Markets

3 News Stories Investors Should Follow This Week

Traders - Michael Nagle / Bloomberg
Credit: Michael Nagle / Bloomberg

The last few months have been frustrating for investors who make decisions based on new stories. The market has been effectively ignoring reality for some time. That, however, has to change at some point. Either the market has to correct, or the news stories have to catch up to the optimism. Here are three stories that will play out this week and that investors should watch closely to see which of those things is more likely.

1: Big Tech Earnings: Large- and mega-cap tech stocks have led the way up, with massive gains there driving the Nasdaq to all-time highs. Microsoft (MSFT), Tesla (TSLA), Amazon (AMZN) and Intel (INTC) are all reporting this week, so by Friday, we will know whether that surge was justified or not.

Usually in a situation like this I would say that for any of the above, a pretty substantial beat would be required to prompt further buying after such strong moves up. In this case, that may not be true. The strength in these stocks is not about “value” in the conventional sense. It can’t be when TSLA is trading at 476x forward earnings, and even the usually staid MSFT has a forward P/E well over 30.

Rather, these strong runs are about buying things that won’t be hurt as much as others in a weakened economy, and in that context, simply matching expectations can be seen as a win. Anything short of a miss of what are basically low expectations from these companies, therefore, will be supportive of big, high-profile tech stocks.

Of course, that can only happen if there is a lot of money actively looking for things to buy, which brings us to the next story.

2: Congressional Stimulus Plans: Republican Congressional leaders are going to the White House today to discuss their proposed package of coronavirus-related spending. Senate majority leader Mitch McConnell supports a $1 trillion package of further stimulus that includes money for more testing, but the White House is opposed to that.

If the White House's opposition to the package was because America is $23 trillion in debt already, and growing, that would make sense, but it isn’t. President Trump opposes coronavirus testing, which he stated again in his interview on Fox News on Sunday. The White House also wants to block billions that would go towards the CDC and other agencies to fight the pandemic, and instead reallocate that money towards other projects (such as a new building for the FBI).

It seems, therefore, that whoever’s view wins out, more money is going to be spent. Exactly where it goes and what it is spent on remains to be finalized, but for the market, that is not the point. The point is that a system already awash with cash will get some more and that will add buying pressure, regardless of the economic reality.

3: Consolidation and Rationalization in Energy: A lot of investors have completely given up on the energy sector, which is perfectly understandable. Oil prices have recovered somewhat after their dramatic collapse in April, but the damage that did to most companies in the sector is still evident. Energy is the worst performing sector in the S&P 500 however you look at it. It was the worst performer again last week, as it has been pretty consistently for around a decade.

There are, however, a couple of stories that offer some hope.

First, it was confirmed this morning that Chevron (CVX) has agreed to buy Noble Energy (NBL) in a $5 billion, all stock deal. That is a good sign for energy investors, as it shows that big oil is doing what it has always done in times of crisis for the industry: going hunting for bargains. That in turn suggests that those companies see this as just another cyclical downturn, albeit an extended one, rather than an existential shift away from their products.

The second story that gives hope is the release of Halliburton's (HAL) earnings. They showed a good beat on the bottom line but with a top line miss. That revenue miss could be seen as worrying, but making more money despite that indicates HAL improved its efficiency considerably. That, just like buying up distressed competitors, is exactly what energy companies should be doing with an eye to the long term. That they are doing those things is an encouraging sign.

Investors should watch for further signs of the same kind of thing from Kinder Morgan (KMI) on Wednesday and Schlumberger (SLB) on Friday. If there are any glimmers of hope in those two earnings releases, a rally in a sector with a lot of upside looks possible.

You might think it strange that I have left out the most important story of all -- the huge spike in new cases of Covid-19 here in America and, increasingly, around the world. It isn’t that strange, though. We have seen repeatedly that while that may represent the biggest danger to the economy, the second wave of Covid-19 hasn't impacted the market that much.

No, that doesn’t make sense to me either, but as long as that state of play continues, then things like big tech earnings, Federal handouts, and energy industry consolidation will be far more influential and are the things that investors should be following.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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