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Rise In Semiconductor, Cloud Computing Stocks Could Set Tone For Broader Economy

JJ Kinahan

It’s positive to see a little euphoria again this morning, but how long can it last? The next Senate vote on a fiscal package seems near, but any delays or failure could potentially put things right back where they were yesterday, at three-year lows.

This may sound cynical, but investors can’t really be blamed for feeling that way. Every rally attempt since mid-February got relentlessly pounded into the ground either the same day or a day later. We need to see a range established for the major indices. It can’t be emphasized enough. When you have these wild swings, the market tends to come back to where it was pretty quickly. 

It’s also still unclear whether the U.S. Senate can agree on a fiscal stimulus package. It’s failed twice the last two days. Stocks plunged to session lows late Monday when the Senate couldn’t get things done and investor hopes got dashed.

And speaking of uncertainty, the allocations within the package—between infusion into the “real economy” versus that earmarked for corporate sector support—might also determine how stocks and sectors react to the final package. There will likely be winners and losers.

Basically, the market appears to be signaling that a fiscal stimulus package—now said to total $2.5 trillion—would be welcomed by investors. The hope is that this money can help make up for some of the business lost as everyone stays stuck at home and with restaurants, sporting events and theaters shut down. The longer Congress waits, some analysts say, the more damage to the economy.

This morning’s rocket launch to limit-up in pre-market trading, along with a 5% jump in crude prices, could also reflect some spillover optimism from the Fed’s move yesterday to shore up credit markets to ensure the funding of American businesses. 

Also providing a boost is news out of China that the lockdown on Wuhan will be lifted April 8. That said, even if things are improving in China and a fiscal package gets passed in Washington, the market is probably going to continue to be sensitive when investors hear about additional cases of the virus. 

It’s interesting to see gold up this morning even amid the pre-market equities rally. One thought is that the dollar is down a little, and that might be providing some support to crude and gold. Bond yields also rose this morning, with the 10-year Treasury yield above 0.8%.

Nike Could Provide Run-Down on Asian Consumer

While the rally isn’t certain to continue, one certainty today is Nike Inc. (NYSE: NKE) reporting fiscal Q3 earnings. That’s scheduled for after the closing bell.

The company is expected to report a 12% decline in earnings, according to research firm FactSet, but a sales rise of 2%. NKE has re-opened most of its stores across Asia, but closures affect most of the West, including the U.S. and Canada. 

As we noted here yesterday, investors might want to give the call a close listen for any clues about how sales are going since stores re-opened in China, and for a sense of whether there’ll be pent-up demand if the virus loosens its grip here.

Like the rest of us, NKE executives don’t know how long this situation will last, so it’s unclear what it or any company can really say now about the near future. Some companies—not necessarily NKE—might present separate guidance paths that account for best-case, middle-case, and worst-case pandemic scenarios. We’ll have to wait and see.

If you’re waiting for data today, February new home sales knock on the front door at 10 a.m. ET, soon after the open. These are likely to show another strong month with 761,000 units on a seasonally-adjusted basis, according to analyst consensus from Briefing.com. Data for the first two months of the year have generally been strong across most vectors, but are likely being discounted because investors know they’ll be wrestling with a bear when the March data show up. 

There’s also a speech on tap this morning from St. Louis Fed President James Bullard. He didn’t sound too optimistic about the near future in an interview with Bloomberg over the weekend, warning of massive unemployment and dramatically lower gross domestic product in Q2. He’s been one of the economists out there beating the drum for some sort of fiscal stimulus. He did add that things could improve later this year if there’s an aggressive government response, Bloomberg reported.

Volatility Sending Signals?

There were some signs of life early this week despite the market sinking on Monday. First, volatility didn’t exactly calm down on the week’s first trading day, but it did stay well below recent peaks for the Cboe Volatility Index (VIX) and actually moved lower. Also, as one analyst noted, the nearby VIX futures contract lost some of its heavy premium to contracts further out, possibly a sign of investor fear dipping a little.

Usually the front-month VIX contract sees the bulk of the buying interest early on when the market hits the skids and investors flock to it seeking what they hope could be protection. The front month got such a big embrace the last few weeks that the curve has been inverted. If the VIX curve starts flattening, it could be a sign of more possible stability for stocks, but one day isn’t a trend. VIX futures (/VX) fell further early Tuesday.

Also, the S&P 500 Index (SPX) finished well off of session lows yesterday, and the Nasdaq (COMP) even rose into the green in the last half hour before flagging at the finish line. Information Technology shares fell just 0.26% Monday. That’s not necessarily something you go out and throw a party over, but it does reinforce the fact that tech stocks continue to perform better than many other sectors and have beaten the major indices over the last few weeks.

Sector Snapshots: Semis, Cloud, Retail, and Homebuilders

Semiconductor shares Micron Technologies Inc. (NASDAQ: MU), Intel Corporation (NASDAQ: INTC), and Nvidia Corporation (NASDAQ: NVDA) all rallied nicely Monday after South Korea reported that exports rose 10% in the first 20 days of March. The export growth was driven partly by demand for teleconferencing technology and components, Reuters reported. Demand from cloud computing firms have boosted sales of server chips for South Korea.

Cloud computing demand might also point toward strength in that segment for major cloud firms like Amazon.com, Inc. (NASDAQ: AMZN), Microsoft, Inc. (NASDAQ: MSFT), and IBM (NYSE: IBM). Their earnings over the next month or two could shed more light.

Some cruise line stocks got a lift yesterday, but homebuilders and retailers continued to be roughed up. Kohl’s Corporation (NYSE: KSS) and Macy’s Inc. (NYSE: M) both fell double digits, as the virus situation continues to take a toll on the brick-and-mortar stores. Retail was already struggling in a big way last year, and this is the last thing they needed. 

As for homebuilders, Lennar Corporation (NYSE: LEN) was one of the stocks that got ripped down on Monday. Last Friday’s existing home sales were the best since 2007, and mortgage rates are extremely low. But homebuilding companies face their own set of challenges in this environment. For instance, who can they get permits from if there’s no one working at government agencies or even if the agencies open but face logistical jams? Permits and other paperwork needed for new homes could be something that slide down the list of local government priorities when there’s an epidemic raging.


CHART OF THE DAY: SILVER LINING: While falling 25% in a month never looks good on the charts, the Information Technology sector (IXT—candlestick) has done that but still easily outpaced teh S&P 500 Index (SPX—purple line). Strength in the semiconductors gave tech some support on Monday after South Korea announced growth in chip exports. Data source: S&P Dow Jones Indices. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Dismembered: In 2019 and through early 2020, the “Trillion Dollar Club”—U.S. companies with a market cap above $1 trillion—was the place to be. As of Monday afternoon, Microsoft (MSFT) might be asking, "Hey, where did everybody go?" At its height, the club included four members (five if you look globally and include oil giant Saudi Aramco, which recently initiated a small public float but remains mostly private). Apple Inc. (NASDAQ: AAPL) was the first to cross the threshold in August 2018, and MSFT joined the club in April, 2019 (though at the time AAPL's market cap had slipped below 12 digits—it rejoined and retook the lead in September 2019). At the market's height in early 2020, Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG) and Amazon (AMZN) were also members. At this point in the selloff, MSFT is still above $1 trillion, and AAPL is on the cusp at $980 billion. GOOGL has fallen the furthest away to $724 billion, but AMZN is holding firm in the $930 billion range, as quarantined and "sheltered-in-place" consumers flock to e-commerce for staples as well as discretionary purchases.

Seeking Clues from Earnings:  There’s no way to know when and where the ultimate bottom might be. The 12-month forward price-to-earnings (P/E) for the SPX has fallen below 15 from highs near 20 a bit over a month ago, according to research firm CFRA. Now, it happens that a P/E of 14 (about where we are now, according to some analyst estimates) was around the low recorded in the depths of the Q4 2018 downturn. However, no one says earnings expectations, already down significantly, can’t fall further. If E falls more, so could P.

In one scenario outlined by CFRA, full-year 2020 S&P 500 earnings per share would post no growth in 2020. If that happened and the market assigned a “14” multiple, it would put the SPX slightly below 2300, a 32% drop from the peak. That would imply the market has basically priced things in at current levels. In another CFRA scenario, where earnings fall slightly from a year ago and the P/E slides to 13, it could mean an ultimate loss of nearly 40% for the SPX and a low reading below 2100. So, there’s more downside potential even from where we are now if earnings estimates start to erode.

Could Earnings Season Provide More Steadiness? All this is conjecture, but it does provide a little perspective. One thing to keep in mind is that the stock market is a forward indicator. It’s likely to start recovering long before the economy does. Another thing to remember is that we’re in a period where there just isn’t much for investors to hang their hats on as far as earnings expectations. Only when companies start delivering guidance in April and May can we get official word on where executives think earnings will go.

At that point, if earnings projections don’t look as bad as the market seems to be pricing in now, maybe there will be a reassessment. Right now, people are doing what they often do at times like these: Assuming the worst.

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