New Claims Fall Below One Million For First Time Since Crisis Began

(Thursday Market Open) Some welcome news on the jobs front might give stocks just enough support today to push them toward another test of record highs. 

Initial jobless claims last week totaled 963,000, the government said. That’s the first time they’ve been under one million since this crisis began. The number was down a decent amount from the 1.1 million that analysts had been expecting, and might provide more indication that the economy continues to recover. That said, any figure this high would be historically huge in normal times, so we still have a long way to go.

Stock indices had been under pressure in pre-market trading ahead of the data but began to trim losses once the number hit the tape. The S&P 500 Index (SPX) sits just below the all-time record high of 3393 and the all-time record close of 3386. 

Aside from claims, investors might keep an eye on Washington today, where politicians continue to haggle over a possible new stimulus package. If this sounds like a broken record, well, it’s been going on for a couple weeks now. Progress looks thin, judging from this morning’s media reports. 

Not much changed overnight, aside from Cisco (CSCO) shares getting beaten up after the company issued a disappointing outlook (see more below). The CSCO weakness might weigh a bit on the Nasdaq (COMP) today. 

Other than that, jobless claims remain the key story this morning. Crude is unchanged and bonds are down a tick. 

Overseas, Wednesday brought some tough news for Anglophiles as the British economy plunged into a deep recession. Gross domestic product (GDP) fell more than 20% in Q2, official data showed. The stock market there dropped 1% Thursday, with shares down across Europe, too. Asia did better, but the Shanghai market has been leveling off after last month’s huge rally.

Like Deja Vu All Over Again

To continue yesterday’s baseball analogy, the market always seems to throw a curveball when investors expect a fastball. 

It definitely felt that way Wednesday. Going into the session, the dominant talk both online and on the news was about a possible rotation out of Tech and into value and cyclical sectors. Then Tech stepped up after the opening bell and left everyone else in its wake. 

Well, maybe that’s an exaggeration. Tech did recover a lot of its losses, helped by Apple, Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT) and the semiconductor stocks regaining their footing, but the other sectors didn’t do badly, either. Instead, Wall Street enjoyed an old-fashioned broad-based rally that carried across most of the key parameters. Nearly every S&P 500 sector climbed 1% or more. So-called “defensives,” cyclicals like Energy, bond proxies…you name the sector, it was on the rise. 

By Wednesday’s close, the SPX was right up near its all-time record high close of 3386 posted back in February before you-know-what dominated the headlines. 

For the record, this has been one very quick comeback from the sudden bear market that occurred in March. If the SPX does set a record high in the coming days, it would shatter the old record of 310 trading days between the previous bull market high and the next bull market high. That record was set in 1967, Barron’s noted. As of Wednesday, it’s been just 122 trading days since the last bull market high. Yes, folks, we’re in a new bull market. That bear market didn’t last long, did it? 

In one exception to the general exuberance Wednesday, Financials lost ground after a strong 10-year auction. This suggests demand for government debt remains elevated, which could ultimately keep a lid on rates. As we’ve been noting, Financials really face a tough headwind thanks mostly to weak profit outlooks weighed on by low rates. That said, the 10-year yield is sitting above 0.67%, up from lows near 0.5% a week ago. 

Another cautionary note beyond the Financial pain is that trading volume continues to be lighter than average, possibly a seasonal effect, with some people perhaps taking whatever passes for a vacation these days. 

Wednesday’s rally came despite the two sides in Washington remaining far apart on a stimulus. There hasn’t been much headway on this key issue, but the market has been resilient despite that. Maybe to some extent people are assuming it will eventually happen, which means we might see some “sell the fact” pressure if Congress and the White House get together on something. We’ll have to wait and see.

Don’t Forget Key Reason for Rally

If nothing else, Wednesday’s action shows why some analysts say stocks might continue to be strong despite valuation concerns. One reason for this is the Fed.

Unlike, say, in 2016 when rates were at all-time lows and stocks were setting new highs, there isn’t that background alarm that the Fed might step in at any time and end the party. That’s arguably exactly what the Fed did in 2017-2018 as it raised rates on a regular basis before the market took a beating in Q4 2018. 

This time, with the pandemic still raging, unemployment in double digits, and economic growth far weaker than even during the slow-growth period of late 2015/early 2016, the Fed has basically committed to keeping its foot off the brake. This can be helpful for all sectors, including defensive ones like Utilities and Staples that tend to do better when rates are low. 

While the average S&P 500 yield is now back down to around 1.8% from above 2% at the peak of the pandemic selloff, it’s still very high vs. the 0.67% yield of 10-year Treasuries. This tends to push many investors into stocks from fixed income. 

At the same time, the low interest rates can help companies that need to borrow (think Energy). They also can help the housing market, automobile makers, and other manufacturers of big-ticket items by generating more consumer interest as people look to take advantage of low borrowing costs. Only banks truly miss the rate party, but they’d arguably benefit if housing remains firm.

And Remember Why Caution Lingers

All this doesn’t mean the stock market goes straight up or even continues to rally at all. There are a bunch of bearish arguments you could make against stocks right now, mostly having to do with pressure from the China trade dispute, valuations, worries about whether consumers can keep spending if a second stimulus doesn’t come around, and, most obviously, the incredible amount of uncertainty about the pandemic. Gold is down the last two days, but it’s still above $1,900 an ounce, which shows the caution out there. 

There’s also the election looming less than three months away. That could create more volatility and help steer various sectors in certain directions if one party or the other appears to be pulling away. Though past isn’t precedent, defense contractor and big pharma shares have often come under pressure historically when Democrats shine in the polls, while education and alternative energy shares can suffer when Republicans look more likely to be victorious. We’ll obviously be talking more about election-related matters as the voting gets closer.

All these worries could lead to some potential hedging as investors now see the market back at February levels where it was before the crisis. Arguably, the SPX is a lot more expensive now than it was then, because earnings expectations have come down so far. 

On that note, Q2 earnings are looking better than analysts had expected but still pretty awful by any historic standards. S&P 500 earnings likely fell 35.2% in Q2, research firm CFRA said Wednesday, which beat its initial pre-earnings estimate for a 45.7% decline. For all of 2020, the firm now sees EPS falling 21.8% vs. the initial estimate of 24.8%, followed by 27.4% earnings growth anticipated in 2021. 

From a technical standpoint, resistance is seen at the old SPX high of 3393, with support seen between a range of 3212 and 3259, CFRA wrote. The SPX briefly traded above the record closing high of 3386 yesterday but couldn’t hold that level.

The bias, CFRA said, remains bullish. Still, these kinds of quick recoveries historically are often followed by pullbacks, the firm added. With that in mind, it wouldn’t be too shocking to see a drop of 5% to 10% for the SPX at some time in the few months, though history isn’t guaranteed to repeat.

CHART OF THE DAY:  BREAK IN THE PATTERN? For weeks, the dollar index ($DXY—candlestick) had been steadily falling while gold (/GC—purple line) soared to new all-time highs. This week changed that, but whether it’s a temporary or more permanent shift remains to be seen. As long as economic data continue to show the U.S. economy recovering, that could keep pressure on gold and provide support for the dollar. Data sources: CME Group, Intercontinental Exchange.  Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Cisco, Lyft Fall After Earnings: The latest earnings news came late Wednesday from Cisco Systems, Inc.  (NASDAQ: CSCO), which beat on earnings and revenue but saw shares get slammed nearly 7%  in pre-market trading after issuing disappointing guidance. It sees fiscal Q1 earnings per share below the Street’s estimates and sales down 9% to 11% year over year. Not pretty. Investors generally gave companies a break when they pulled guidance earlier this year, but now seem to be back to punishing firms that disappoint with weak forecasts. 

With CSCO, the guidance miss is actually a bit concerning because usually they’re pretty good at figuring out what’s going on and how it might affect their financials. The pandemic might be throwing a lot of companies into confusion. 

Lyft, Inc. (NASDAQ: LYFT) shares fell nearly 2% in pre-market trading after the company reported a 61% drop in revenue for Q2 as the pandemic limited demand. Lyft said active riders dropped 60% from a year ago. 

How to Stop Worrying and “Love” Inflation: The numbers are in and investors are wondering, should they worry about inflation? Not necessarily. Instead, maybe the 0.6% rise in core and headline consumer prices for July sends a different message, one that’s more positive. When inflation starts to show up, it often reflects consumers stretching their muscles. Remember, prices took a sharp dive earlier this year with the arrival of the pandemic and the economy coming under pressure. Now they’ve gone up 0.6% two months in a row. That might sound a little concerning, but the 12-month rise is just 1.6%, well below the Fed’s 2% target. 

Speaking of which, the Fed has made very clear it has no plans to raise rates any time in the near future. Some analysts say no rate increase may come until…wait for it…2025! In normal times, maybe consecutive 0.6% CPI readings might be reason to think the Fed could turn hawkish. Not this time. That’s good news for the market not only because it means rates are likely to remain low, but also because if the Fed keeps allowing inflation to grow, retailers and other businesses could possibly see their profits benefit from higher prices. At this point, gasoline and food lead the price increases, the government said. Health care and housing also are more expensive, but airline fares, apparel, motor vehicle insurance, and used cars and truck prices all declined over the past 12 months. 

Split-Screen: As we suggested might happen, Apple turned out to be a trend setter when it announced its four-for-one stock split a couple of weeks ago. Now it’s Tesla, Inc. (NASDAQ: TSLA) going five-for-one and seeing shares rise meteorically Wednesday. That raises the question of who might be next. There are plenty of FAANG and other Tech stocks that come to mind, though we won’t speculate here. You can probably name a few yourself. Meanwhile, “A” shares of Berkshire Hathaway (NYSE: BRK-A) recently traded above $320,000. While a stock split sometimes seems to lift shares (which appeared to happen with AAPL and TSLA), they don’t offer much else for current shareholders other than maybe bragging rights about how you owned the stock way back when. However, if you’re an options trader and hold shares of a company that’s planning a split, there are some things you might want to know about how that works.

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

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