morning and could get some attention, but keep in mind that these are backward-looking. More recent housing data actually looks pretty decent. Meanwhile, oil continues its amazing rally and is above $34 a barrel this morning.
Initial jobless claims continued to be historically high at 2.438 million last week. Still, that was down from a week ago and last week’s claims were revised lower. It would be amazing news if these kept falling over the next few weeks as the country reopens and more people get back to work. We can hope.
Encouraging Signs
Energy got a big lift Wednesday after leading things down Tuesday, while Communication Services and Information Technology also placed high on the leaderboard. Amazon.com, Inc. (NASDAQ: AMZN) and Facebook, Inc. (NASDAQ: FB) both set new all-time highs as investors continue to embrace companies that seem to be doing well in this stay-at-home world.
That said, strength in Energy yesterday also suggests that some investors might be putting a little more faith in companies that you need to go outside and maybe even beyond your neighborhood.
Airlines, for instance, got a nice tailwind Wednesday. United Airlines Holdings, Inc. (NASDAQ: UAL) and Southwest Airlines Co. (NYSE: LUV) both jumped more than 5%. Any hint of investor interest in the travel sector tells you at least some people expect tourism and maybe even business trips to come back eventually (see more below).
The encouraging thing Wednesday was how theSPX managed to hold its gains in the final hour, something it failed to do Tuesday. The SPX finished well above that pesky 2940–2950 resistance band that’s been such a tough challenge over the last few weeks. The next major resistance point appears to be the 200-day moving average right smack at 3000, a level not breached since early March.
An SPX move above the 200-day would likely be seen as a huge technical victory and might even pull more buyers in from the sidelines. Last year, the 200-day served as solid support several times when things got tough. This year, the SPX fell under the 200-day back in early March, and a few weeks later traded hundreds of points below it. To be back here so fast is really pretty amazing when you think of all the world has been through.
Score One for the Little Guys, While Big Box Stocks Lose Steam
Another potential green flag is the performance of small-caps recently, which sometimes can be a barometer for an improving economy. The Russell 2000 Index (RUT) is up almost 40% from its lows posted two months ago, compared with a 36% climb for the SPX from its March low.
It may not sound like a huge margin of victory for the RUT over the SPX, and it wouldn’t be in football. However, you’ve got to take it in context because the RUT fell 44% from its 2020 high to its 2020 low while the SPX fell just 35%. A bigger drop followed by a bigger rise for the RUT vs. the SPX can’t be easily dismissed when you consider how historically the RUT is often thought of as a leading indicator for the broader market.
That doesn’t mean we’re out of the woods by any stretch of the imagination. Data continue to look pretty horrible and probably won’t improve much anytime soon. The unemployment rate is a reminder of how many people are suffering out there, and stands in contrast to this rallying stock market. Signs of caution remain firmly in place as the 10-year Treasury yield tipped back below 0.7% on Wednesday and hasn’t been able to gain any real traction, due in part to the Fed’s historic stimulus.
Another troubling thing yesterday was seeing pressure on two companies that reported decent earnings—Lowe’s Companies, Inc. (NYSE: LOW) and Target Corporation (NYSE: TGT). That was the second day in a row where investors apparently decided to punish companies after pretty solid reports. The previous day saw Walmart, Inc. (NYSE: WMT) and The Home Depot Inc. (NYSE: HD) getting the silent treatment. Maybe that’s something to keep in mind going into NVDA’s earnings after the close today, considering what a run it’s been on so far in 2020.
Gold prices also remain near five-week highs in what could be a signal of caution. On the other hand, crude and copper both are climbing, which can point to improved economic activity. It was good to see crude supplies drop again last week as people start getting out more. Remember, this is typically the time of year when gasoline use hits its peak thanks to travel on holidays like Memorial Day, July 4, and Labor Day. It won’t be a typical demand summer for crude, obviously, though after usage dropped to practically zero in April, any change for the better could be welcomed.
So from a big picture sense, what seems to be going on out there is optimism, but cautious optimism. People were buying bonds yesterday, and it’s very surprising to see the stock market doing well and also seeing people buying bonds.
Future Game
One way to assess how investors see the economy shaping up is to check crude futures now and then and see if farther-out contracts hold any kind of premium to the so-called “nearby,” or front-month contract.
The wide gap between the front month and back months has really closed compared with a month ago when it was in steep contango (meaning back months priced higher than “nearby” months). By Wednesday, July crude fetched around $33.50 a barrel, while September was at $34.50. While it’s difficult to put much confidence in thinly-traded contacts a year out, it is interesting to see that next June only trades at $36.60.
While you don’t want to put too much faith in any one indicator, especially such a lightly-traded one, crude in the mid-$30s a year out doesn’t show much investor confidence in any major recovery for the global economy. It also might be a bit concerning to those in the energy industry, who could be facing these low prices for months to come. We’ll have to wait and see.
CHART OF THE DAY: VOLATILE VOLATILITY. The Cboe Volatility Index (VIX—purple line) has been trending down since the March spike, when the market suffered a massive selloff. However, there have been times—notably within the last week—that the VIX Volatility Index (VVIX—candlestick), which uses a basket of VIX options to measure expectations of volatility in the VIX itself (over the next 30 days), has held firm (see more below). Data source: Cboe Global Markets. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Fear of Fear Itself? When trying to gauge the level of fear in the market, many turn to the Cboe Volatility Index (VIX), which uses options on the SPX to measure expectations of volatility over the next 30 days. But how volatile are those expectations? That's where the VIX Volatility Index (VVIX) comes in—it's the market’s estimation of what SPX volatility might be in the near future. And though the VIX has been steadily inching back down toward more normal levels after the big spike in March, it's still hovering around 30. This despite SPX seeming to have found a range—along with a moderate uptrend—which typically puts a sizable damper on volatility expectations. Perhaps more interestingly, recent gyrations in the equity market helped lead to a mini-spike in the VVIX (see chart above). Might this indicate that—to paraphrase FDR—one thing this market has to fear is fear itself?
Care for a S’more? If there's one story line that defines this week's market action, it might be the eyeing of a return to normal life, and for Americans in the summertime, that means travel. Topping the big-movers list this week is the travel industry, with airlines, cruise lines, and big hotel chains racking up gains upward of 10%. And online travel agents knocked it out of the park, with Booking Holdings Inc. (NASDAQ: BKNG) and Expedia Group, Inc. (NASDAQ: EXPE) gaining 15% and 24% respectively since the end of last week. But what may turn out to be the king of them all this year is camping and all things related to travel in the great outdoors. Since its May 8 reporting of a Q1 loss of 3 cents per share (which was well ahead of consensus), shares of Camping World Holdings, Inc. (NYSE: CWH) have essentially doubled, touching the $20 level Wednesday.
According to an article in The Wall Street Journal last weekend, many Americans are turning to recreational vehicles this summer, with reports of sales and rentals of RVs seeing a hefty spike. And why not? It's a nice blend of social distancing and wanderlust, not to mention a throwback to previous generations, when summer travel meant piling into the wood-paneled station wagon and heading for the hills to get away from it all.
Slight Uptick In One Economic Estimate: Corporate earnings drive the markets but underlying economic fundamentals also play a role. And as we all know, initial GDP forecasts tend to get revised often since the initial data may not be too comprehensive. GDPNow, a “nowcast” released by the Federal Reserve Bank of Atlanta, is a GDP projection model that provides a running estimate of GDP growth. So as manufacturing data, construction spending, auto sales, etc. get released, GDPNow is revised.
The GDPNow estimate for real GDP growth for Q2 2020 is -41.9 percent. That may be a big drop since their initial nowcast of -12.1 percent on April 30, but what’s encouraging is that after housing starts were released on Tuesday, the GDPNow forecaster saw its first uptick, from -42.8 to -41.9. It may be slight but it’s encouraging news. The next update will be next Thursday, after the Commerce Department releases its second estimate of Q1 GDP. As a frame of reference, since the 2008–09 financial crisis, the U.S. economy has averaged growth of about 2%—not exactly robust by historical standards but certainly a lot better than current estimates for 2020.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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