Stocks

Daily Markets: Why Are Stocks Rallying Now?

Person checking stock price on smartphone
Credit: Witthaya / stock.adobe.com

Today's Big Picture

Yesterday's equity market rally was likely inspired by improving pandemic data out of Europe and a degree of short covering. For more on that, see today's Data Download. Following overnight news that new case and death rate trends in Europe continue to improve, equities in Asia closed up almost across the board today, and European equities were higher as we approach the opening of US equity markets. US futures point to another positive open today. The big focus for investors today concerning the economy will be on the Job Openings and Labor Turnover Survey.

We suspect the market is reacting with "hopium" that the lockdown and social distancing efforts in Europe that are leading to these declines will be replicated in the US in the coming weeks. The fact that the Fed is buying the equivalent of QE1 every 10 days is probably helping as well (more on that and other market dynamics below). Adding to that hopium, New York Governor Cuomo said he sees signs that a possible flattening of New York's caseload curve is starting to emerge even as the death toll in the US approaches 10,000. While we understand that the governor needs to keep spirits up, so far we do not see a convincing rolling-over in the data just yet.

It is always more pleasant to see the markets go up, rather than down. Still, we suspect that share prices are getting ahead of themselves as the coming quarterly earnings reports are likely to have plenty of negative surprises. The US and the rest of the world are not out of the pandemic woods, not by a long shot, with a high likelihood of more painful headlines in the coming weeks and months.

Data Download

Coronavirus

As of this morning there were over 1.35 million confirmed cases of the coronavirus globally and over 75.7k deaths. The past seven days have seen more than 70k new cases every day, which means we will see 1.5 million cases before the end of the week. We will also likely cross over 100k deaths by Friday. The UK is now catching up to the other large European economies and is not year nearing its peak. Yesterday British Prime Minister Boris Johnson was moved into intensive care. Our thoughts are with him, his fiance, his family, and the British people. This virus is brutal.

The US has the greatest number of cases by a wide margin, with over 367.6k confirmed and 10.9k deaths. Yesterday there were over 1,200 deaths in the US. The US will likely see over half a million confirmed cases before the end of the week. Yesterday 11 states added more than 1,000 near cases each as there are now 11 states with over 10,000 total confirmed cases. In the US, New York continues to be the epicenter, by a wide margin. By the end of today, NY will have more cases than Italy.

The good news out of the big five nations in Europe (Germany, Italy, Spain, France, UK) continues, with improving trends in both new cases and deaths. On the downside, the smaller nations in Europe continue to see cases escalating. The number of active cases in South Korea has been steadily decreasing - another optimistic sign. On the other hand, cases in Canada and Brazil are growing rapidly.

Domestic Markets

The Federal Reserve's no-holds-barred buying spree is so massive that it is amounting to the same size as the first round of Quantitative Easing during the Great Financial Crisis every ten days. Let that sink in. No wonder the markets have been in such a rosy mood. The Fed is back baby!

Yesterday the Dow rose 7.7%, its best day since March 24 while the S&P 500 and Nasdaq were also up over 7%. The S&P 500 managed to get up above the key 2,640 resistance level that has held firm over the past two weeks. All sectors closed up on the day. Even the cruise lines joined in on the party yesterday as Royal Caribbean (RCL) closed up 21% and Carnival (CCL) up 20%.

Boeing (BA) rose on the day, gaining more than 19%, Nordstrom (JWN) rose 24%, MGM Resorts (MGM) closed up 22%.

On the other end of the spectrum, Zoom Video Communications (ZM) and Peloton Interactive (PTON), two stocks that have benefited from the pandemic, closed down on the day 4.1% and 1.3% respectively.

Looking at which stocks performed the best yesterday, it was clear that those that had been hit the hardest during the downturn performed the best - a dash for trash or a short squeeze depending on your perspective.

US Economy

According to a recent poll by the Financial Times, 73% of American's say the pandemic has reduced their family's income, with nearly 50% saying they would be without any income at all if they were unable to work because of illness. Another 24% reported that their household income have been cut "very significantly."

Yesterday the Federal Reserve announced that it would be providing financing for Paycheck Projection Program (PPP) loans rather than buying them as had been previously reported. Here is the challenge: the CARES Act carved these loans out as carrying a zero risk weight for banks, but if the Fed doesn't buy them, then they are still sitting on the banks' balance sheets which means that banks will not be able to meet the demand for the loans. Expect to hear more on this problem.

The NFIB Small Business Optimism Index fell 8.1 points in March, the lowest level since October 2016. We expect to see this number fall much farther in next month's report.

Later today in the US, we will get the Redbook sales for the week ending April 4, which will give additional insight into just how much consumer spending has crashed. Later on in the morning, we will get the JOLTs report and later Consumer Credit report for February, back when the world was a lot less insane.

Global Economy

Finance ministers from the European Union are meeting virtually today as the block is facing its biggest challenge since its formation, with the pandemic reopening old wounds. So far, talks have not been going well as the southern nations, primarily Spain and Italy, push for some form of debt mutualization, which northern nations, particularly Germany, utterly oppose. With leaders already exhausted, both mentally and physically, and with the inability to have side conversations as the meetings are now being conducted in the virtual world, we expect tensions are likely to rise further in the weeks to come.

Japan saw Household Spending contract by 0.3% YoY in February, after having contracted 3.9% in the prior month as Average Cash Earnings grew just 1% YoY, below the prior month's 1.5% and below expectations for 2.1%. The nation's Leading Economic Index rose to 92.1 from 90.5 in January, but hell, February feels like it was in the last decade in COVID-time.

Germany's Industrial Production for February rose 0.3%, down from the prior 3.2% but much better than the expected 0.9% decline.

February Retail Sales in Italy rose 5.7% YoY, up significantly from the 1.5% previously and far better than the 0.2% expected. Here's the thing - this was likely because of the panicked buying as people prepared for the lockdown that came in March. Next month's report is likely to be one of the ugliest on record.

Australia's exports contracted 5% MoM in February, with imports also contracting 4%. The nation's central bank left rates unchanged at 0.25%.

Stocks to Watch

Kraft Heinz (KHC) guided its March quarter revenue well above consensus expectations, given strong consumer demand for its products. Kraft sees revenue for the quarter up 3% to roughly $6.14 billion vs. the $5.79 billion consensus.

Beginning today, Kroger (KR) will start limiting the number of shoppers allowed in its stores to 50% of capacity, which is similar to a strategy recently enacted by BJ's Wholesale Club (BJ). Kroger will also test one-way aisles to maintain space between people in stores.

Ralph Lauren (RL) shared the majority of its stores in North America, and Europe remains temporarily closed. Still, it is encouraged by the improving situation in China and South Korea, where most of its retail stores have reopened.

Apple (AAPL) supplier Hon Hai Precision (HNHPF), better known as Foxconn, reported its March sales dropped 7.7% YoY to $11.5 billion but rose roughly 60% MoM which suggests it has started to see some recovery from COVID-19 disruptions.

Samsung (SSNNF) shared its March quarter operating profit rose 3% YoY to $5.23 billion, edging out the $5.05 billion consensus, as revenue rose 5% to roughly $45 billion. The preliminary results follow the company's comments last month that its smartphone and consumer electronics businesses would feel the bite of the coronavirus, while data center demand would help its chips business.

Given Samsung's comments, we suspect investors will want to watch shares of NVIDIA (NVDA)Intel (INTC)Qualcomm (QCOM)Skyworks (SWKS), and Qorvo (QRVO).

Chinese electric vehicle company Nio (NIO) delivered 1,533 vehicles in March 2020, up 116.8% MoM as the company's production capacity rebounded from the coronavirus. Tesla (TSLA) announced it will expand its lineup in China by offering a locally built Model 3 sedan with a range of more than 650 kilometers on one charge vs. 450 kilometers for the current basic model.

Beazer Homes (BZH) served up March quarter highlights that included a 3.9% increase in net new orders. Parsing the report, we find the company net new orders for March fell 25.7% with cancellations jumping to 25.1% of gross new orders from 15.2%. Beazer went on to note that customer traffic and sales slowed significantly as a result of the public health crisis.

According to a Nikkei reportNissan Motor (NSANY) will lay off about 10,000 workers in the US, which is nearly its entire workforce at its US factories, with plans to rehire the workers once production at the plants restarts.

Specialty retailer Cato (CATO) has extended its brick & mortar store closure until further notice and suspended its dividend.

Boeing announced it will temporarily suspend all 787 operations at its South Carolina facility until further notice.

The Public Investment Fund of Saudi Arabia reported an 8.2% stake in Carnival, which sent shares soaring yesterday. D.E. Shaw also reported a 5.2% stake in Blue Apron (APRN), which led its shares to climb in aftermarket trading last night.

Moody's lowers the long-term ratings on Harley-Davidson (HOG) to Baa2 from Baa1 with a Negative outlook.

Cypress Semi (CY) has received antitrust clearance in China to merge with Infineon Technologies (IFNNY) in a transaction that is expected to close on April 16.

And the list of companies withdrawing their 2020 guidance continues to grow. New additions include:

  • Matson (MATX)
  • Penumbra (PEN)
  • Genuine Parts (GPC)
  • Flowserve (FLS)
  • Sunrun (RUN)
  • Blackbaud (BLKB)
  • Hillenbrand (HI)
  • Zimmer Biomet (ZBH)
  • Global Payments (GPN)
  • Natus Medical (NTUS)
  • Community Health (CYH)
  • Tactile Systems Technology (TCMD)
  • Vestas Winds Systems (VWS)
  • Alcon (ALC)
  • Greenbrier (GBX)
  • DR Horton (DHI)

Companies expected to report after today's market close include Levi Strauss (LEVI) and SMART Global (SGH). Readers looking to get the lowdown on those reports and others to be had this week, we suggest visiting Nasdaq's earnings calendar page.

On the Horizon

  • Dates to mark:
    • April 8: FOMC Minutes
    • April 10: US equity markets closed for Good Friday
    • April 14: NFIB Small Business report
    • April 15: Retail Sales report
    • April 17: Options Expiration
    • April 24: University of Michigan Consumer Sentiment report
    • April 28: Wholesale and Retail Inventories
    • April 28-29: Federal Reserve FOMC meeting
    • April 29: Q1 GDP (first estimate)
    • April 30: European Central Bank rate decision
    • May 1: Vehicle Sales
    • May 12-14: Google I/O Developer Conference
    • May 25: US stock market closed for Memorial Day

Thought for the Day

"One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." ~ Plato

Disclosures

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

Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

Read Chris's Bio

Lenore Elle Hawkins

Lenore Elle Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, her focus is on macroeconomic influences that create investing headwinds or tailwinds. Lenore co-authored the book Cocktail Investing and in addition to her Tematica work, provides M&A consulting services for companies in Europe looking to expand globally. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

Read Lenore's Bio