Market Pulls Back Amid Rising Virus Cases And Grim Corporate Earnings Expectations | #corporatesecurity | #businesssecurity | #

Key Takeaways:

  • Amid lower risk appetite, oil and Treasury yields sink, gold moves higher
  • JP Morgan Chase, Wells Fargo, Citigroup
    report quarterly results next week
  • China threatens retaliation after sanctions from the United States

It looks like investors might be in the mood to take some risk off the table as they close out a week where coronavirus cases have continued to surge, increasing worry about an economic recovery.

There may also be some caution as corporate earnings season gets into higher gear next week and corporate profits are expected to show a big hit from the effect of the coronavirus.

Amid the risk-off mood, buying interest in U.S. government debt increased. That pushed yields lower and could make for rocky trading in bank stocks today ahead of earnings reports next week. As an aside, it could be interesting to see whether money ends up coming out of bonds and goes back into stocks as investors look for yield if the rate on the 10-year Treasury falls to 0.5%.

Looking Ahead Toward Bank Earnings Next Week

Earnings season gets into higher gear Tuesday with several major banks reporting. JP Morgan Chase (JPM
) is just one of the major U.S. banks reporting Q2 earnings Tuesday morning. Results from Wells Fargo (WFC
) and Citigroup (C) also are due to hit the wires. Analysts expect C and JPM to remain profitable in Q2, but project a slight loss for WFC.

While no sector is immune to the virus, few arguably have as much exposure as Financials. That was reflected in Q1 when most of the big banks took large provisions for credit losses, hurting their profitability. The overriding question heading into this earnings season is whether the banks decide to add substantially to those provisions or start slicing them a bit. Their actions could say a lot about how they see the reopening taking shape. Even if these provisions ease in Q2, they’re likely to continue to weigh on banks’ profitability.

The banking sector is feeling the heat, and analysts’ expectations are low going in. Earnings for banks in the S&P 500 are expected to fall a cumulative 48.3% in Q2, ahead of only four other sectors, according to research firm CFRA.

Getting back to today’s action, investors were also seeking the relative safety of gold and selling often-volatile crude oil. That’s pretty typical activity when risk appetite wanes.

Another thing that seemed to be weighing on investors’ minds was news out of China that Beijing said it will retaliate after the United States put sanctions on Chinese officials over treatment of minorities. While the tit-for-tat moves are nowhere near as market-affecting as tariffs have been, investors and traders are still sensitive to U.S.-China relations after the bruising trade war that took a pause with a phase one deal earlier this year.

In economic news this morning, producer price data unexpectedly fell. The producer price index fell 0.2% month-on-month in June while the core index dropped 0.3%. A Briefing.com consensus had expected the headline producer price index to show 0.4% monthly growth for June and a core print of 0.1% growth.

If the economy were doing well, a dip in inflation would probably be welcome. But with the economy on the backfoot, falling prices seem to be a sign of economic weakness.

Tech Stocks Continue Strong Performance

On Thursday, outside of the tech and consumer defensive sectors, news that coronavirus cases continued to rise sapped optimism across the board. While the tech-heavy Nasdaq Composite (COMP) closed at another record high, the S&P 500 Index (SPX) and Dow Jones Industrial Average ($DJI) lost ground.

On a day when people were worried about the economic reopening, you might have expected to see the Consumer Staples sector to do fairly well, both as a generally defensive play and on expectations of people buying more household necessities in case they have to stay at home more during the resurgence.

But it’s interesting to see the Information Technology sector do relatively well. Tech has traditionally been viewed as a cyclical sector, which tends to fall on bad economic news. But with Microsoft
(MSFT), Apple
(AAPL), Alphabet (GOOGL), and heavily tech-oriented Amazon
(AMZN) now among the largest companies in the world, their growth-to-value transition has given them a safety appeal to many investors, helping give them market leadership on days like Thursday.

In addition to the evolution of tech and tech-related companies, some of the push into the tech sector is also likely coronavirus related. With the threat of more people having to stay home for longer if the economy can’t get back up to speed as quickly as hoped, it seems that could continue being a boon for computer and internet related companies that help make possible remote learning and working as well internet-based entertainment.

More Stock Optimism Among Younger Investors

There has been a narrative in the media that retail investors have been piling into stocks willy nilly. But the reality appears to be more nuanced.

While the total equities exposure TD Ameritrade
clients have been willing to take has been on the rise, according to the June Investor Movement Index® (IMXSM), not everyone has been buying with both hands.

Historically speaking, the IMX – which is TD Ameritrade’s proprietary, behavior-based index aggregating Main Street investor positions and activity to measure what investors actually were doing and how they were positioned in the markets – is toward the lower end of its readings.

An interesting wrinkle, however, is that millennial clients have increased their exposure to the market at a faster rate than traditional clients. It seems that there is some youthful optimism about the economy that might be related to younger people being less dramatically harmed by COVID-19.

The Bad Gets Less Bad: In economic news Thursday, weekly jobless claims came in less than expected, helping offset some of the negative market sentiment. Initial unemployment claims for the week ended July 4 showed an addition of 1.314 million to state unemployment ranks, less than a Briefing.com consensus expectation of 1.35 million. Perhaps more importantly, it continued the trend of a decreasing number of new weekly claims. “The key takeaway from the report is that it suggests things are less bad on the job loss front, but less bad is clearly still a long way from good for both initial claims and continuing claims,” Briefing.com said.

Forecasting a Smaller Q3 Rebound: A new economic forecast from a major bank projects that the economy will bounce back sharply in Q3, but not as sharply as previously thought. It won’t come as a surprise to anyone that the domestic economy contracted in Q2 – when retail sales, industrial production, and non-farm employment fell massively. Perhaps a more pressing question for Wall Street is what the economy might do during the Q3, especially as the coronavirus resurgence has complicated reopening activities. In a note Thursday, Wells Fargo Securities said it thinks real GDP will grow at a roughly 18% annualized rate during Q3. That’s a strong rate but lower than the 24% the bank had previously projected because of the slowed reopening process. Still, growth of 18% would be a big step in the right direction. “It appears that the economy entered the third quarter with significant momentum, albeit from a low base,” the note said.

Airline Traffic Continues To Increase: The number of air passenger numbers in the United States are still a fraction of what they were before the pandemic, but they are on the rise. Transportation Security Administration data from Wednesday showed total traveler throughput numbers at checkpoints was 632,498, after sinking below 90,000 in April. For some perspective, that new number is a little over 25% of what travel numbers were the previous year. Airlines have become one way that market participants have been trying to get exposure to the reopening economy at what could be bargain prices if things eventually get back to relative normalcy. But the timeline of that last bit has increasingly come into question. TD Ameritrade clients have been net buyers of Southwest Airlines (LUV) and American Airlines Group (AAL) on weakness in the two airlines’ stocks, according to a TD Ameritrade summary of information from the June IMX. “Both stocks traded higher early in the period on hopes of an economic recovery and increased demand but fell as the period progressed and COVID-19 cases increased in the U.S.,” the summary said.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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