Powell Speech In Focus As GDP, Jobless Claims Meet Expectations, But Keep An Eye On Volatility

Key Takeaways:

  • Weekly jobless claims, quarterly GDP estimate come in near expectations
  • Late surge in volatility yesterday despite record SPX SPXC highs could draw attention
  • Powell speech gets underway and is likely to be the main focus early

This morning is like an all-you-can eat breakfast buffet. Scoop up some protein with a speech by Fed Chairman Jerome Powell, the latest word on initial jobless claims, and an updated gross domestic product (GDP) estimate from Washington.

Anyone trading today should consider treading carefully. Besides the fact that stocks had a lower tone ahead of the open and all this news is hitting the market, there’s also been a spike in volatility (see more below). Sometimes a volatility surge in the middle of a stock rally has spelled trouble, though there’s no guarantee.

Powell began his speech right before the opening bell, meaning he’ll likely be the primary focus early. You don’t need to be told his words can be influential. Media reports say he’s likely to talk about inflation and what may be an evolving policy where the Fed lets inflation go above 2% at times without trying to hammer it down immediately. Consider paying close attention to anything specific he might say about how this could affect the Fed’s approach to rates in the future.

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Before Powell’s speech, investors got the latest read on unemployment. Initial new jobless claims last week came in exactly as Wall Street had expected at 1 million on the dot. The prior week’s number got revised down a smidgen but remained near 1.1 million, and continuing claims fell a bit.

The numbers might not influence the market much because they came in so close to expectations, and of course it’s good to see them fall. Still, the report reflects a lot of suffering still out there, and there’d been hopes the numbers would be lower by now.

Another number this morning is negative-31.7%. That’s how much the government estimates GDP slipped in the horrid Q2. It’s a slight improvement from the first estimate of worse than 32%, but with numbers this bad, it’s hardly worth a celebration.

In sum, there’s not a lot to chew on here with your coffee. Nothing really jumps out of the data as a major surprise, so maybe it’s back to watching Powell and volatility.

Tech Back in Driver’s Seat

Lately, it feels like every time other sectors try to steal some thunder from Information Technology, the Tech sector storms back as if to say, “Hey, look at me!”

It certainly seemed that way Wednesday, as gains not only in Info Tech but also in Communication Services—home of a couple major FAANG stocks sometimes grouped with Tech—helped the overall market set new record highs. The Nasdaq NDAQ (COMP) starts today on a five-session win streak, so we’ll see if that can keep going.

Earlier this week, Tech took a brief back seat amid some bullish rumblings in so-called “cyclical” sectors like Financials and Industrials. At that time, some analysts started talking about a possible rotation, and that didn’t seem like such a wild prediction.

After all, Apple AAPL (AAPL) and Tesla TSLA (TSLA)—two of the leading Tech names (though TSLA is actually grouped in Consumer Discretionary)—had recently posted meteoric gains after announcing stock splits. With the splits becoming facts on the ground this week and next, and major Tech earnings pretty much over, there was a sense that maybe Tech would cool off and make room for other sectors to have their day in the sun.

That still could happen, but maybe not yet. When something works, investors often keep doing it. They haven’t really been punished yet this summer for scooping up more Tech shares, so the trend could potentially continue.

One question is how much more buying interest there might be in stocks like AAPL, Facebook (FB FB ), and Amazon AMZN (AMZN) after the wild rides they’ve all had. AAPL seems to be slowing a bit, but FB and AMZN were cooking on Wednesday.

So was Salesforce CRM (CRM), whose shares rose an amazing 26% after a double-victory this week of better than expected earnings and the announcement of its inclusion soon in the Dow Jones Industrial Average ($DJI). It’s hard to imagine a better week than that, and investors are rewarding shares about the way you might imagine.

It goes to show you that if a company exceeds estimates and puts out strong guidance, investors tend to jump in. That might sound elementary, but it’s not always the case. Some recent earnings seasons have seen certain companies’ shares beaten down despite bullish quarterly numbers and forecasts, hurt perhaps by hopes for even better. Maybe with the pandemic slowing things down so much, it’s enough for investors to see a company meet expectations and post any guidance at all, since so many haven’t been able to do that. CRM went way above and beyond just meeting, however.

Treasury Weakness Could be a Warning for Tech

The Treasury market came under pressure this week ahead of Powell’s speech, leading some analysts to say it might reflect a sense that the Fed could signal being more comfortable with higher inflation. Others say Treasuries got hurt by strong data, including Wednesday’s durable goods report and Tuesday’s new home sales. Consumer confidence was the outlier so far this week, perhaps starting to show some worries as government stimulus winds down.

If there’s a silver bullet out there that could pierce the Technology rally, it’s possibly that yields have been creeping higher. Many analysts agree that the current low yields, accompanied by a weaker dollar, have helped spur this “risk-on” move by many investors into “growth” sectors like Tech, including the FAANGs, cloud, and semiconductor stocks. If yields start to move steadily out of the low range they’ve been in mainly between 0.6% and 0.7%, we’ll have to see if the growth sectors can keep gaining ground.

Some also point to historically high valuations for stocks like AAPL and TSLA, questioning not necessarily how justified they might be, but whether new investors will want to jump in at current prices. That remains to be seen, though both saw separate analysts raise their price targets Wednesday. The splits that make their stock prices seem relatively affordable for more investors might also help keep the rally going, though in the past that hasn’t been a slam dunk for companies that split their stocks.

No one in the last year or two who predicted weakness for either AAPL or TSLA has been proven right so far, and there’s a growing sense that AAPL, at least, has become the kind of stock many want to hold for perceived safety and stability. That said, no equity investment is ever truly safe or stable, and AAPL has suffered long dry periods in the not so recent past.

From a fundamental standpoint, there’s still a lot of excitement around 5G and the cloud helping drive Tech, while the pandemic shutdown continues to add to investor enthusiasm around chip companies that help power our hand-held devices and video games.

Correction on Horizon for SPX? Looking at the broader picture, the SPX might be in territory where it’s at risk of a technical correction, according to research from Briefing.com. The firm noted that the SPX is up nearly 59% from its March low, and is 13% above its 200-day moving average. Momentum could mean continued gains for now, but history tends to show that being this far above the 200-day can bring selling pressure.

Also, the market still seems top-heavy, with high-market-cap Tech and Communication Services stocks powering along while those other sectors we talked about earlier just tread water. For instance, Wednesday saw declining issues far outnumber advancing ones at both the New York Stock Exchange (NYSE) and Nasdaq despite overall gains in the indices (see chart above). That could be something to keep a close eye on in coming days, because things often go back to equilibrium in the longer run.

In a related note, the CBOE Volatility Index (VIX) jumped 5.6% Wednesday and settled at 23.27. This included a surge higher for VIX into the close despite record highs for equities. While it’s possible VIX is a blip, there have been times recently when a VIX rally in sync with a stock market rally has spelled trouble for equities. This happened in early June, for instance, right before the market plunged 5%. Past isn’t precedence, obviously.

Talking Tech: The coming inclusion of Salesforce (CRM) in the $DJI might simply reflect the world we live in where Tech is so big a part of everyone’s lives. If you look at the stocks that are actually driving the rally and the companies that everybody is using, it really is a technology-leading society at this point, especially with COVID.

On the other side of the coin, any Tech stock whose results disappoint might get punished even more than usual, because the thought could be, if you can’t succeed now, when can you? Tech earnings are few and far between for a while, though Oracle ORCL (ORCL) is expected to report early next month.

Speedy Delivery: Earlier this week we noted that shipping companies have been the main tailwind behind the recent strength in the Dow Jones Transportation Average ($DJT). Airlines not so much, as most of those stocks remain well below their 2020 highs.

When shipping companies do well, it often reflects underlying economic strength. Obviously, if airlines continue to struggle because unlike shipping companies and freight railways, they have to deliver passengers. That comes with far more complications in these COVID-19 days. You don’t have to tell a package to put on a mask before boarding.

As the economy opens up and people start feeling a bit less uncomfortable with the idea of travel, it might be a boost for regional airlines vs. international. A one- or two-hour flight could be more appealing to some tourists than an overseas trip, and many countries aren’t allowing overseas visitors, anyway.

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

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