29 Jun Capital 19 Catch-Up
The Major Indices Stumble Over Fresh Covid19 Concerns And Bank Stress Tests
The major indices had a tougher time of it in the penultimate week of the second quarter of 2020. All three had been coming off gains in four out of the last five weeks, as signs of green shoots in the economy were augmented by a number of the larger states looking to reopen their economies despite coronavirus cases remaining stubbornly consistent.
As Chief Investment Strategist at Leuthold Group Jim Paulson told CNBC earlier in the week “The message today may be that the virus and the bull market can coexist. Despite back to back days of Covid19 cases above 30,000 over the weekend and ongoing reports of hot spots, the stock market managed to post a strong gain. Market action seems to suggest that investors expect the economy to continue improving in the months ahead even though the country is likely to experience spotty or temporary spikes in the virus.”
It was certainly a welcome theory for investors and the jury is no doubt still out. However, the number of Covid19 cases continued to rise throughout the week, leading to a record number of infections by Friday (40,173), and the seven-day average moving above where it was even back at the peak of the pandemic in April. it was enough to spook even the most optimistic on Wall Street.
Through the week the Nasdaq picked up record highs on Monday and Tuesday, its 20th and 21st record closes so far in 2020. But by the end of the week, the tech-heavy index had slipped 1.9% from the end of the previous week. It was still the best performer over the five sessions as the benchmark S&P500 fell 2.9%, and the Dow lost 3.3%.
The Federal Reserve didn’t help matters on Thursday after the market closed, as they slapped new restrictions on banks following their annual stress tests of the financial industry. It found several banks could find themselves down at minimum capital levels if the coronavirus pandemic causes further problems with the economy.
The banks will now have to suspend share buybacks and cap dividends at their current levels (which they were probably going to do anyway) at least until the end of the third quarter. Bank of America (BAC) and JP Morgan (JPM) both fell more than 5%, while Wells Fargo (WFC) and Goldman Sachs (GS) dropped 7.4% and 8.7% respectively.
Sporting retailer Nike (NKE) also had a tough week, as it suffered a surprise loss in its fiscal fourth quarter. Earnings per share saw a deficit of 51c, while revenue was down 38% to $6.31 billion. Product shipments to retailers were heavily affected by store closures and were down 50%, however, online sales were up 75% and contributed to 30% of total revenue. Nike was aiming to reach 30% digital sales by 2023, but have now amended that goal to be 50% in the same time period. It’s a smart move during a time that may continue to be affected by ongoing closures of bricks and mortar retail stores.
Nike fell 7.6% on the news and it dragged the rest of the sports leisure retailers down with it. Under Armour (UAA) lost 5.2%, Lululemon Athletica (LULU) dropped 1.9%, and Adidas (ADDYY) fell by 4.2%. Not surprisingly Nike were hesitant to give guidance for their latest quarter but seemed quietly confident that their retails stores would continue to remain open for the foreseeable future. As it currently stands 85% of their North American stores are still open, while 90% of stores are open in Europe the Middle East and Africa, and 65% in the Asia Pacific region.
In the rest of the market, it was the usual sectors that struggled as soon as Covid19 fears raised its ugly head again. The airlines, casinos, cruise companies, and bricks and mortar retailers struggled, while the tech industry remained stoic. Gold hit 8-year highs on Tuesday before pulling back slightly, while treasuries also rose, and the oil price sank.
Apple hit all-time highs on Monday and Tuesday after it announced it would be making its own computer chips for its line of Macs and ditching Intel (INTC) products which it had been using for the past fifteen years. Apple also revealed new operating system upgrades for iOS and the Mac, as well as improvements to ear pods, Apple Watches, and Apple TVs amongst a host other things. Amazon (AMZN) also hit new highs on Tuesday.
The week ahead is a shortened one on Wall Street as the US stops to celebrate Independence Day. The 4th of July falls next Saturday but the nation will get Friday the 3rd off as a public holiday to turn it into a long weekend. That will push the all-important June nonfarm payrolls forward a day to the Thursday, where analysts are hoping for 3 million jobs to have been added in the past month. Consumer confidence will be out on Tuesday, with the ISM manufacturing index and the ADP private employment report to come out on Wednesday.
Elsewhere Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin will testify to Congress on Tuesday with an update on the economy and future plans for monetary policy. We’ll also see earnings reports from Micron Technologies (MU), FedEx (FDX), and Constellation Brands (STZ) who were the subject of a stock report we recently did and which you can read here: https://capital19.com/investing-in-us-stocks/constellation-brands-stz/.
And it will also be a big week for social media services Twitter (TWTR) and Facebook (FB) as they face a burgeoning boycott from advertisers regarding their accountability for what is written on their platforms in regard to hate speech and disinformation. So far Coca Cola (KO), Unilever (UL), Hershey’s (HSY), and Levi Strauss (LEVI) have postponed advertising spending for an indefinite period. In the face of spreading protests, they will no doubt be scrambling to introduce policies to allay further fears and avoid continuing revenue losses.
What will no doubt be the focus again, however, will be the number of coronavirus cases and whether they keep rising or can be contained. Texas has already announced a pullback of their reopening strategy over the weekend, and if more states decide to follow suit we may see stocks continue last week’s pullback. All in all 36 states across the US were seeing a rise in cases compared to the previous week. Let’s hope we see a levelling off again rather than another spike.
Have a great week.