Without Apparent Progress On Stimulus Talks, Stocks Take A Breather Amid Summer Vacations

Key Takeaways:

  • U.S. retail sales data show 1.2% rise in July
  • Chinese retail sales, industrial production figures disappoint
  • Apple AAPL hits record high after news of Amazon AMZN Prime-like bundles

Those hoping to wake up to a different vibe for the trading day this morning may have been disappointed as stock index futures charts looked pretty similar to yesterday’s indices.

The market seems to be in a holding pattern at the moment as participants continue waiting on a stimulus deal from Washington, where lawmakers don’t seem to be making all that much progress. The S&P 500 Index (SPX) pulling back from a record-close hasn’t helped sentiment much, nor did news overnight that Chinese industrial production rose at a slower-than-forecast clip and retail sales there unexpectedly fell.

Back home, the Commerce Department released mixed retail sales data. The headline number came in up 1.2% versus Briefing.com consensus of up 1.8%. Ex-autos, however, retail sales were a tad stronger than expected—up 1.9% vs. consensus estimate of up 1.4%.

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The lackluster trading in equities comes as the Treasury department has been issuing high levels of U.S. government debt, perhaps sucking up some investment dollars that might otherwise have been deployed in the stock market.

And, despite the pandemic, summer vacations may also be keeping volumes on the low side. That can contribute to subdued trading when there isn’t much in the way of headlines, especially as corporate earnings reports trail off. But low volumes can also make for choppier-than-normal trading when news does break. 

Investors may want to monitor the headlines over this weekend when trade talks are scheduled between the U.S. and China. The talks are meant to gauge China’s compliance with the phase one trade deal, but the relationship between the world’s two largest economies has been strained over issues including Hong Kong, TikTok and WeChat.

Watching Beige Paint Dry

Unless you’re a short seller, a boring day is probably better than a huge rout. That’s probably the silver lining for other types of investors about Thursday’s mostly-sideways trade—that it was better than a selloff.

Although the SPX traded above its record finish of 3,386.15 from February, it couldn’t hold that level and ended the day slightly in the red, as did the Dow Jones Industrial Average ($DJI). The tech heavy Nasdaq Composite (COMP) closed in positive territory, but it still wasn’t much to write home about.

A Treasury sale on Thursday that didn’t see stellar demand seemed to keep a lid on things for the equities market.

The stalemate over the next round of government stimulus continued in Washington, leaving investors without a catalyst to move stocks meaningfully higher or lower. Wall Street participants have been hoping for another round of financial aid for Main Street to help goose consumer spending and help corporate bottom lines as the pandemic drags on.

Plus, the bulk of earnings season is behind us—though some, such as retail and home improvement will be reporting in the coming days (see more below). And though Fed governors are on the speaker circuit these days, the central bank’s board is on hiatus until mid-September. In other words, even in this crazy year, we might get some semblance of the “dog days of summer.” Though the Cboe Volatility Index (VIX) ticked up this morning, in recent days it’s been drifting closer to the 20-mark—historically seen as a line between “normal” and “elevated” risk. The VIX hasn’t ticked below 20 since February. 

Tech-Related Companies Outperform

Aside from Amazon (AMZN), which ended slightly lower, it was a more upbeat day for the FAANG stocks, as Facebook (FB), Apple (AAPL), Netflix NFLX (NFLX), and Alphabet’s (GOOGL) Google all outperformed the COMP.

AAPL was the best performer, gaining 1.77% and hitting an all-time high after Bloomberg reported the iPhone maker is planning digital services bundles to encourage customers to subscribe to more Apple services.

The move comes after Apple announced a four-for-one stock split to make its stock more affordable to average investors. Investors seem to be interested in being more involved in companies they know and like—and whose products they use every day—and the split is likely helping more retail investors get involved.

And now that Tesla TSLA (TSLA) has announced its 5-for-1 split—which helped touch off a fresh rally in its shares—analysts are looking at the other big tech companies whose shares have advanced to levels unreachable for many retail investors. Might we see similar moves from GOOGL or AMZN in the coming days? Or will they be more like Berkshire Hathaway BRK.B (BRK.A), which CEO Warren Buffett has said will never split, and whose shares trade for over $300,000 per share? 

Economic, Earnings Calendar

Looking ahead, next week is relatively light in terms of economic data, but there are a few reports investors may want to keep their eye on. Those include July data on housing starts and building permits, another round of weekly unemployment figures, and an existing home sales report for July.

The earnings report calendar is also relatively thin, but there should still be plenty to keep investors interested.

In tandem with the housing market reports next week, quarterly results from Home Depot HD (HD) and Lowe’s (LOW), could also shed some light on the housing market. Deere (DE) could be interesting to watch to see how farmers are doing. A bevy of retailers, including Kohl’s KSS (KSS), Target TGT (TGT), and Walmart WMT (WMT), could provide some additional clarity on the state of the U.S. consumer. And NVIDIA NVDA ’s (NVDA) report might show how the work-, play-, and learn-at-home trend is progressing.

The State of Claims: In economic news yesterday, weekly unemployment claims fell to fewer than one million for the first time since the coronavirus-sparked economic crisis began. The number, which dropped more than expected, may have been affected by eligible people not applying for state unemployment benefits because the extra weekly $600 federal benefits expired at the end of last month. Even though the weekly figure is still astronomical compared with pre-pandemic levels, a sub-1-million number is still movement in the right direction.

Consumer Inflation: Speaking of movement in the right direction, this week’s consumer price index numbers may have made some investors perk up. Both the headline and core figures rose at a higher-than-expected clip of 0.6% in July. Is this a sign that we’re getting inflation at the consumer level instead of just in asset prices such as stocks and houses? Although one data point isn’t a trend, especially in these extraordinary times, a continued move higher in inflation for everyday folks would be a welcome sign as it would be an indicator of a recovering economy. It could also (eventually) be a game changer for Federal Reserve monetary policy, which probably wouldn’t be welcome in some sectors of Wall Street but would be a boon for savers on Main Street as well as banks that have been struggling under extremely low interest rates. Still, it seems we have a long way to go before the Fed begins thinking about raising rates (or, in the words of Chair Powell, thinking about thinking about it), as much of the economic recovery is still very much in the green shoots category.

Profit Center Decimated, but Banks Roll with Punches: One sector that still requires special care is the Financials sector. Banks remain very tied to rates. If your philosophy is to buy bank stocks, you might want to widen the time horizon and not look at them every day. They’re still trying to find their footing and are likely to see a lot of stops and starts. If bank shares do catch fire, as they seemed to be early this week, that could help market momentum because healthier banks often tell you the economy is getting healthy. Even now, with all the challenges over the last five months, the largest banks have managed things pretty well. Just think about it. Their biggest input for profits (net-interest margin) has been decimated, but the stocks have hung in there because so many have found other ways to make money and have done such an amazing job of cutting expenses.

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

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