We Didn’t Start The Fire

We didn’t start the fire.  Equities rallied yesterday following a spike in the Chinese stock market caused by a government mandate to buy stocks… hmm. The US rally was led by tech stocks pushing the Nasdaq to a higher high.

 

N O T E W O R T H Y

 

All clear?  Yesterday’s optimistic market action was just like any other recent one, or was it?  China sparked the optimistic tone of the day with an “unofficial”, official editorial on state-owned media calling for more stock gains.  That actually happened as did the buying, causing the Shenzhen Component Index to surge by +4.09% into what some analysts are calling bubble territory. US investors followed suit driving shares up as well on, I suppose, optimism.  I state that tongue-in-cheek because I couldn’t help but avoid the press headlines over the long weekend, despite my efforts to do so.  Cases are surging.  Not just cases but, more importantly, the positivity rate.  That is daunting enough on the health front, but there are worrisome developments on the economic front as well.  Hard-hit states which ignored the early signs have relented and begun to reverse their re-openings.  Other states are slowing their re-openings in response to the rise in infections.  To be clear, slowing or reversing a re-opening is not the same thing as locking down an entire economy, but the results of the setbacks will certainly have an impact on the robustness of a recovery.  For those of us that follow the headlines and markets closely, yesterday could have appeared, on the surface, as a typical day.  Bad virus news?  Bad economic data? No worries… buy recovery stocks, sell lockdown stocks.  One analyst has begun to refer to it as the COVID-on and the COVID-off trades.  Yesterday was notably, a little different. Topping the S&P winners list was Freeport-McMorRan, a mining company, followed by a few tech companies, an oilfield services company, and a lockdown restaurant favorite.  The losers list was topped by a natural gas pipeline, an energy utility, an energy company, an engineering consulting concern, and a tech company.  It was clearly neither a COVID-on or a COVID-off day. Taking a step back, there was one pattern which emerged in what we loosely refer to as tech. Shares in companies like Amazon, Apple, Microsoft, Netflix, Adobe, Salesforce.com, and eBay all surged, hitting new highs.  The tech-heavy Nasdaq Composite Index rose by +2.2% to hit its 24th record-high close of the year. When investors are confused with the direction of the pandemic, they have been snapping up tech shares as they are perceived to be less vulnerable to the setbacks caused by the virus.  Clearly yesterday was one of those days. Further evidence can be found in the bond markets.  Typically, when stocks surge, bond markets pull back, but that was not the case yesterday.  Recall bond traders are typically more pragmatic than stock traders, taking their cues from economic data.  When stocks trade up and bond traders don’t relent, many analysts grow concerned that stocks are getting ahead of themselves.  Now granted, the Fed is buying bonds in the open market which does serve to buoy the market somewhat, but with 10-year yields appearing to be mired in the 0.65% – 0.70% range, it is clear that bond traders are not banking on the same robust recovery that stock traders appear to be hoping for.  Finally, it is worth noting that volatility has cooled off somewhat in recent days after a bit of a spike in early June.  The VIX index is around 28 this morning after spending much of June in the 30’s.  For reference, the index was in the 70s and 80s in March.  This morning’s reading projects 1.74% daily swings in the S&P500, which is a walk in the park compared to the 5.09% swings that were projected back in March.  The index is still high compared to its historical average, but its recent pullback can be viewed as being positive for equities.  Still, other analysts would say that the index’s pullback in the face of a mounting COVID caseload is dangerous complacency on the part of equity traders.  Next week, earnings season will begin in earnest with Banks, and that will bring another big test for stocks… and our vigilance.

 

THE MARKETS

 

Stocks popped yesterday led by tech as Alphabet/Google rejoined the trillion-dollar club and Amazon.com closed over $3000/share for the first time. The S&P500 climbed by +1.59%, the Dow Jones Industrial Average rose by +1.78%, the Russell 2000 advanced by +0.77%, and the Nasdaq Composite Index rocketed up by +2.21 to a fresh high.  Bonds advanced and 10-year treasury yields added +1 basis point to yield 0.67%.

 

NXT UP

 

– JOLTS Job Openings (May) is expected to come in at 4.5 million, down from April’s 5.046 million openings.

– Fed speakers include Raphael Bostic, Randall Quarles, Mary Daly, and Thomas Barkin.

– Paychex will announce earnings before the bell.

daily chartbook 2020-07-07

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