- Week begins with more confusion on fiscal stimulus as Congress, White House clash
- U.S./China tensions mount ahead of earnings over next two weeks from major Chinese firms
- Volatility could become more of a factor amid geopolitical, Washington concerns
With earnings taking a slight breather, focus this week could turn more toward geopolitical and virus headlines. That means the relative lack of volatility we’ve enjoyed lately has a chance of fading away even more quickly than the weekend just did.
There are a lot of unanswered questions both at home and overseas that could bring choppier trading. The week begins with confusion over Washington’s stimulus plan, more tension between the U.S. and China, and U.S. schools facing a chaotic reopening around the country.
We’ll chat more about some of this below. From a front and center standpoint, Monday morning brought another set of disappointing earnings from a travel-related firm. Marriott (MAR) shares are down after the company reported worse quarterly results than analysts had expected. One interesting nugget, however, is that the company said trends improved toward the end of the quarter.
A bit later this morning, many eyes will likely focus on the monthly job openings report for June. While the data are a bit long in the tooth, it could be interesting to see if businesses had any big rise in employment needs as reopening advanced. The May headline number was 5.4 million.
It may not have been intended, but the U.S./China trade spat ratcheted up last week just in time for earnings from some of the best-known Chinese companies.
Those expected to report over the next two weeks include Alibaba
It could be very interesting to hear what executives of these firms—especially TCEHY, the developer of WeChat—have to say in their earnings calls. There might be a lot of pieces in motion for all of these companies, and we can likely expect analysts on the calls to ask some pretty pointed questions of the executives.
It looks like the U.S./China back-and-forth is probably going to be more of a centerpiece for the markets rather than a small overhang as China responded over the weekend with sanctions against 11 Americans, including two senators.
The situation has really escalated after being mostly background noise earlier this year, and could drive additional volatility because of potential impacts on major companies. For instance, this morning brought a report that Apple
Stimulus Talks Drag Into New Week
The other overriding concern heading into the week is lack of resolution on a fresh stimulus package from Congress. Over the weekend, President Trump signed executive orders to extend $400 a week in enhanced unemployment, among other things. This probably won’t be the final word on the situation, and it’s unclear if it can even be put in place. We’ll see if talks to resolve this continue. There’s no way to predict, but it would be surprising if nothing ultimately gets done.
The market managed to rebound and close mostly higher Friday despite the absence of any constructive news on this front, but could face pressure as the week goes by if the two parties can’t find common ground. The major indices have arguably built in expectations of a new package, and there’s kind of a timer running on this. Those $600 extra unemployment benefits ended more than a week ago, meaning some people might be starting to feel the effects.
We’ll probably learn more about the consumer mood next week (the week of Aug. 17) when big retail firms start to report. This week is a bit light on the corporate reporting front, but. Lyft (LYFT
It’s tempting to put LYFT into the same vehicle as Uber (UBER
Between China, the stimulus, the scattering of earnings data, and retail sales, there are plenty of potential volatility drivers still around even though the Cboe Volatility Index (VIX) ended the old week well below 23 and at new lows for the post-COVID era.
Get Out Your Pencils and Sector Scorecards
Last week ended with a nice Friday comeback following some early struggles, though the rebound didn’t include Information Technology. All of the FAANGs other than Facebook (FB), finished lower. Maybe that reflected a little Friday profit taking after these shares stormed to huge gains earlier in the week. Pressure on Tech also might have reflected the U.S./China trade war gaining more steam.
In what might have been a positive development, cyclical sectors like Financials and Industrials did better than Tech on Friday. So did small-caps represented by the Russell 2000 Index (RUT), it’s not always cut and dry, but when you have a day like that, it can sometimes signal better performance from stocks that would benefit from reopening. Industrials, Energy and Financials led gains last week.
The dollar also strengthened at the end of last week, which could be read as investors liking recent U.S. economic data.
Investors also might be bidding stocks up after what’s been a better than expected earnings season. About 82% of companies reporting so far topped analysts’ forecasts with their Q2 results, up from about 71% on average over the previous four quarters, Barron’s reported. Some analysts have begun to raise their Q3 earnings expectations—not a bad sign at all.
Gold took a pretty big licking Friday as the dollar rose, which isn’t surprising since a stronger dollar typically hurts the yellow metal’s value. One day, however, isn’t a trend. Gold and the dollar have been going in opposite directions for weeks (see chart below). If they do start following through on Friday’s change of pace, it might be interesting to see if that puts pressure on other commodities, especially crude. A higher dollar tends to push crude prices down.
August Jobs Picture Under Scrutiny: One concerning thing was the way job growth unfolded in July came from some of the states hardest hit by the virus. Smaller increases in job creation occurred in California, Texas and Florida, where businesses faced new restrictions and closures amid a surge in cases. The July data were mostly collected in the middle of the month, so if things deteriorated further as July went on (something that might be possible judging from two weeks of rising initial unemployment claims in late July), the August report might reflect those issues.
In other words, between the slower pace of openings and the fact that 300,000 government employees were added in July in what’s expected to be a one-time occurrence, it’s quite possible August could be weaker than July from an employment growth standpoint. We’ll have to wait and see, and also be prepared for any market response if this proves true. One way to get a hint is to keep an eye on the weekly claims data, which did fall in the most recent week but remained high historically.
Closing in on New High, or Are We? You’re probably going to hear a lot today and in the days ahead (if you haven’t already) about the SPX nearly getting back to its all-time high close of 3386, which it posted in mid-February before the pandemic. It’s only about 1% away.
In a sense, though, being “even” with the February highs isn’t really the right way to put it because it’s not a comparison of apples to apples. Back in February, a lot of analysts were already worried about valuations as the SPX had a forward price-to-earnings ratio (P/E) of around 20, which compares to average historic levels closer to 16.
The SPX is now nearly even with the all-time high on the surface, but the P/E level is quite a bit higher now. That means you could argue that the index is higher even though it’s the same, if you follow. For instance, research platform S&P Capital IQ now anticipates a 21.7% earnings per share drop in 2020 for the S&P 500
So How Does This Factor In? Assuming earnings do fall nearly 22% from 2019, as some forecasters think, the price-to-earnings ratio for the SPX is now more like 26. As you might have heard in the media, this is similar to levels last seen during the peak of the internet stock craze back in 1999–2000.
That doesn’t necessarily mean the next two years will resemble the rough patch the market experienced in 2001 and 2002. Things are different in so many ways, including of course all the monetary and fiscal stimulus right now and rates being so low. Still, this kind of valuation for the SPX is nearly uncharted territory. That’s why it might not be a good time for many investors to go “all in” pursuing stocks at this point.
TD Ameritrade® commentary for educational purposes only. Member SIPC.