Capital 19 Catch-Up

The Battle Between the Federal Reserve and Covid-19 Ramps Up


Last week on Wall Street saw the battle of two competing forces looking to dominate market direction. On the one hand, you had the financial power of the Federal Reserve ready to take up arms at the sight of any trouble. And on the other you had an alarming increase in Covid-19 cases and hospitalisations breaking out in many states, specifically in those that had recently reopened their economies. 

Overall the major indices bounced back from the previous week’s heavy losses to all record gains. The Nasdaq led the way yet again by rising 3.7% for the week, and in fact, didn’t experience a negative day. The benchmark S&P 500 index made gains for three out of the five sessions and made 1.8% overall. While the Dow was only positive for two sessions but still managed to eke out a 1% gain for the week. 

Most of the gains came from the first two days of trading as Fed Reserve chairman Jerome Powell made the rounds in Washington. An announcement that the Fed would move on from buying ETF’s and maneuver into buying individual company bonds on the secondary market helped dragged the market from early losses into impressive gains. He reiterated that the economy would take longer than expected to recover, but the Fed would be there to back it up as necessary, with the intention of tempering purchases depending on how the market was functioning. The ultimate Fed put. 

Sentiment was also boosted early in the week by a Bloomberg article citing a rumoured infrastructure investment from the White House of $1 trillion. The money is expected to be spent on the traditional roads and bridges type of expenditure, as well as setting aside money for a 5G wireless network (the conspiracy theorists won’t be happy) and to assist building rural broadband. Dow component Caterpillar (CAT), manufacturer and seller of construction equipment, jumped 4% on the news. 

The May retail sales numbers that came out on Tuesday also helped boost economic optimism. A 17.7% surge in sales was it’s biggest jump ever, beating out October 2001 when sales jumped 6.7% following the 9/11 terrorist attacks. Retail sales were up an impressive 16.8%, with clothing and accessories up 188% and sporting goods, hobby and musical instrument retailers, and book stores up 88.2%. The numbers were a relief to investors after March sales were down 8.3% and April sales lost 14.7%. Total sales were still 6% lower than this time last year, however.

The retail numbers were tempered by the weekly jobless claims which showed another 1.5 million Americans applying for unemployment during the week. That’s now thirteen straight weeks that initial jobless claims have been over 1 million. To put that in perspective, jobless claims did not come close to 1 million during any week of the GFC through 2008-2009. On a positive note, however, we have now seen 11 straight weeks of the jobless numbers falling, a trend that we no doubt hope continues.

Also causing traders to temper their optimism were the rising cases of Covid19 in many of of the larger states that have been intent on loosening restrictions. California, Texas, Florida, and Arizona all saw spikes along with many other smaller states. The World Health Organisation today has reported that the last twenty-four hours has seen the largest single-day increase in coronavirus cases at 183,000, with 54,771 cases have coming out of Brasil and 36,617 out of the US. 

On Friday Apple (AAPL) reported that it would be closing 11 of its flagship stores throughout Arizona, North and South Carolina, and Arizona due to rising cases, with potentially more to follow. Apple had only partially re-opened some of its stores in the last month, and have the luxury of relying on their online sales in the event these retail stores are closed down again. An apple statement advised, ” Due to current Covid-19 conditions in some of the communities we serve, we are temporarily closing stores in these areas. We take this step with an abundance of caution as we closely monitor the situation and we look forward to having our teams and customers back as soon as possible.”

The reemergence of coronavirus spikes hit all of those industries which had begun to recover from their initial falls. The airlines, cruise lines, and bricks and mortar retailers were hardest hit and will continue to be sold off if the number of new cases increase. Now could be a handy time to check out Capital 19’s pandemic portfolio which contains stocks that benefit from such outbreaks. You can take a look at the latest update and a list of the stocks here:

For the week ahead Nike (NKE) will be reporting earnings and without any guidance to go on from the company analysts have very little idea what to expect. China sales will play a massive role and give us a strong indication of how the recovery is going there, while the success of the Nike e-commerce business will be directly under the microscope. With many turning to exercise while being stuck at home during the pandemic I love the future of Nike once this is all cleared up, so I’m hoping for a terrible result on Thursday so that I can pick them up at a better price. They are currently down only 5% year to date, after losing nearly 40% in March. 

Apple holds it annual WWDC tonight, and it has moved online for the first time ever. So although we won’t get to see Tim Cook’s always awkward presenting skills we will likely see new operating systems announced, new iMacs, headphones, and an Apple TV, and potentially a services bundle which will include music, TV, games and News services all in one. 

Economic data this week will include existing home sales tonight, new home sales tomorrow, GDP revision and durable goods orders on Thursday, and consumer spending on Friday. There will also be a number of Fed members out and about and making speeches, while results from the latest Fed stress tests on banks will be out on Thursday. 

Have a great week.