15 Jun Capital 19 Catch-Up

Nasdaq Reaches 10,000 Milestone As Stocks Stumble Late In The Week Amidst New Coronavirus Cases And Fed Caution

The trading week started out as many of the last few have, with investors punting on a successful reopening of the economy and those stocks most affected by the shutdowns climbing back up from out of the doldrums. The airlines were flying again with United Airlines (UA) up 14.8% and American Airlines (AA) up 9.2%, and their fellow battlers the cruise lines following them higher with Carnival Cruise Lines adding 15.8%.

The Nasdaq continued outpacing all others as it continued to hit record highs on Monday, Tuesday and then into Wednesday as the tech-heavy index closed above 10,000 for the first time ever. It was the FAANG stocks that led the way, as they have been doing for much of the market recovery. Despite the Dow and the S&P500 falling in the Tuesday session Amazon (AMZN), Apple (AAPL), Facebook (FB), and Netflix (NFLX) were all up more than 3%, with Alphabet (GOOGL) struggling at the back of the pack with only a 0.28% gain.

The airlines, cruise lines and bricks and mortar retailers started feeling the pinch mid-week however as the number of coronavirus cases started to grow in select states, but especially in Arizona and Texas. By Wednesday they had given back all of their Monday gains as the banks joined them in the falls. Wells Fargo (WFC) was hardest hit losing 9%, while Citibank (C) lost 6.1% and JP Morgan (JPM) fell 4.11%.

Federal Reserve Chairman Jerome Powell continued his promise to keep supporting the economy after the FOMC meeting concluded on Wednesday afternoon. He suggested that rates would remain near 0% for at least the next two years, while the Fed would increase its bond holdings by purchasing $80 billion per month in Treasurys and $40 billion in mortgage-backed securities.

However Wall Street didn’t appreciate the gloomy tone of the Fed Chair as he predicted a slower recovery for the economy than most wanted to hear. The Fed forecast the economy to contract by 6.5% in 2020 but then to expand by 5% in 2021. Of course, estimates provided by the 17 FOMC members varied considerably with ranges of GDP predictions for this year coming in as low as -10% and as high as -4%. While next year’s GDP was predicted to be anywhere from a -1% contraction to a 7% gain.

These are, supposedly, the smartest economic managers in all of the United States, and even they can’t get close to agreeing on how badly the shutdowns have affected the economy. It highlights just how unpredictable the situation currently is. The stock market has certainly been sitting on the extremely positive side of thinking. Although that optimism took a little stumble on Thursday as we experienced our worst trading day since the 16th of March.

Not even the seemingly untouchable Nasdaq was spared the drama, falling 5.27%, joining the benchmark S&P500 with a 5.89% drop, and the Dow with a 6.9% fall. An increase in hospitalisations from Covid19 cases across Arizona, Texas, South Carolina, Arkansas, and California, and increases in infections across 21 states gave the market a reminder that the pandemic wasn’t entirely done with just yet. Many were calling it a second wave, but in reality, it’s just an extension of the first wave.

The White House has given every indication they will be dealing with an increase in cases very differently this time around. Treasury Secretary Steve Mnuchin said on Thursday that “we can’t shut down the economy again”. It seems like they are ready to go full Sweden on the coronavirus. Just let it ride and see what happens.

But of course, as we found out last time it isn’t really up to the Federal government to decide on shutdowns. It’s a state-run thing and no doubt each will have differing opinions on what to do if cases continue to build. And of course, individuals will have the final say on whether they are comfortable going out into the public or not and spending money in the economy. For the moment it’s a “watch this space” for markets.

All of the major indices bounced back in the Friday session, highlighting that this market isn’t convinced that the next pullback will be as bad. It wouldn’t be a big surprise if we saw a correction here, ar at least a pause, the market has been on a rocket since March. The gains weren’t enough to haul back the heavy losses from Thursday however with The Dow down 5.5% for the week, the S&P500 down 4.7%, and the Nasdaq down 2.3%.

The trading week ahead will be likely focussed again on potential rises in Covid19 cases. But of course, there other things are happening as well. The May retail report will be a highlight with economists expecting a 5.1% bounce back from April’s horrible numbers. OPEC will meet on Tuesday and Wednesday to decide on supply cuts. While Fed Chairman Jerome Powell will front both the Senate Banking Committee and the House Financial Services Committee so we will no doubt get further thoughts from JPo on the economic recovery.

Carnival Corp (CCL) will report earnings on Tuesday which will no doubt be a horror show with revenue expected to be down 73%, which is a loss of $1.3 billion. Others to report include homebuilder Lennar Corp (LEN) tonight, supermarket retailer Kroger (KR) and gun manufacturer Smith and Wesson (SWBI) on Thursday, and auto sales leader CarMax (KMX) on Friday.

Have a great week.