Capital 19 Catch-Up

S&P500 Turns Positive For 2020 But Employment Concerns and US-China Stoush Stifle Markets


A burst of early optimism saw the S&P500 index turn positive for the year on Monday as tech stocks reversed their heavy falls from the week before. But the recovery was to be shortlived, however, as employment concerns, rising COVID deaths, and geopolitical bickering between the US and China weighed on the markets.

All of the major indices lost ground for the week with the heaviest losses again coming from the Nasdaq, with investors fearing the tech stock rally may have run its course. The Daq lost 1.3% over the five sessions, adding to the 1.1% it lost the week before. The Dow’s thirty components lost 0.7% for the week, while the S&P500 almost managed a gain but fell late in the Friday session to drop 0.2% over the five days.

Hopes for a new coronavirus vaccine had markets rising on Wednesday. The US government has promised $1.95 billion to drugmakers Pfizer (PFE) and the German-owned BioNTech if they can prove their COVID vaccine is effective in fighting the virus. It will allow them to produce up to 100 million doses with an offer to fund another 500 million more if required. This process would usually take around 10 years from start to finish but governments are hell-bent on getting an effective treatment to the public as quickly as possible. Of course, further tests still need to be run but there’s hope out there. Pfizer was up 5% after the announcement.

Markets are still waiting for a second stimulus package to shield the economy from the worst of the shutdowns. Wall Street is asking for a $1-1.5 trillion rescue package and was hoping to get some finalisation last week, however, the pollies are dragging the chain again, arguing over the size of the payments and the method of distribution. The European Commission finalised their own $750 billion package last Tuesday, so an announcement this week would be a much welcomed event for a tired looking US market, but we’ll have to wait and see if Washington DC can get their act together.

The late-week falls were mainly due to the employment numbers as weekly jobless claims rose for the first time in fifteen weeks. Analysts were expecting 1.3 million claims but a surprise 1.416 applied for benefits in the last week, making it the 18th week in a row that the number has topped the million mark. With more states shutting down their economies after a hasty reopening there are fears that job recoveries may have stalled in July. We’ll find out next week when the non-farm payrolls are released on August 7.

There was also a rising of tensions in the US-China spat as the quarrel hit a new diplomatic low. The US accused the Chinese consulate in Houston of being “a hub of spying and intellectual property theft” and ordered it be closed down. China accused the US of “malicious slander” but then retaliated by promptly shutting down the US consulate in Chengdu after accusing its staff of messing in its internal affairs. I can’t see the situation getting any better here in the near future and highly doubt that China will adhere to their promises in the mini-deal struck last year. However, there’s every chance that the US will have a new government in a few months which should help to dispel some of the bad blood on each side and hopefully lead to better relations between the two powerhouses.

On the earnings front, the Airlines were front and centre and the results were just as bad as we had been expecting. American Airlines (AAL) reported a loss of $3.4 billion or $7.82 share and its revenue declined by 86.4% year on year. Southwest Airlines (LUV) lost $2.67 per share, while its revenue was down 82.9% to $1 billion. While United Airlines (UAL) lost $2.6 billion, while revenue was down by 87.1%. Most come in slightly above estimates but still fell away as forecasts for the third quarter continued to look grim. All are continuing to cut costs as capacity suffers amidst state shutdowns, and most expect to lay off more workers in the coming months.

It was better news for Tesla (TSLA) who reported its fourth straight quarter of profits for the first time ever, with the feat meaning it can now be included in the S&P500. Revenue was at $6.04 billion, beating estimates of $5.37 billion, while profit came in at $2.18 per share beating estimates of .3c per share. While its share price rose after-hours on Wednesday it fell away with the rest of the market on Thursday and Friday, losing 12.2% over the two days. The stock is still up 229% for the year to date. We mentioned last week that we thought the stock was overpriced and we wouldn’t be surprised if it falls further here.

Microsoft (MSFT) beat estimates on profit, and grew revenue by 13% year on year, coming in at $38.03 billion and a hefty $1.5 billion more than expected. This was despite the software giant closing down its retail locations. Guidance was a little lower than expected which saw the share price down 4.3% despite the beat. Fellow tech stock Intel (INTC) also beat estimates on the top and bottom lines but offered disappointing guidance and announced its next-generation chips would come out later than expected after some manufacturing issues. Its share price fell 16% on Friday, while competitor Advanced Micro Devices (AMD) gained 16.5% on news of the chip delays.

The week ahead will be another big one for the tech industry as heavy-hitters Google (GOOGL), Facebook (FB), Amazon (AMZN), and Apple (AAPL) all report their second-quarter earnings. We’ll get to finally see if this tech rally we’ve experienced over the last few months has been justified. These four stocks along with Microsoft are the 5 largest stocks on the S&P500 and account for a whopping 22% of the weight of the index. Investors will be sweating on some earnings beats here.

Other notable earnings reports will come from Catch Up favourites McDonald’s (MCD), Visa (V), eBay (EBAY) and PayPal (PYPL). While we’ll also see the numbers from Starbucks (SBUX), Boeing (BA), General Motors (GM), Procter & Gamble (PG), Kraft Heinz (KHC), Ford (F), Exxon Mobil (XOM), and Merck (MRK). Big data releases will include the Durable Goods orders tonight, Consumer confidence on Tuesday, and the weekly jobless claims on Thursday. While the Fed Reserve will be expected to keep interest rates at their record lows on Wednesday.

Have a great week.