Capital 19 Catch-Up

Traders On “Hopium” As Markets Push Higher Again


Optimism surrounding a successful economic reopening continued last week in the US, with all of the major indices firing again. Wells Fargo’s (WFC) head of global market strategy, Paul Christopher, referred to the giddiness traders were feeling as being on “hopium”, as all 50 states began to, at least partially, put out their open for business signs.

For the week, which was shortened by the Memorial Day long weekend, the Dow and the S&P500 made 3%, while the Nasdaq was up 1.71%. Friday was also the last trading day of the month, with the Nasdaq leading the pack rising 6.7% in May, the S&P500 following in second place with a 4.5% gain and the Dow not far behind picking up 4.2%.

The US Covid-19 death toll has reached 106,000 over the weekend. It’s a curve flattening of sorts with the numbers decreasing slightly and at a number, I’m suspecting, would be enough to keep state and federal governments on the path to re-opening. I don’t think even a small increase would give those in charge second thoughts. It will take quite another big jump to have them second guess themselves.

It was a great week for the banks last week, who all bounced on hopes that the economy would soon be back to normal. Citi (C), Bank of America (BAC), JP Morgan (JPM)and Wells Fargo (WFC) all made more than 10% in the Tuesday and Wednesday sessions before pulling back slightly on the Thursday and Friday.

Other stocks hoping to benefit the most from a reopening also rallied earlier in the week. Carnival Cruises (CCL) made 12.6% in the first session of the week but had lost half of that gain by the end of the week. Its share price is still down almost 70% year to date. The major airlines also outperformed for the week with Delta Airlines (DAL), Southwest Airlines (LUV), and United Airlines (UAL) were all up more than 10% over the four sessions. MGM Resorts (MGM) was also up 8% for the week.

The jobs numbers were a little better this week. Only 2.1 million people applied for unemployment (that seems like a ridiculous statement when I read it back). That total jobless tally since mid-march now sits at over 40 million. Importantly the number of continuing claims dropped by 4 million which is a good start and a promising sign. The non-farm payrolls come out on Friday with the number of jobs expected to be lost in May hitting 7-8 million, while the unemployment rate is expected to rise to near 20%. In April the economy lost 20.5 million in jobs with the unemployment rate around 14.7%.

Unless we see another spike in Covid-19 cases, of greater concern to markets this week will be US relations with China, and the continuing protests and rioting occurring across the country.

The Chinese situation seems to be escalating and I suspect it’s because they aren’t holding up their end of the trade deal. To be fair there’s been a global pandemic which has wiped out almost everyone’s economies but the US still aren’t happy with them. The White House blames China for not being upfront about the covid19 outbreak and causing countless deaths, and they’re also concerned about China’s stronghold over Hong Kong.

White House economic advisor and ex-CNBC anchor Larry Cudlow summed up the government’s feelings on Friday stating “the U.S. government is … I’ll use the word furious at what China has done in recent days, weeks and months. They have not behaved well and they have lost the trust, I think, of the whole Western world.” Further clashes would have a negative effect on markets but China will hopefully try to dampen any feuding until at least the November elections where they’ll be hoping to get a friendlier government to deal with.

In the more immediate term, protests and riots continue in cities across the US at the time of writing. I’m not going to wade into the social reasons for the demonstrations, that’s for smarter and more worldly people than I, but the fact is they are happening and they seem to be escalating rather than quieting down. Such events can have a remarkable impact on the economy. In the LA riots of 1992 is has been estimated the city lost $4 billion in taxable sales and more than $125 million in direct tax sales. And that doesn’t include the $1 billion in property damage.

The actual damage this time around will be difficult to ascertain. Mostly because a lot of the economy is shut down already, tourism was already non-existent, and job losses were already at all-time highs – which may be the reason why so many people have the spare time on their hands to protest. Damage costs will still be high and insurance companies will be feeling the pain the longer this continues, however. Let’s hope we see a de-escalation sooner rather than later.

Economic data for the week ahead will include construction spending, service PMI, factory orders and international trade. While the private jobs report will come out on Wednesday, ahead of Friday’s nonfarm payrolls.

On the earnings front, we’ll see reports from Dick’s Sporting goods (DKS), Tiffany (TIF), Zoom Video (ZM)Gap (GOS), and Slack (WORK). At the bottom of the Catch-Up email today we have an article on the way Covid19 has changed the way we work and how this is likely to continue into the future. It mentions companies such as Zoom and Slack and the role they will play going forward. Make sure you give it a read.

Elsewhere Warner Music Group will IPO on Tuesday with shares likely to open in a range of $23-$26 with a valuation of around $13 billion. And on Friday it’s National Doughnut Day in the US. I’m not sure if we in Australia have a similar event but I’ll be getting my hands on some cinnamon doughnuts to celebrate regardless.

Have a great week everybody.