Having It Both Ways: Investors Bid Up Stocks On Treatment Optimism, But Treasuries Stuck

Key Takeaways:

  • More green early on as investors seem enthused about possible virus progress
  • Fixed income stuck in place, possibly reflecting a little caution
  • Travel, leisure stocks get into the act early on hopes of progress in reopening

The week starts with a bit of a head-scratcher. The major stock indices are flying on hopes for new tools to fight COVID-19, but fixed income is stuck in place.

The 10-year yield ended last week at 0.64%, and then made a dramatic move all the way to 0.638% as of an hour before the opening bell. Let’s call it basically unchanged. This might be reflecting a little reluctance by many investors to rotate more heavily into stocks than they already are. Maybe people are shifting the deck a little within their equity portfolios, but not from fixed income into equities. This kind of caution could suggest the early stock market rally isn’t completely unchained.

Mega-caps continued to move higher in pre-opening bell hours, this time with a little company. Airline, hotel, and casino stocks have some wind in their sails early on, which could be related to a weekend announcement that the U.S. Food and Drug Administration (FDA) will allow expanded use of blood plasma to treat hospitalized coronavirus patients.

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As with all things virus-related, it’s important for investors to take this with a grain of salt. Plasma isn’t a magic bullet, and it’s not something that can be produced like widgets on a production line because its supply depends on blood donations. Still, anything that might help sick patients is good to hear.

AstraZeneca (AZN) is also making early gains after media reports said the Trump administration is considering fast-tracking its vaccine.

In the commodity arena, crude futures are up a bit as hurricane worries in the Gulf of Mexico start to increase. We’ll see what happens there, but any rise in crude is potentially supportive for the battered Energy sector.

Time to Split, Tesla

The most interesting stock to watch this week might be Tesla (TSLA). Shares have exploded 50% since the company declared a stock split Aug. 11, rising 24% last week alone. At one point Friday, TSLA came close to $2,100 a share as investors took advantage of their last chance to be shareholders of record ahead of the split this Friday.

This is a momentum trade, and TSLA could be heading into a period of volatility as investors figure out what to do with the split. The easy thing to say is that shares are out over their skis, but betting against TSLA hasn’t been a winning strategy most of this year.

Something to be said in favor of the split is that a retail investor with, say, $2,000 to spend and wanting to get into TSLA, can only buy one share at that price. This potentially limits their ability to manage the trade. They only can sell their entire stake or hold on. If, on the other hand, they have five shares at $400 each and want to take a bit of profit but stay in the stock, they can sell two or three shares and not have to punt the entire position. This is potentially a helpful development for retail traders.

Apple AAPL (AAPL) is another stock about to split (on Aug. 31) that’s been going nowhere but up lately (see more below). Today is the last day investors can get into the stock and be eligible to quadruple their share count as of next Monday (though the 4-for-1 split means no change in value of those shares), which might drive some strength. The Nasdaq NDAQ (COMP) had an incredible week last week mostly thanks to TSLA, AAPL, and chipmaker Nvidia NVDA (NVDA). A lot of companies in Tech, including NVDA, are reporting really nice earnings and projections, so you can’t chalk all of this up to simple speculation.

Also, one more word about TSLA. Whatever you might think of all the hype around it or its stunning stock market move, has really made some fundamental progress as a company this year by meeting and exceeding production goals and improving cash flow. Also, TSLA’s price-to-earnings ratio is on the high side, but so are the P/Es of many other Wall Street darlings this year.

Is Recess Already Ending?

One trend we’re watching this week sounds like the title of one of those old 1950’s horror movies: “Return of the Quarantine.” Not that we’re necessarily going to have a mass shutdown again, but some indications from Wall Street at least suggest the “stay-at-home” stocks coming back to the theater.

Zoom (ZM), a stock we haven’t talked about much lately, is up 25% over the last two weeks. This could either be people thinking we’re going back inside, or maybe a sideline of kids going back to school and spending most of their days on the site.

Housing is another reason to think about the “stay-at-home” trade. Just about all the housing data last week, including building permits, housing starts, and existing home sales, pointed toward people embracing home and hearth as the pandemic continues. Shares of homebuilders Toll Brothers TOL (TOL), D.R. Horton (DHI), and Lennar LEN (LEN) all rose more than 3% Friday.

More housing data are due tomorrow as new home sales for July hit the tape. Only a small gain from June is expected, according to analyst consensus from Briefing.com, up 10,000 to a seasonally-adjusted 787,000.

Also tomorrow, TOL is expected to report earnings after the close, so that could give investors more information on housing. There’s generally a low inventory of home, and demand seems to be rising, especially considering so many reports of people leaving cities for the suburbs in these times of social distancing.

Retail dominates earnings this week with Best Buy BBY (BBY). Dollar General (DG DG ), Dollar Tree DLTR (DLTR), Nordstrom JWN (JWN), and Gap GPS (GPS) all expected. Kohl’s KSS (KSS) got kicked around last week, as department stores just can’t seem to get out of their own way.

One important Tech company: Salesforce CRM (CRM), also is expected to report after tomorrow’s close.

Outside the corporate world, another highlight this week could come Thursday morning, when Fed Chairman Jerome Powell is scheduled to deliver a speech titled, “Monetary Policy Framework Review.” This is part of the Fed’s Jackson Hole symposium, which is nowhere near Wyoming this year, unfortunately for lovers of hiking and alpine scenery.

A Bit More Balanced: Most investors and traders turn to the SPX SPXC to get an idea of how the overall market is performing. But it is a weighted average with five companies—Apple (AAPL), Microsoft MSFT (MSFT), Amazo AMZN n (AMZN), Alphabet (GOOGL), and Facebook (FB)—making up about 25% of its market cap. So even though SPX closed at a record high, only a handful of stocks are close to their own all-time highs. If you look at it from a sector perspective, according to a CNBC report, the Energy sector, banks, and Industrials are about 41%, 35%, and 11% off their highs, respectively. 

This wide disparity between the heavily-weighted stocks and the rest of them that make up the index can be seen when you compare the SPX with the S&P 500 Equal Weight Index (SPXEW), where components are weighted more equally. SPXEW is over 7% away from its record high (see chart above) and has yet to reach its June high of 4585. So once in a while, if SPX is making extreme moves, it doesn’t hurt to compare it with SPXEW, just to get a different perspective.

Volatility in the Mix: Investors might want to keep an eye on volatility this week, as it remains relatively high. The Cboe Volatility Index (VIX) finished Friday in the 22.5 area, which kind of split the difference between recent highs and lows. However, you might think it would be going down more considering the SPX is at an all-time peak. There’s been no real attempt to push VIX back below 20, which would put it back near its historic average.

This relative strength in VIX could partly reflect how concentrated the market is, with the FAANGs and MSFT dominating the SPX in terms of value. Such a top-heavy situation might have some investors nervous, especially when you consider recent developments like U.S./China tension and regulatory issues some FAANGs face with Congress.

Any news that knocks FAANGs off their pedestal could really hurt the SPX. Financials, the second biggest sector after Tech, got roughed up last week and are one of the worst performers year-to-date, so it’s not looking like they could come to the rescue in a Tech selloff. Another VIX issue could be election jitters. If you look at Cboe futures, they’re projecting volatility to rise pretty substantially as we move through October and toward the Nov. 3 election. This could be something to watch as we move forward. Summer doesn’t last forever.

Buy American? Industrial giant Deere DE (DE) reported Friday and had a monster day, up more than 4%. What might be worth watching with DE and other multinationals like Caterpillar CAT (CAT) now that earnings are over is the impact of the falling U.S. dollar, which makes U.S. goods cheaper overseas. The dollar index climbed back above 93 on Friday but remains way below this year’s highs of above 100.

The other side of the coin is how the softer greenback might negatively affect small-cap stocks in the Russell 2000 Index (RUT). If all of a sudden American goods are looking better and better internationally, investors might decide RUT is a little less attractive because it’s more reflective of the domestic trade.

The gap between COMP and small-caps in the Russell 2000 (RUT) got wider last week, continuing a trend that’s been going on for a while now. If the trade war with China heats up, however, that could give RUT a little more of an advantage, since smaller companies tend to be more domestic in their sales.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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