| Friday's Headlines 1. Markets resume bullish stance on potential coronavirus treatment 2. Gloomy outlook ahead for earnings season 3. U.S. sector scorecard for the second half 4. China super-rally pauses on state media caution Markets Closed
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Programming note: James Chen is a guest writer today as Caleb is taking the day off.
Markets Today U.S. equity markets started out the day Friday on slightly shaky ground. But stocks trended up throughout the day, resulting in the Dow rising nearly 370 points, the S&P 500 surging more than 1%, and the Nasdaq hitting yet another new record high by market close. Even the relatively lagging small-cap Russell 2000 climbed an impressive 1.7%.
Helping to drive this surge was a report by Gilead Sciences saying that its antiviral drug, remdesivir, has been found to lower the mortality risk for severe coronavirus cases by 62% versus standard care alone. The drug was also found to improve clinical recovery overall. The news lifted Gilead's (GILD) stock by more than 2% on Friday.
Not only did Gilead's announcement help boost the broader indexes, it also led to strong surges for sectors and industry groups impacted most severely by the pandemic, most notably airlines and energy stocks. Hope for a treatment is luring investors back to these battered industries, at least for now.
In the past week, and indeed since the March lows, tech stocks have clearly been the darlings of Wall Street and investors everywhere. One look at the chart below of the tech-heavy Nasdaq 100 ETF, QQQ, tells the story. QQQ has risen more than 6% since the beginning of the month and a whopping 55% since its March lows. Today, it hit another all-time high.
In the week ahead, aside from the beginning of earnings season, U.S. retail sales numbers on Thursday will be closely watched as investors gauge how reopening efforts have been impacted by a resurgence in coronavirus cases.  Headlines:
 Gloomy Outlook Ahead for Earnings Season As noted above, earnings season begins in earnest next week. Though all earnings seasons are eagerly anticipated by investors, it's even more so this time around. That's because we'll see companies' profit and revenue results from a period when the pandemic and its negative economic impacts were at their most severe thus far. Overall, results are not expected to be good, to say the least.
According to Refinitiv, earnings are expected to fall by 44%, the worst since the Great Recession of 2007–2009. The big banks are up first next week, and the forecast looks even worse. According to Refinitiv, the financial sector is expected to see an even more pronounced earnings decline of around 52%. Bank of America, JPMorgan, Wells Fargo, and Goldman Sachs will all be reporting in the week ahead.
Be prepared.  U.S. Sector Scorecard for the Second Half As the second half of the year kicks off ahead of an eagerly anticipated earnings season, let's take a quick look at the scorecard for the different equity sectors thus far in July. The chart above ranks the 11 State Street SPDR sectors by performance up to Friday's market close for the beginning of July, the third quarter, and the second half.
Clearly, it's been a very good week and a half for communications sector stocks, as the sector has surged by well over 6%. This is no surprise, as the XLC ETF's largest holdings are Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX), in that order. Facebook shares hit a new record high this past week, Alphabet just hit its own high on Friday, and Netflix has been hitting new pandemic-driven highs since April (NFLX rose over 8% on Friday alone). Consumer discretionary stocks have also continued to surge. Again, no surprises there since the XLY ETF's top holdings, by far, are Amazon (AMZN) and Home Depot (HD), both of which have been on massive runs since March lows.
Struggling in flat-to-negative territory for July are the real estate and industrial sectors, which have been hit by the marked resurgence of new coronavirus cases in the U.S. No sector, though, has suffered more severely in the 2nd half thus far than energy. The XLE ETF, which counts Chevron (CVX) and Exxon Mobil (XOM) as its biggest holdings, has dropped more than 6% in July. Energy companies have been hit especially hard by the pandemic resurgence, as commercial consumers of oil and gas (like airlines and other transportation companies) project sharply reduced business.  China Super-Rally Pauses on State Media Caution The big story in international markets this week has undoubtedly been the massive surge in China stocks. The benchmark Shanghai Composite index (chart above) had its largest weekly gain in about five years at over 8%. This was driven by the state-owned China Securities Journal touting the "wealth effect of the capital markets" and a "healthy bull market" on Monday this past week. Investors clearly took the sales pitch to heart as they ran up stocks by around 5.7% on Monday alone.
China stocks continued to rise until Friday, when the Shanghai Composite dropped nearly 2%. Apparently, the state media had changed its tone. The same China Securities Journal published an editorial on Thursday that reminded investors of the massive plunge in China stocks in 2015. At around the same time, a large, state-owned pension fund dumped shares in one of China's biggest insurance companies. These two factors were enough to compel investors to start selling.
The week ahead could see more selling as the parabolic upmove potentially unwinds even further. What to Expect in the Markets This Week First, let's look at how different asset classes have been doing:  Economic Events This Week Monday, July 13:
Tuesday, July 14:
Wednesday, July 15:
Thursday, July 16:
Friday, July 17:
Big Banks and Netflix: Earnings Begin in Earnest Earnings season is upon us in earnest, and a whole array of big banks report this week. The COVID-19 crisis has hit banks hard in two ways. First, it has caused the Fed to drop interest rates down to zero, putting pressure on banks' net interest margin, meaning it's harder for banks to make money from lending. Secondly, the significant recession the pandemic caused has meant that banks have to sock away enormous sums of money to cover potential loan losses as existing borrowers may default.
While banks may have it tough, it's unlikely to be much easier for other businesses. Q2 saw the brunt of the shutdown across much of the world and the accompanying economic slowdown. Earnings for the S&P 500 are expected to fall by 44% year-over-year, the largest such drop since the 67% drop in Q4 2008 during the Great Recession.
One company that may buck the trend is Netflix. With live sports, restaurants, movie theaters, and other entertainment options shuttered due to COVID-19, more people may flock to Netflix in search of something to break the monotony of lockdown life. This may let Netflix continue to grow its subscriber base even in the face of the increasing proliferation of other streaming services. Central Bank Decisions From Europe, Japan, and Canada
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(chart courtesy YCHARTS)  Cruise line stocks, such as Carnival, Royal Caribbean, and Norwegian, are all up today following the former's announcement that it will resume cruising out of Germany via its AIDA cruise line brand. Shares of Marathon Petroleum rose by 8.5% as oil prices increased due to a boosted demand forecast from the International Energy Agency (IEA).  Mohawk Industries' stock price continues to fall, this time by nearly 3.5%, as the flooring manufacturer deals with a lawsuit for alleged financial misconduct. Pharmaceutical stocks, including Regeneron and Incyte, are also down. This follows Gilead Sciences, another pharmaceutical company, reporting new data regarding its antiviral medication remdesivir. Word of the Day Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA.  photo courtesy: bangordailynews.com Today in History July 10, 1986: People Express Inc., the upstart discount airline, rejected a takeover offer from Frank Lorenzo's Texas Air. Instead, People Express sold its Frontier Airlines division to United for $146 million and stated its resolve to remain independent. The move, said chairman Donald Burr, "strengthens substantially our financial position and flexibility." Two months later, on the verge of bankruptcy, People Express sold out to Texas Air for roughly half the price it could have gotten in July. The Wall Street Journal, July 11, 1986, p. A3; http://olesen.com/aha/pe/pehist.htm
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Friday, July 10, 2020
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