The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling, ‘Swing, you bum!’ – Warren Buffett
Last week’s market action may be signaling a change in leadership as both the Dow Jones Industrial Average and the S&P 500 Index posted gains while the technology-heavy Nasdaq Composite Index dropped over 1%. Netflix, Facebook, Alphabet (Google) and Microsoft, among the year’s top performers, were all down for the week while Amazon posted its first weekly decline in 11 weeks. Despite the loss for the Nasdaq, this index is still up 17% for the year while the S&P 500 is down less than one percent. The Russell 1000 Value Index also outperformed its growth counterpart by nearly 4.5%, perhaps a sign that value stocks may begin to close the performance gap. Although Covid-19 related deaths rose to more than 138,000 with more than 3.6 million confirmed infections, there was positive news with regard to potential vaccines. Pfizer and German biotech manufacturer BioNTech were granted fast track designation by the FDA for two of the companies’ four vaccine candidates against the coronavirus. The next phase of the vaccine trial will start later this month and the companies expect to have 100 million doses by the end of 2020 and more than 1.2 billion doses by the end of 2021. Data in the New England Journal of Medicine also showed that Moderna’s coronavirus vaccine was very effective in neutralizing antibodies in all 45 patients in an early stage trial. It was the official start of second quarter earnings season last week, too, and the results were encouraging. In a week that was dominated by the financials, JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley all beat earnings estimates as their strong results were driven by a surge in trading revenues. Other companies such as PepsiCo and Johnson & Johnson also reported better than expected earnings. But the increase in loan loss reserves among the biggest banks in the country could be an ominous sign for the economy. As some states delay or reverse the reopening of businesses, the markets are likely to remain volatile until there is a remedy for the virus.
U.S. retail sales in June were better than expected and surprisingly strong, especially after jumping nearly 19% in May. The consumer price index (CPI) in June registered its biggest increase since 2012 due largely to higher gas prices. Inflation has risen less than 1% in the past year and should remain low until the pandemic ends. Weekly jobless claims were 1.3 million, slightly more than expected, and it was the 17th straight week that claims were at least 1 million. The University of Michigan consumer sentiment index fell in July as consumer confidence was affected by the surge in new coronavirus cases which could lead to a slower economic recovery.
For the week, the Dow Jones Industrial Average climbed 2.3% to close at 26,671 while the S&P 500 Index gained 1.3% to close at 3,224. The Nasdaq Composite Index dropped 1.1% to close at 10,503.
Both existing home sales and new home sales for June are expected to show a substantial increase from the previous month due to pent-up demand and low mortgage interest rates. The June leading economic indicators are forecast to increase nearly 3%, matching the gain in May.
Among the most prominent companies scheduled to report second quarter earnings results are IBM, Microsoft, Intel, Texas Instruments, AT&T, Verizon, Honeywell, Lockheed Martin, American Express, Travelers, Schlumberger, Halliburton, Union Pacific, Southwest Airlines, Coca Cola, Philip Morris and Kimberly Clark.
It may be too early to conclude that so-called value stocks in economically sensitive sectors will take over the reins from technology stocks in leading the market higher. The strong performance of the S&P 500 Index last week relative to the technology-laden Nasdaq Composite Index was the largest weekly outperformance of the S&P 500 since back in February 2016. Sectors that are tied to the health of the economy and are thought of as being in the value category, such as consumer cyclicals, industrials, financials and energy stocks, were the big winners. A closer look at small capitalization stocks that are considered more sensitive to the economy also showed that value significantly outperformed growth last week. The second quarter earnings season has just begun, however, and the banks and other financials dominated the early results last week. While their earnings mostly beat analysts’ estimates, the strong results were due largely to a surge in trading revenue. The four largest banks in the country, JP Morgan Chase, Bank of America, Citigroup and Wells Fargo, have provided about $33 billion for bad loans in the second quarter as a result of the coronavirus pandemic and its impact on the economy. The alarming increase in the number of Covid-19 cases recently could lead to a slowdown in the economic recovery and additional losses for the banks. Nearly 500 companies from a diverse group of sectors report their earnings results this week, which should give investors a more complete picture on the health of the economy and whether or not cyclical companies can continue their comeback.