Ever-present

 

Ever-present.  Stocks sold off yesterday as traders came to realize that rising COVID cases cannot be ignored. Unemployment may be improving, but it is still in a really tough place.

 

N O T E W O R T H Y

 

Where there is smoke…  The market is a funny thing, impossible to predict with any consistency, laying at the whims of anonymous speculators and robot-driven traders. waiting in the shadows to foil your plans. On any given day, you may watch a financial markets channel on TV to learn that roughly half of the guest speakers are utterly convinced that the market will go up while the other half are convinced that the market will go down.  The bulls will lay out their case for a V-shaped recovery, pointing to the last bull market and the advances in virus treatments.  In contrast, the bears will point out rising virus cases and nosebleed stock valuations, making their case for a double dip, W-shaped recovery.  Just remember that the folks that get tapped to do these interviews are really, really good at making their cases.  Some of them even have stakes in the market and hope to sway viewers into their camp thus helping their chances of achieving gains.  The Wall Street terminology for that is talking your position, which implies that whatever analysis they provide is not really objective.  That said, investing should not be viewed as simply as the oft-used risk-on or risk-off.  Sure, it is good to know if the market is going up or down, but longer term investors are more focused on which companies, sectors, industries, or investing themes will prevail in the years ahead rather than tomorrow’s session.  To be fair, picking those winners is no easy task either, but a little bit of diligence can possibly minimize unnecessary pain.  The stock markets, year to date, have set all sorts of records, good and bad, and the economy has set records as well, mostly bad.  At first glance, one would think that attempting to pick winners in this market is a fool’s errand, and that is probably correct.  However, picking losers could prove to be more fruitful.  As we witnessed back in March, when markets tank all stocks go with them.  Perhaps a more eloquent way to say that is “all ships fall with the ebbing tide”. Most traders’ instincts in that environment was to buy the dip, and for some that has paid off… so far… but it has not been smooth sailing for all of the dip-buyers, especially those that decided to buy all sectors, especially the hardest hit ones.  With hindsight being 20/20 (see yesterday’s note), it may seem obvious now that Information Technology and Health Care would be the winningest sectors year-to-date, but I want to remind everyone that when the market was at record volatility levels while making new lows, choosing the already-overvalued tech sector and the under-appreciated healthcare sectors was a risky gambit. However, it was far simpler to avoid the two year-to-date laggers: financials and energy. Those sectors were already struggling leading into 2020 for various reasons.  A contracting global economy could only confound the poor performance of those sectors, and that has proven out in the performance numbers.  The S&P Energy sector is down by -46.1% year to date while the S&P500 Financial sector is off by -26.5%.  If we take the same approach to individual companies we can find some similar patterns.  In last quarter’s earnings, investors appeared willing to accept bad performance and withdrawn guidance, but that appears to be changing.  Q2 earnings season does not “officially” begin until next week, but there have been some notable announcements in the past few weeks, and investors seem to be approaching them more rationally. Good performance: stock up, bad performance: stock down.  As we ease into Q2 earnings season next week, we can expect investors to return to that more rational approach.  Sure, things are still bad and uncertain for all companies, but a company that is losing money, operating at fractional capacity, laying off workers, closing locations, and borrowing money to keep the lights on is probably one that should stay on the “watch list” and off the “buy list” for now.  In this environment it is far harder to pick the winners than it is to identify the losers.  Pro-tip: avoid the losers.

 

THE MARKETS

 

Stocks sold off yesterday as the reality of virus surges in the South and Southwest US could no longer be avoided.  The S&P500 sold off by -0.56%, the Dow Jones Industrial Average traded off by -1.39%, the Russell 2000 Index dropped by -2.00%, and the Nasdaq Composite Index rose by +0.53% led by technology (are you surprised).  Bonds jumped and 10-year treasury yields fell by -5 basis points to 0.61%.  Crude oil fell by -3.13%, slipping back below the $40 mark as traders grew concerned about demand.

 

NXT UP

 

– Producer Price Index excluding Food and Energy (June) may have risen by +0.1% month over month, compared to last month’s drop of -0.1%.

– Baker Hughes Rig Count (July 10) is expected to have fallen to 258.67 from last week’s 263.

– Next week we will get CPI, some housing numbers, an assortment of regional Fed reports, the Beige Book, Retail Sales, Industrial Production, and University of Michigan Sentiment.  Next week also marks the beginning of Q2 earnings season, so check back on Monday for calendars and details.

 

daily chartbook 2020-07-10