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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday, September 08, 2020 Headlines

1. US markets' sell-off continues as tech stocks drag

2. Tesla in another historic drawdown

3. The equity risk premium remains tame through volatility

4. Global markets are outshining the US

5. These country ETFs are trading above January highs

Markets Closed

Dow
27,500.89
−632.42 (-2.25%)

S&P
3,331.84
−95.12 (-2.78%)

Nasdaq
10,847.69
−465.44 (-4.11%)

VIX
31.57
+0.82 (+2.67%)

Bitcoin
10,024.95
−354.81 (-3.42%)

US 10-Yr Yield
0.684
−0.037 (-5.13%)

Image courtesy GettyImages/Al Bello/Staff

Markets Today

U.S. markets picked up right where they left off last Friday as investors kept on selling throughout the day. Few sectors were spared as investors unwound their positions in big technology stocks like Apple, Facebook, and Microsoft, which led the declines. The Nasdaq has now fallen 10% in the last three days, which is a technical correction, while the DJIA has fallen nearly 7% over that time, its worst stretch since March. The S&P 500 is down nearly 11% since the all-time highs it set on Sept. 3. That wasn't even a week ago.

You had to look hard to find winners today, but Disney (DIS), McDonalds (MCD), and Caterpillar (CAT) were happy to oblige. Those sound like cyclical stocks, which makes sense when we see that part of the market starting to catch up with the growth sector.

Summer flings are ending hard, and Tesla (TSLA) investors, especially new ones, are experiencing some heartbreak. The electric automaker has lost $143 billion in market value in just the past week as the stock has fallen 33%.

Economies are slowly bouncing back off the mat, and several countries are starting to outperform the U.S. for a change. We're also flying a lot more. Look at the rebound in TSA checkpoint screenings:

Image courtesy Bespoke Investments

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Headlines:

JPMorgan Chase says it's probing the role of some employees who may have enabled misuse of COVID-19 relief funds in what it calls potentially illegal activities. The bank said it has seen "instances of customers misusing Paycheck Protection Program Loans, unemployment benefits and other government programs" and that some "employees have fallen short, too," according to a memo to staff from the bank's senior leaders Tuesday, as reported by Bloomberg. The firm said the conduct doesn't meet its principles "and may even be illegal."
Apple announced a digital-only event on Sept. 15 where it's expected to reveal new products. The invitation Apple sent to press for the event says "Time Flies" on it, suggesting the Apple Watch Series 6 will be released. The latest watchOS 7 software supports sleep tracking and will be available for current Apple Watches, but expect that to be one highlight. Rumors have suggested it will also detect blood-oxygen saturation.
General Motors will receive a $2 billion, or 11%, equity stake in EV maker Nikola (NKLA) as part of a strategic partnership. In exchange, GM will engineer, validate, homologate, and build the Nikola Badger for both the battery electric vehicle and fuel cell electric vehicle variants. Nikola will utilize GM's Ultium battery system and Hydrotec fuel cell technology. Shares of Nikola shot 50% higher on the news.
The U.S. mortgage market recorded its best quarter in years this spring, as the housing market is booming while much of the economy stumbles. Lenders issued $1.1 trillion in home loans between April and June, according to mortgage-data firm Black Knight Inc. That was the biggest quarter in the company's records, which date to 2000. Lenders extended roughly $2.5 trillion in home loans in all of 2019. Refinancings, up more than 200% from a year ago, drove the increase. Mortgage rates hit new lows multiple times this year, falling below 3% for the first time in July.
Brexit trade deal talks resumed today, and the pound slid as the possibility of a "no deal" exit rises. U.K. Prime Minister Boris Johnson's government is publishing legislation tomorrow that may put a hard customs border in Ireland and override the withdrawal agreement signed with the European Union. The head of the government's legal department has quit over this, according to the Financial Times.
Tesla shares fell 20% today, the worst daily drop for the stock in its history. This continues a multi-day sell-off that has knocked $143 billion in market value from the company. On Friday, the S&P 500 Index Committee announced that Tesla won't be joining the S&P 500 as investors expected. Joining the index instead are e-commerce website Etsy, automatic test equipment maker Teradyne, and healthcare firm Catalent.
Japan's economy shrank more than initial estimates in the second quarter of 2020. The government revised the GDP decline to -7.9 % (-28.1% annualized) in the April–June period from -7.8% (-27.8% annualized). This was the third straight quarter of contraction for the economy and its biggest quarterly drop since World War II. The Q2 revision, however, was slightly better than analysts were expecting.
U.S. air-safety regulators are considering a review of quality-control lapses in the production of Boeing 787 Dreamliners stretching back almost a decade, according to The Wall Street Journal. The plane maker grounded eight Dreamliners last month and reportedly disclosed to the Federal Aviation Administration that it produced certain parts that failed to meet its own engineering standards. The FAA says it is investigating manufacturing flaws, but it's too early to say if it will require new inspections.
Italian antitrust regulators have launched investigations against Google, Apple, and Dropbox for practices related to cloud storage services. All three are accused of collecting and using data for commercial purposes without properly informing customers or receiving consent in a fair manner. Dropbox is further accused of failing to provide information on withdrawing from the contract.

Chart courtesy Morgan Stanley

Equity Risk Premium Looks a Lot Like 2009

U.S. markets are feeling the downdraft over the past few days, but market historians will tell us that this kind of sell-off following a steep recovery in equities is pretty similar to recent cycles. Markets get overheated on the way up when exuberance is high, and they get over-sold when sentiment shifts abruptly. Eventually, they return to the mean.

Morgan Stanley's equity research team points out that despite the recent surge for U.S. markets, the equity risk premium, which measures how much the equity market is expected to return over risk-free assets like government bonds over the long term, has remained somewhat stable through the volatility. In fact, it looks a lot like it did in late August of 2009 as the market was starting to pull higher.

What's Different Today?

In 2009, the Federal Reserve was in the midst of lowering interest rates to jumpstart the economy out of a recession. Today, we know where interest rates are, and where they are going: zero and nowhere. Earnings are also improving much faster than many investors thought. That, according to Morgan Stanley's research team, is likely to drive certain sectors of the market higher, like small caps and cyclical stocks. Mega-cap tech stocks, which have been overbought in the past several months, may have further to fall as their equity risk premiums remain sky high.

Chart courtesy AllStarCharts.com

Global Stocks Are Holding Their Own

The slide in U.S. markets has not been mirrored by all other major global markets. To be sure, they have not surged as much as the U.S. equity markets, but their recovery is more in line with the economic recoveries happening in their regions.

JC Parets, founder of All Star Charts and a friend of Investopedia, points out that the MSCI All World ex-U.S. index is outperforming the S&P 500 Equal-weighted index by nearly 5% since June 8.

While the equal-weighted index does not account for the massive influence of the FANGMAN stocks, it does provide a cleaner way of comparing country performance for those investors who don't want to join the herd in owning the popular stocks.

Chart courtesy AllStarCharts.com

Where Markets Are Hot

Many of you write in requesting more coverage of international markets in this newsletter. We'll do a better job of that going forward, but to satisfy your immediate interests, JC of All Star Charts points out that there are a few global markets that are already above their Jan. 2020 highs and many more on the cusp.

The top performing global markets, as seen through the ETFs that track them, are as follows:

ASHR - China
EWT - Taiwan
EWD - Sweden
EDEN - Denmark

The laggards include energy dependent economies like Nigeria and Chile as well as Southeast Asian economies like the Philippines and Thailand, which depend heavily on global trade and tourism.

More News:

Best Buy (BBY) Drops Despite Beating Earnings Estimates

Travel Credit Cards Add New Perks During the Pandemic

Virgin Galactic (SPCE) Rebounds

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(charts courtesy YCharts)

Shares of General Motors are up by over 8% after announcing a partnership with Nikola to develop and manufacture electric trucks, with the automaker receiving an 11% share of the startup as part of the deal. Airline stocks, including Southwest and Delta, are up today following U.S. Transportation Security Administration (TSA) data showing a significant increase in travel demand over the Labor Day weekend.

Five out of the eight stocks that fell the furthest today belonged to oil companies following Saudi Arabia slashing its official selling price to Asia and the United States, resulting in oil prices experiencing their worst day since mid-May. The odd ones out, KLA, Lam Research, and Applied Materials, were all semiconductor stocks, which fell on concerns of a potential chip trade war between the U.S. and China.

Word of the Day

Equity Risk Premium

The term equity risk premium refers to an excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies and depends on the level of risk in a particular portfolio. It also changes over time as market risk fluctuates.

Photo credit https://www.scotchbrand.com/3M/en_US/scotch-brand/

Today in History

Sept. 8, 1930:
The Minnesota Mining & Manufacturing Co. sent out its first shipment of an amazing new waterproof, transparent product that the company thinks may "have large possibilities." It's called Scotch Tape (supposedly from the stinginess with which the company first coated the surface with a small amount of adhesive). It's a rapid success as, in the depths of the Depression, penny-pinching Americans used it as a cheap tool for everything from resealing food cans to helping torn fingernails heal.

https://news.3m.com/English/press-releases/press-releases-details/2005/3M-Celebrates-75-Years-of-Scotch-Transparent-Tape/default.aspx

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