By Pete Biebel, Senior Vice PresidentPrint This Post
The big story in the markets last week was the continuing rally in precious metals. Gold gained about 5% for the week, and Silver spiked nearly 18%. While media outlets are quick to attribute the rally in precious metals to a flight to safety amid the pandemic, a more accurate description is probably a flight out of paper currency. Following a decade of central bank printing presses running at full speed, the recent surge in fiscal spending to revive COVID-sickened economies has made many suspicious of the health of their country’s currency. Gold has been trending higher for more than a year. While it did sell-off by about 15% in the “sell everything” weeks of early-March, Gold was making higher highs by mid-April and has continued to shine since. Silver was a little slower to get going. Because it is also an industrial metal, slowing global growth and the threat of trade wars took some of the luster off the metal. Now, as economies are emerging from their COVID slumps, industrial metals are also rallying.
With the rally in precious metals in the spotlight, it was easy to overlook several other less obvious developments. One of those was last Monday when a revival and a rush back into the mega-cap Tech stocks, which had begun to stumble in the previous week, lifted the NASDAQ Composite Index (COMP) to a 2.5% gain that day. The Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) were left in the dust. DJIA gained just 0.1% that day and SPX managed just 0.8%. Eight of the eleven S&P sectors had net losses for the day. At the end of the day’s session, the number of declining issue outnumbered gainers by nearly a three-to-two margin. It was another example of how the yin and yang of a relative handful of big stocks can dominate market direction.
Those behemoths got their comeuppance over the balance of the week. But first, Tuesday morning brought news of several positive developments from companies working on COVID vaccines. It also brought news of a massive fiscal stimulus fund to be created by the European Union to help revive the economies of its member countries. Stocks rocketed higher on the U.S. opening. SPX hit a new recovery high in the first half-hour of trading. COMP as well as the three leading sectors (Communication Services, Consumer Discretionary and Technology) all hit new all-time highs that morning. But the celebration ended as quickly as it had begun. COMP was in the red at the end of the first half-hour. COMP, SPX and those three leading sectors all ended the day near their lows, most of them with losses.
DJIA and SPX were able to climb back into the area of their Tuesday morning highs late in Wednesday’s session, but sold-off hard Thursday afternoon and Friday morning, ending the week with small net losses. COMP was much worse. Its Thursday morning high was just back into the area of Tuesday’s lows. Even with its big gain on Monday, COMP in the end lost 1.33% for the week where DJIA and SPX had net losses of just 0.76% and 0.28% respectively. Technology was the worst of the U.S. equity sectors, losing 1.55% for the week.
There have been signs of frothiness and speculative excess in the market over the past couple months. The blow-off gap-up opening and reversal on the Monday of the previous week hinted at a possible decline in the froth in the weeks to come. The strength in Tech last Monday gave hope to the speculators that the prior week’s weakness was a fluke. That was followed by another blow-off and reversal this past Tuesday. It all suggests that many of those mega-cap Tech stock leaders may now be entering a period of consolidation and perhaps even a little retracing.
The NASDAQ 100 Index (NDX), which is composed of the largest non-financial NASDAQ stocks, might be the single leading index to watch for signs of deterioration. On the market’s rally early last week, NDX failed to climb above the previous week’s high. If NDX drops much below last week’s low near 4440, then the weakness is likely to spread to other sectors. Another high-flying index that is likely to parallel the action in NDX is the NYSE FANG-plus Index (NYFANG). It’s an indicator composed of just ten tech companies, but it includes many of those mega-cap tech names.
The rally in precious metals has been supported by trends in two other markets. A weaker U.S. Dollar is bullish for prices of any commodity that trades in Dollar terms. Since peaking in March, the Wall Street Journal U.S. Dollar Index has been heading south. That index ended Friday at its lowest level in more than a year-and-a-half. Lower interest rates can also help precious metals. Gold and silver don’t pay dividends, so, with lower rates, there’s less of an opportunity loss from holding the metal versus an income producing stock or bond. The yield on the benchmark 10-Year Treasuries has been near historic lows for much of the past four months. But, since that yield hit 0.9% in early-June, it too has headed south. By week’s end, the Ten-Year rate had fallen to 0.587%, its lowest level since early-March.
Traders will be watching for signs of progress in the negotiations on another fiscal stimulus package. Congress is expected to unveil a follow-on bill by the end of the month; that’s when most of the supplemental payments to unemployed workers that began in April are due to expire. The total package could amount to anywhere from $1 trillion to as much as $3 trillion in additional fiscal stimulus. It seems that the current market expectation is for a package totaling around $1.5 to $2 trillion. It also seems that the market has little expectation that Congress will reach an agreement any time before about 11:58 pm EDT on Friday.
This week brings the greatest number of quarterly reports in this earnings season, including more than a third of the SPX component companies. We’re likely to see some isolated fireworks every morning of the week. The list of the scheduled economic reports, while lengthy, is unlikely to set off any explosions. Traditionally, the wrap-up of the Fed meeting has been known to ignite spurts of volatility, but this time around the policy announcement is likely to be a dud. Any news of agreement and passage by Congress of a new stimulus package could ignite the market, but for the reasons noted above, I think that news has a very long fuse.
|Monday 7/27/2020||Durable Goods Orders, June, M/M||+15.8%||+6.5%|
|Dallas Fed Manufacturing Survey, July||13.6|
|Tuesday 7/28/2020||S&P Case-Shiller Home Price Index, May, M/M||+0.3%||+0.5%|
|Consumer Confidence, July||98.1||95.7|
|Wednesday 7/29/2020||International Trade in Goods, Trade Deficit, June||$74.3B||$74.3B|
|Wholesale Inventories, June, M/M||-1.2%||+0.2%|
|Pending Home Sales Index, June, M/M||+44.3%||+5.2%|
|State Street Investor Confidence Index, July||94.3|
|FOMC Policy Statement and Press Conference|
|Thursday 7/30/2020||Initial Jobless Claims||1,416K||1,388K|
|Real GDP, Q/Q, SAAR||-5.0%||-35.0%|
|Friday 7/31/2020||Personal Income & Outlays, Income, June, M/M||-4.2%||-1.0%|
|Personal Income & Outlays, Spending, June, M/M||+8.2%||+5.6%|
|Employment Cost Index, Q/Q||+0.8%||+0.6%|
|Chicago PMI, July||36.6||42.8|
|Consumer Sentiment, July||73.2||73.2|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.