foxex: Changing of the Guards

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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. European and US markets rally on EU stimulus plan and economic hopes

2. EU presents €750 billion stimulus plan

3. Japan announces $1.1 trillion stimulus plan

4. Stay-at-home stocks are sagging

5. Weekly earnings are plunging

Markets Closed

Dow
25,548.27
+533.16 (+2.21%)

S&P
3,036.13
+44.36 (+1.48%)

Nasdaq
9,412.36
+72.14 (+0.77%)

VIX
27.62
−0.39 (-1.39%)

Bitcoin
$9,164.41
+$329.57 (+3.73%)

US 10-Yr Yield
0.68
−0.018 (-2.58%)

Image credit: Bruce Yuanyue Bi/Getty

Markets Today

European and U.S. markets rallied again, bolstered by the EU's new €750 billion stimulus plan and improving economic data. The DJIA closed above 25,000 for the first time since March 10 and above its 100-day moving average for the first time since late February. Tech stocks, which have been the market leaders, have taken a back seat in the past few days as better economic news has shifted investors' appetites to financials and industrials. No recovery is complete without the participation of the financial sector, so the recent breakout appears to be a healthy sign.

The U.S. and China are creeping steadily towards a stand off over Hong Kong, as the Trump Administration said today it can no longer certify the financial center's autonomy from China, which could open it up to sanctions. It's hard to imagine any new progress on the trade deal between the two countries with this matter in the way.

As more economies open here in the U.S. and around the world, investors and scientists are closely watching for signs of new cases of COVID-19 to emerge as social distancing guidelines are loosened.

The early data out of Georgia, the first U.S. state to open, is not encouraging. Let's hope that's an anomaly.

chart courtesy Barclays

Headlines:

The European Commission presented its much-awaited coronavirus-related stimulus package. The recovery fund dubbed "Next Generation EU" includes €500 billion in grants and €250 billion in loans for member states, with the money borrowed on financial markets and repaid from the bloc's budget.
Japan Prime Minister Shinzo Abe released his plan for stimulus spending of $1.1 trillion today and parliament is expected to pass it before June 17. It will include money for businesses, healthcare assistance, and local governments. This new plan and previous coronavirus measures are worth $2.18 trillion, or 40% of the country's GDP.
Boeing is planning to lay off more than 6,000 employees this week in an effort to slash costs as the coronavirus pandemic continues to devastate the air travel and aerospace industries. The aircraft manufacturer previously said it is seeking to reduce its head count by 10% through voluntary and involuntary separations from the company. Boeing employed more than 190,000 people at the end of 2019.
The Trump administration said it could no longer certify Hong Kong's political autonomy from China, a move that could trigger sanctions and imperil the financial center's special trading status with the U.S.
U.S. mortgage applications to purchase a home rose 9% last week from the previous week and from a year earlier, according to the Mortgage Bankers Association's seasonally adjusted index. It was the sixth straight week of gains and a 54% recovery since early April.
Today Walt Disney World Resort executives submitted a proposal to health officials in Florida for a phased reopening of the resort's theme parks. Disney lost $1 billion in operating income during the first quarter due to global theme park closures.
Pizza delivery is a big hit with Americans stuck at home during the pandemic. Domino's says same-store sales in the U.S. were up 20.9% year-over-year from April 20 to May 17. Papa John's North America comparable sales were up 33.5% between April 27 and May 24.
The U.S. division of bakery chain Le Pain Quotidien filed for bankruptcy protection as pandemic restrictions continue to wreak havoc on fast-casual dining chains. The Belgian company's U.S. arm said in court papers it hoped to avert a complete liquidation of its 98 Le Pain Quotidien locations with a proposed $3 million sale of the business to fast-casual restaurant operator Aurify Brands LLC.
Mexico's economy will contract 8.8% this year in its deepest slump since 1932, according to the central bank's worst-case estimates. Even in the best-case scenario, the economy will shrink 4.6%, which would be its worst performance in more than a decade, according to the bank's quarterly inflation report published Wednesday.

chart courtesy Goldman Sachs

What Will Be the Dominant Investing Theme of the Decade?

There is no doubt that this pandemic has changed the global economy forever. But even before it struck, the economy and the leadership in the stock market was evolving. The last decade belonged to the FAANG stocks, without question. They changed the way we live in profound ways, and Apple and Amazon became trillion dollar companies along the way.

If the next decade is going to be influenced by the decline of globalization, less business travel, social distanced learning and work, tele-medicine, and battling new viruses, the sectors that lead will be markedly different than in years past.

The FAANG stocks aren't going anywhere, but we have already witnessed a new attention to healthcare and pharmaceutical stocks as those industries are in the bullseye of fighting health pandemics. We have also seen all-time highs for payment processors like PayPal, workplace software companies like DocuSign and Zoom, and big box retailers like Walmart and Target that have massive online presences.

The energy sector, on the other hand, has been destroyed and will look a lot smaller a year from now, barring an enormous rise in oil prices. Will a new energy sector devoted to combating climate change emerge?

chart courtesy YCharts

Stay at Home Stocks Starting to Suffer

Before we get too carried away and proclaim the stay-at-home stocks the four horsemen of the next decade, it's interesting to see how investors have shed them in the past week as economic signals start to flicker again. Amazon, Peloton, Zoom Technologies, Netflix, and Activision have all hit all-time highs in the past three weeks. In the past five days, however, they are all down from their highs and underperforming the S&P 500, which is up more than 3%.

That shows both how fickle some investors are right now and how much trading is happening in online accounts as people move in and out of these stocks.

Buy and hold is out of style.

Image courtesy BLS/Bloomberg

Weekly Pay Is Falling

We'll get another report on weekly U.S. first-time unemployment claims tomorrow, which is likely to show another 2 million Americans joining the jobless ranks. The unemployment rate is likely to hit 25% for May when we get that report next week. While those headline numbers get all the attention, and deservedly so, the drop in weekly pay for those who have held onto their jobs is noteworthy.

According to the Labor Dept., weekly pay fell 11% in April from the prior month. That was the biggest drop on record, but it will likely be broken in May. This, plus historically high unemployment, will be immense hurdles to growing consumer spending again.

More News:

Canopy Growth Earnings: What to Look For

Hibbett Sports Stock Jumps Higher After Analyst Upgrade

Penny Stocks to Watch for June 2020

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(chart courtesy YCHARTS)

Shares of retailers, such as Gap (nearly 19%), Nordstrom (over 17%), and Kohl's (15.5%), are up today as optimism continues to build for the economy's reopening. Cruise line stocks, such as Norwegian (over 9.5%) and Royal Caribbean (9.5%), rose on news that France and Germany are urging the European Commission to issue public debt to support the sectors hit hardest by the global shutdown.

Shares of cybersecurity maker Fortinet fell 4.6% today and below its 100-day moving average. Twitter's stock price fell by 3.5% after President Trump threatened to impose new regulations on social media platforms. This declaration came after Twitter, in an effort to combat misinformation, applied a "fact-checking label" to Trump's tweets.

Word of the Day

Sector Rotation

Sector rotation is the movement of money invested in stocks from one industry to another as investors and traders anticipate the next stage of the economic cycle.

The economy moves in reasonably predictable cycles (most of the time). Various industries and the companies that dominate them thrive or languish depending on the cycle. That simple fact has spawned an investment strategy that is based on sector rotation. Even those investors who don't base their entire strategy on sector rotation would be wise to anticipate the cycle.

image courtesy loc.gov

Today in History

May 27, 1933:

President Franklin D. Roosevelt signed into law the Securities Act of 1933, requiring all issuers of stocks and bonds to publish a prospectus disclosing risks, conflicts of interest, and ownership positions. Says Roosevelt: "The Act is thus intended to correct some of the evils which have been so glaringly revealed in the private exploitation of the public's money." With the public crying for revenge on Wall Street after the Crash of 1929, the bill had passed in the House of Representatives without any debate or a recorded vote; the Senate had debated it for only two hours.