The View from 5th Avenue

Value leading? Straight talk from Fauci and Powell reminded participants that global economies are far from the V shaped recovery many are looking hoping for, and the S&P 500 dropped 3.8% the previous two sessions.  The gap between Value and Growth remains wide though, and when Trump said today he would be open to a Phase 4 stimulus bill (just not the one the Democrats offered this week), Value stocks helped turn around a very negative start to the session (S&P was -1.8% at the low), and the S&P is now in the green.  JPM and Wells Fargo outperformed from the start, and now the Bank sector is +3.7% (Fox’s Gasparino has been talking about a merger between GS and WFC).  The other popular Value sector, Energy, is also leading (+1.9%).  US Treasuries remain bid though, with the 10-year yield at 0.62%.  So this is not risk-on across the board, but rather a rebalance into market underperformers.

The More We Know…The good news? The number of new confirmed COVID-19 cases has levelled off on a global basis. The bad news? That doesn’t tell the whole story. Some countries – particularly developing economies – are only in the beginning stages of this pandemic, which is huge cause for concern because many have larger populations and fewer resources. The global curve is still a ways from being flat.

Disneyland (Shanghai) open, Fantasyland next? – There’s a growing chorus that many bulls already reside in this hypothetical amusement park. Yesterday a prominent US IB said stocks are due for an 18% pullback, today another says the bullish case for US stocks “left us about six weeks ago” and the always colorful (yet generally bearish) David Rosenberg said the United States is in the midst of the Great Repression – the commentary didn’t improve from there. Want something for the bull crowd? After GDP declines similar to what we saw in Q1, historically we’ve seen the S&P go better (see below)…we trade modestly in the red today as the market digests another historic albeit expected data point (consumer prices).

No Breather Needed… After US stocks powered into the weekend, today’s slow start was easily dismissed as the market taking a “breather.” But apparently FOMO and FANG need no rest, as the usual suspects of tech led the Nasdaq into the green (FDN +1.1% new all-time highs) and the S&P and small caps (IWM +0.1%) have now turned positive as well. Clearly the re-opening optimism hasn’t played out yet, with CNBC making much ado about Shanghai Disneyland opening its gates to a limited crowd. However, if countries like China and South Korea that are employing contact-tracing and other arguably invasive methods are still having trouble containing second wave infections, how will the USA fare against the same challenges?   

WOW – Hopefully this will be the only time in everyone’s career that markets see a NFP drop like this.  20.5mn jobs lost is tough.  Markets expect that loss to flip in the coming months, and some companies are moving forward with their plans to re-start their plants (Boeing and Ford).  But job creation will take time for the tail, since every sector saw deep cuts (leisure 7.6mn, education 2.5mn, retailers 2.1mn, manufacturing 1.33mn). 

Umm…Say What Now? – The Nasdaq is now in positive territory for the year. The more concentrated NDX100 went above the ‘high-water’ mark on Monday and has only added to it since. Of course, FAAN(M)G along with Tesla make up nearly 50% of the QQQs and their runs has been well-documented. Where has this money been coming from? Value names have yet to grab the conch, with large-cap and more notably small-cap value names still deep in the red YTD. Companies that have been neatly placed for this sort of event, Peloton (+16.7%), Paypal (+13%), and Fortinet (+20%) will only have investors more in need to chase performance. Meanwhile, Apple and Microsoft are bigger than the EuroStoxx 50.

Midweek Mixed Bag… The S&P continues to crawl along nearly flat on the day as investors remain in a wait-and-see mode with regards to how re-opening plans will pan out. The sector tables also present a muddled picture with big Tech once again leading the way but trailed closely by more-cyclically focused Autos (thanks to GM +4.8% on earnings). The laggards are also a blend of defensives / cyclicals with Utilities, Banks, and Energy all underperforming.

Curious Case of Mixed Signals…We are stuck in the land of in-between currently, though given the moves up today, sentiment isn’t faring too badly.

Don’t Make it a Habit… The S&P is trying to avoid its first 3-day losing streak since early March but there hasn’t been much enthusiasm to start the week. The tone is risk-off as Value names take another beating, but quiet volumes and a less “sexy” slate of earnings indicate the market is in a bit of a no-man’s land, unsure where to get next after surviving the initial plunge and subsequent furious rebound.

Bulls vs Bears – Earnings season has proven to be a series of moving the goal posts. With more than ¾ of the S&P500 having reported by now, 70% have beat EPS forecasts. Great! But hold the phone – the bars have been lowered drastically. Concentration risk in the FANGs persists (see below – Breadth troubling?) but they all reported this week and did quite well, although Amazon’s “reinvestment” being taken poorly today – it’s coming off all-time highs YESTERDAY so lets not fret. And these companies have nearly become as defensive as the traditional consumer staples names. Positive linearity has been a oft-cited phrase; are things stabilizing to getting better? That’s the bar right now. At some point the Street will need to see actual growth but we’re not there yet.