Before The Bell - The last fortnight of trading on Wall Street has been an up-and-down affair for investors. The first five trading days went to the bears, punctuated by a one-day drop of more than 1,860 points for the Dow Jones Industrial Average on June 11th. That setback resulted in a big week for the bears, with the aforementioned Dow 30 and the S&P 500 falling more than 5% each for the week ending June 12th. The selloff was then followed by a partial rally on Wall Street last week, with the Dow 30, the broader S&P 500, and the tech-heavy NASDAQ Composite producing respective rallies of 1.0%, 1.9%, and 3.7%. Overall, the main theme for the U.S. equity market over the last two weeks has been the return of some volatility, with both the intra-day and daily swings for the major averages at times swift and pronounced.
So what is causing the recent unevenness among traders these days? The volatility is being driven by reactions to the fluid coronavirus pandemic and recent commentary from the Federal Reserve. In general, the market has moved higher on news of more states opening up their economies, but has also backtracked on worries about a second wave of the coronavirus cases, particularly in states like Texas and Florida that have been very aggressive in their re-openings. The increase in positive cases in more than 20 states last week unnerved investors, to an extent, as it brings worries about dialing back the economic openings in some regions. The market also has gyrated on recent commentary from Federal Reserve Chairman Jerome Powell. The aforementioned Dow-30 plunge came after the central bank leader said that U.S. economy’s recovery to pre-virus levels may take longer than expected and the lead bank plans to keep interest rates near-zero until at least 2022. That commentary has been offset, at times, by comments from Mr. Powell that the central bank will continue to be aggressive with its monetary policies to support the U.S. economy. What all of this has done is made for a spike in volatility in recent weeks.
On Friday, it was another seesaw session for the U.S. equity market. Worries about a second wave of COVID-19 cases nationwide unnerved investors, with the main indexes finishing the session in the red after a seesaw day of trading. Late-session news that Apple (AAPL) was reclosing some recently opened stores in areas that have seen a recent spike in coronavirus cases fueled the late-day selling and pared some of the weekly gains. For the day, the Dow, S&P 500, and the small-cap Russell 2000 were down 209, 18, and eight points, respectively. The NASDAQ finished with a relatively flat showing (up three points), but it should be noted that the gains were pared into the closing bell. On the day, all of the major equity groups, save for healthcare sector, finished in negative territory.
Our sense is that the recent uptick in volatility in Wall Street will continue over the next few weeks. With earnings season still about three weeks from heating up, investing sentiment is likely to be driven by the highly fluid coronavirus pandemic. (Investors should note that NIKE will release its latest quarterly results after Thursday’s closing bell. The report will likely be closely examined by Wall Street for clues about what the forthcoming second-quarter earnings season may look like. Specifically, investors will be keeping an eye on the retailing giant’s business in China, its on-line sales, and the company’s performance during the global pandemic.) That may lead to some uneven performances for the market. As we have done for the last few weeks, we continue to recommend that subscribers focus on the stocks of the high-quality companies, which are ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line. Historically these stocks have done better than the market when there is a pick-up in volatility. The technology stocks should be eyed as well as they, despite some minor hiccups the last few weeks, are outperforming that market. Investors should note that our recent reviews of a number of the bigger technologies names can be found in this week’s release of Issue 7 of The Value Line Investment Survey, which can be viewed digitally this morning on valueline.com.
In addition to the continued coronavirus updates, investors will get a number of important reports on the U.S. economy this week, including data on existing and new home sales (the former later this morning), initial weekly unemployment claims, the trade gap, personal income and spending, and durable goods orders. We also get a final revision to the first-quarter GDP estimate.
Before the opening bell, the equity futures point to a modestly higher start for the U.S. stock market. Traders are trying to balance the prospects that the coronavirus-stricken economy would rebound quickly against worries of an extended rise in new cases over the weekend. That said, investors should note that most of the international indexes have been in negative territory this morning. Fueling some of the overseas pessimism were reports of a recent spike in Germany’s coronavirus cases. Stay tuned. – William G. Ferguson