- Rational Exuberance? Indices Rally And Volatility Ebbs, But Caution Is Still In Play
- Dollar Gains as British PM Enters ICU
- Retail Investors Have Their Say
- Final Thoughts on Jobs Data
- Schwab Market Perspective: Moving, With Bottlenecks
- U.S. stocks and economy: Moving, but with bottlenecks
- Global stocks and economy: Different speeds
- Fixed income: Real rates are on the rise
- Caution Ahead? Five Warning Signs a Stock Might Not Be a Good Buy
- Failure to Meet Numbers
- Weakness vs. Peers
- Trend Isn’t Always Your Friend
- Poor Chart Action
Rational Exuberance? Indices Rally And Volatility Ebbs, But Caution Is Still In Play
- Markets look to build on Monday’s rally as focus squarely on case numbers
- Lack of major data, earnings means market could remain headline-driven, volatile
- Major indices closing in on 20% gains from late-March lows, led by Info Tech
Hope occupies the driver’s seat this morning as investors around the world eye the latest virus numbers and seek light at the end of the tunnel. However, it’s important not to get carried away by all this exuberance.
These rallies are amazing, but the key is keeping it in perspective. U.S. cases continue to grow, and reports say we’re still on the “uphill” side of the virus count. Let’s not get too excited until we’re definitely on the “downhill” side of things. It’s not uncommon to see sharp but short-lived rallies in a bear market.
U.S. stocks look poised to build on Monday’s steep rally, following the lead of markets in Europe and Asia as bulls grip the wheel for the second day in a row. The major U.S. indices are closing in on 20% gains from their March lows, and Treasury yields are on the rise.
Stock futures reversed early losses to climb sharply before the opening bell. Crude oil looks it could be building a base and getting away from those low-$20s readings of March. It’s hard to say here if crude is driving stocks or vice-versa.
Overseas, the virus numbers looked a little better early Tuesday, especially when you hear about no new deaths in China, and Spain and Italy reporting lower fatalities. New York State’s data show signs of deaths plateauing. All of this is playing into the market’s early strength, but investors might want to be careful about being swept up in the frenzy.
This is still a volatile market that could move sharply in either direction depending on the latest headlines. Anyone thinking of trading might want to keep trade sizes lower than usual and remember the importance of dollar-cost averaging.
We’re between major earnings and data releases, which sometimes can mean more volatility as people have little to focus on other than the latest virus headlines.
Still, the light schedule isn’t necessarily a bad thing for now, considering that earnings and data are ly to remind investors how much economic damage transpired over the last quarter or so.
In just a week the schedule gets a lot busier when big banks approach the earnings season starting line.
Dollar Gains as British PM Enters ICU
The U.S. dollar gained ground late Monday in what looked a response to news of British Prime Minister Boris Johnson being moved to intensive care for coronavirus. The pound tanked against the dollar last month as investors flocked to the greenback in the first phase of the economic crisis, but had been clawing back a little over the last week.
The dollar index moved back above 100 last week after burrowing below it for a few days in late March. Despite all the U.S. fiscal and monetary stimulus that would ordinarily weigh on the currency, it’s still attracting investors trying to find solid ground, apparently. Gold also rallied early Tuesday, a possible sign of caution.
The sad news about Johnson’s illness didn’t seem to spook U.S. stocks much, though. They powered higher Monday in another huge rally, led in part by semiconductors and the Utilities sector. Semiconductors climbed more than 10% Monday amid rallies for some of the big names there including Nvidia (NVDA), Advanced Micro Devices (AMD) and Micron (MU).
Semiconductors also got help from a couple of upgrades, including one to Intel (INTC) and another to Lam Research (LRCX). Right now, semiconductors seem to be acting kind of a leading economic indicator.
When they do well, it’s probably a sign of investor confidence in a quicker economic recovery. That’s because these chips are components in so many of the electronic devices everyone uses all the time.
Bigger demand for them is a canary in a coal mine.
Semiconductors weren’t the only stocks getting a lift yesterday. Boeing (BA) gained more than 19% to lead the Dow Jones Industrial Average ($DJI) higher. Raytheon (RTN), American Express (AXP), and Visa (V) rose more than 11% each. Retail stocks, including department and clothing stores, also rose sharply.
On the other side, Consumer Staples lagged the rest of the Street on Monday. Stocks Kroger (KR) and Clorox (CLX) rose, but trailed the cyclical sectors.
As we’ve seen often through this volatile stretch, it’s the Staples that people cling to when they’re worried, but those stocks get less popular when a “risk-on” day Monday happens. That risk-on/risk-off psychology changes the weather.
You never know what you’re going to get on any given day, and it’s a very headline-driven market.
The Cboe Volatility Index (VIX) has descended dramatically from highs above 80 last month to around 45 by the end of the day Monday, so that’s a hopeful development for anyone tired of these wild moves.
From a technical standpoint, you could call Monday’s gains constructive. They took the S&P 500 Index (SPX) above a resistance range between 2630 and 2640 that had been in place for almost a month.
The closing level was higher than any in almost a month, and now you can see another channel of resistance up a little higher at 2700. That’s not just a psychological level. It also isn’t far from a 61.
8% retracement of the rally from the December 2018 low to the February 2020 high.
If you’re thinking 200-day moving average, maybe don’t get too excited yet. At 3,019, it’s still more than 300 points above where the SPX closed Monday. The market has to learn to crawl before it can run.
Retail Investors Have Their Say
According to the Investor Movement Index® ($IMX), a proprietary, behavior-based index created by TD Ameritrade to indicate the sentiment of retail investors—TD Ameritrade clients were net buyers of equities last month. Much of the buying, however, was away from high-beta stocks and into large-cap SPX stocks with healthy balance sheets.
Some of the stocks showing inward flows included Exxon Mobil (XOM), Disney (DIS), and Ford (F) (which is a low-priced stock, so perhaps a cheap “take a shot” stock). There was also some interest in Boeing (BA). Interestingly, clients were net sellers until mid-month, when it was as if they flipped a switch and turned to net buyers.
Overall in March, retail traders tracked by IMX were attracted to companies that have previously weathered storms. Looking ahead, there’s a lot we don’t know, from the continued impact of the COVID-19 pandemic to the potential lift provided by the recently passed economic stimulus package.
After the last quarterly options expiration, many clients didn't re-up on their hedge trades. Perhaps they were taking some of the froth off the VIX. They may have been waiting to see before reinitiating hedge trades. With VIX as high as it’s been, the cost to hedge is quite high.
Millennials were among the first to move back into cruise lines Carnival (CCL) and Royal Caribbean (RCL), and also into Uber (UBER).
That age group might be the first to jump back into these places (as consumers) once the coronavirus pandemic abates. But net, Millennials seem to have scaled back some risk.
Remember: This is the first real pullback many of them have seen in their investing lives. But since they're long term investors, many understand the need for equity exposure.
Final Thoughts on Jobs Data
Last Friday’s jobs report already seems ages ago, but it’s not too late to make a few final observations to tuck into your pocket and glance at again when the next one approaches.
It’s no shock that leisure and hospitality lost jobs. However, the one that was a little surprising was seeing job losses in healthcare and social services.
Why would these sectors see declines? It’s probably the social services side of it more than healthcare because they probably just had to shut down, where we know healthcare is an essential need in this crisis.
The health and social services sector could be an interesting one to watch in the April report to see if all those people coming back into healthcare from retirement caused job growth there.
On another note, some people might have been confused to see overall average wages rise across the economy, considering the current situation. That’s not surprising when you consider that restaurant and bar jobs are gone and those tend to have lower wages more reliant on tips.
Small businesses create most of the jobs in the economy, and they could get help from a Fed move announced Monday. The Fed announced the establishment of a facility that will purchase small business loans that are guaranteed by the White House's Payroll Protection Program (PPP).
CHART OF THE DAY: WAVING THE YELLOW FLAG: The S&P 500 Index (SPX–candlestick) may have veered off … [+] course from forming a classic pennant pattern (yellow triangle) but it looks it’s back on track. SPX just broke a short-term resistance level (horizontal yellow line).
If SPX continues moving up and stays above this resistance level, there’s a chance resistance could turn to support and SPX could bounce off the 2630 level. But there may be caution ahead–something to look out for. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only.
Past performance does not guarantee future results.
Chart source: The thinkorswim® platform from TD Ameritrade.
Fasten Your Seatbelt: Hopefully you did that a while ago, with your tray in the upright position. This bumpy ride has probably felt even more nauseating if you boarded it with some airline stocks in your portfolio, and smooth air might be a ways off, even with some travel shares bouncing Monday.
The airline sub-sector of the SPX starts reporting pretty early in earnings season, and the predictions look about as bad as you might think. For instance, research firm CFRA put out a note Monday that projects Q1 airline earnings per share to nosedive nearly 211% from the same quarter a year ago. Of all the sub-sectors, only department stores and copper-mining companies are seen doing worse.
On a related note, Delta (DAL) said Monday it expects Q2 revenue to be down 90%.
If you’ve held onto your airline shares through this rough weather, is there any hope? Well, think of it this. Airlines are part of our country’s infrastructure, and it’s not in the country’s best interest to let these companies fail. We need them to do business, so they’re going to continue to be supported by the government.
If you’re in it for the long-haul and not looking for a “quick pop,” major travel companies, including airlines, eventually could conceivably recover a bit from the stall they’re in. Still, people may stay home longer than expected, so there will be volatility in the short-term.
Eventually, though, the stay-at-home-orders are going to come off.
How to Determine Value Here? It’s Complicated: One confusing thing that’s ly added to recent wild market swings has been figuring out a fair way to value stocks as earnings suddenly stand on shaky ground.
That makes it hard to put a number on 2020 earnings per share for the S&P 500, but many analysts now seem to think no growth or slightly negative growth from a year ago is ly. Research firm FactSet, for instance, now sees 2020 earnings per share (EPS) falling 1.2%, compared with its initial estimate for 10.4% growth.
If EPS is ultimately down from a year ago instead of flat, there could be more room to move lower in the SPX from a valuation standpoint.
That’s not what people necessarily want to hear. Since we’re stressing the positive, let’s note that at the current SPX level, and assuming unchanged 12-month forward EPS, the SPX has a price-to-earnings (P/E) of around 16.
That’s near historic averages and down from nearly 20 at the recent all-time highs, which many analysts thought looked pricey.
So a lot depends on the crisis not lasting long enough to punish earnings more than they’ve already been.
Looking Backward to Look Forward: Another way to check value is to look back to previous years of earnings instead of relying on unclear 2020 forecasted earnings.
Before Monday’s sharp rally, the so-called cyclically adjusted price-to-earnings (CAPE) ratio—which measures real stock price divided by a 10-year average of real earnings—was significantly lower than it had been earlier this year.
While still historically high at 23, it was down from 31 in January, according to an article in Sunday’s New York Times by economist Robert J. Shiller. The historical CAPE average since 1881 is 17. “From this perspective, the market looks on the expensive side, but not inordinately so,” Shiller wrote before Monday’s big gains.
“When the CAPE has been at such a level, it tends to show moderate positive, not disastrous, returns over the next 10 years.” Still, Shiller says he worries that current investor anxiety could ultimately lead people to become more risk averse, causing lower valuations for stocks in the long run.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
Schwab Market Perspective: Moving, With Bottlenecks
Listen to the latest audio Schwab Market Perspective.
U.S. economic growth is accelerating as vaccinations rise and social-distancing measures ease, but hopes for a long-lasting spending boom may hit a couple of speed bumps.
Vaccine rollouts in major countries are proceeding at different speeds, but stock market performance contradicts what vaccination data would seem to imply for investors.
Meanwhile, inflation-adjusted longer-term Treasury yields have risen as investors anticipate stronger economic growth.
U.S. stocks and economy: Moving, but with bottlenecks
With regional social-distancing measures easing, mobility is gathering steam and the path to a broader reopening is becoming clearer.
Many believe that the recent massive buildup in savings will be spent quickly as the economy broadly reopens.
However, we think it is premature to assume a long-lasting spending boom will emerge—not only because consumers’ spending habits may have become more prudent, but also because the math for a rebound in services is much different than for goods.
The additional COVID-19-related fiscal relief measures implemented in late 2020/early 2021 bolstered consumers’ finances. As you can see in the chart below, the personal savings rate (unsurprisingly) spiked higher after households were mailed a second round of checks at the end of the year.
Savings jumped after government stimulus checks were mailed to households
Source: Charles Schwab, Bloomberg, as of 1/31/2021.
The next round of aid—the recently-passed American Rescue Plan—includes $1,400 direct cash payments for individuals. Most people plan to save a bulk of this round of relief, followed by paying for food and housing expenses, according to a survey by Bloomberg and Morning Consult in February.
Many argue that these savings will be drawn down quickly as the economy reopens. However, pent-up demand in goods has arguably already been satisfied. The manufacturing sector has seen a marked improvement in demand and general sentiment.
As you can see in the chart below, the Institute for Supply Management’s Manufacturing purchasing managers index (PMI) has stayed firmly in expansionary territory, and in February reached its highest level since December 2018. The rebound has not come without caveats, though.
The prices-paid and supplier-deliveries components have surged, underscoring the disruptions businesses are still experiencing within supply chains.
Strong manufacturing sentiment, albeit with supply-chain issues
Source: Charles Schwab, Bloomberg, as of 2/28/2021.
U.S. stocks have come under some pressure recently, particularly given the rapid rise in the 10-year Treasury yield since the end of February. The Information Technology and Consumer Discretionary sectors have led to the downside, as investors continue to rotate into cyclically oriented sectors, given the prospects for rapidly-accelerating growth this year.
Stocks were arguably ripe for a pullback, given buoyant investor sentiment across nearly every metric.
As you can see in the chart below, SentimenTrader’s Panic/Euphoria Model had risen to a level not seen since the technology boom in the late 1990s, before recent market weakness brought sentiment down to a zone that historically has tended to be better (but not the best) for stock market returns.
A full washout in excessive optimism has yet to occur, and risks may persist if bullishness spikes again and/or market breadth deteriorates. Yet, as is always the case with sentiment, a negative catalyst is typically needed to accelerate stocks’ moves to both the upside and downside.
Euphoric sentiment has edged down from extremely high levels
Source: Charles Schwab, SentimenTrader, as of 3/5/2021. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Global stocks and economy: Different speeds
In February, markets moved to price in the potential impacts of stimulus and the recovery, while vaccine rollouts in major countries proceeded at different speeds.
The chart below shows vaccine doses administered as a percentage of the total population, revealing starkly different trajectories in these major countries since their first dose was administered.
The United Kingdom was the first country to start vaccinations and remains in the lead among major nations, followed closely by the United States. In comparison, the European Union is lagging and China is far behind, showing little progress through the Lunar New Year holiday.
Vaccination is progressing at different speeds
Source: Charles Schwab, Bloomberg data as of 3/2/2021.
The vaccine-led recovery is arguably the most important factor for stock markets around the world, making this divergence a clear signal to investors about where to shift focus and where to avoid.
But, as is often the case, investing isn’t that simple: The performance of the stock markets in these countries contradicts what the vaccination data would seem to imply for investors.
The best-performing stock market this year has been China, followed by Europe and the U.S.; the U.K. has posted the worst performance year-to-date.
Stock market performance is reverse of rollout progress
Source: Charles Schwab, Bloomberg as of 3/2/2021. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.
What drives this counter-intuitive outcome for the markets? China may be the easiest to explain. Its stock market is the best-performing in the world so far this year, even though the vaccine rollout lags other large economies by a wide margin.
China’s targeted public health policy of stringent case containment using public health measures during outbreaks has been effective.
This created little urgency for people to get vaccinated, while the economy has moved forward, unimpeded by broad-based lockdowns.
We aren’t suggesting the vaccine rollouts don’t matter; inoculations are very important to the global economy and markets. Rather, we point out that investors shouldn't get caught up in which country is “winning” the vaccination race.
Sales for global companies, which drive the major indexes, are dependent upon all major countries seeing a vaccine-led recovery in the second half of this year.
Although the UK leads in vaccinations, UK stocks get only about 23% of their revenue domestically and are dependent on foreign trade for the rest, as you can see from the chart below.
The path of vaccinations for the rest of the world is more important to the revenue of companies in the UK than domestic vaccination progress.
Global sales matter more than domestic
Revenue breakdown by country for MSCI United Kingdom Index
Source: Charles Schwab, FactSet data as of 3/3/2021.
We anticipate a ramp-up in vaccination progress in Europe in the coming months, which will contribute to its ability to reopen areas of the economy shuttered during the pandemic.
The EU has secured orders for more Pfizer/BioNTech and Moderna doses, while large European pharmaceutical companies without vaccine candidates are converting factories to produce vaccines from their competitors.
Strong earnings and a global economic recovery are expected later this year, prompted by mass immunizations.
Fixed income: Real rates are on the rise
Bond yields rose to the highest level in a year in early March on signs that the economy is bouncing back from the depths of the downturn last year.
Ten-year Treasury yields moved slightly above the 1.6% level, the highest level in a year. With the passage of the $1.
9 trillion fiscal stimulus package and the pace of vaccinations picking up, the markets are pricing in a strong economic recovery.
Most notably, real interest rates—bond yields adjusted for inflation—have been rising. After dropping to as low as -1.0% last year, 10-year real yields have moved up by about 35 basis points1 to -.0.65%. While still in negative territory, that’s a big move in a short period of time.
Rising real yields reflect optimism about the economic recovery. With the pace of the vaccine rollout picking up and another large fiscal stimulus package passed, markets are beginning to price in a return to more normal interest rate levels.
Caution Ahead? Five Warning Signs a Stock Might Not Be a Good Buy
When a highway ramp leads into oncoming traffic, warning signs keep drivers from going the wrong way. That usually gets the job done.
But when a particular stock poses danger, the signals aren’t always so evident. What might you consider to help avoid the stock market equivalent of two semitrucks bearing down on your portfolio?
Failure to Meet Numbers
First, find out whether the company you’re considering has issued any recent earnings warnings or failed to meet analysts’ earnings expectations more than once in recent quarters. Either may be a red flag.
Although no company can always perfectly predict how a quarter might go, it’s important to see that the firm has a decent track record of conforming with both its own and analysts’ expectations. Failure to do that might indicate either disorganization within the company or failure by company leaders to respond to changes in industry dynamics. You may not want that.
The other possibility is that the company might be in a very volatile industry that no firm could have much control over. That’s not always a bad scenario, because sometimes volatility can mean the chance for greater returns, but if you don’t a roller coaster ride, it might be better to stay away.
How can you check if a given company delivered on financial estimates over the last few quarters? Login to your account at tdameritrade.com, then click on Research and Ideas >Stocks >Profile.
Type in the company’s stock symbol, and from there choose the company’s profile page and hit the Earnings tab*. That tab gives an overview of the company’s recent earnings results, including how it performed versus analysts’ expectations.
There’s even a red mark on any quarter where the company delivered a negative earnings surprise, which will tell you by how much it missed expectations.
You might also want to check the Analyst Reports tab for the company, which can tell you how analysts are viewing quarterly performance, what issues the company faces, and whether analysts believe it’s on the right path to resolve them.
Weakness vs. Peers
Another important tab on the TD Ameritrade stock profiles page is one called Peer Comparison.
When you scroll down in this tab, it shows your chosen stock versus key peers in the industry, comparing them on the basis of important metrics such as earnings growth, price-to-earnings (P/E) ratio, and profit margin, among other factors. This data can help you smoke out possible danger signs in a stock.
“I always to compare stocks to others,” said Kevin Hincks, manager, trader contributor and host, TD Ameritrade. “Compare a stock to its sector and see how it’s doing compared to other stocks. Case in point: the P/E ratio. If the stock you pick has the highest P/E, maybe it’s not the best choice.”
“If you’re looking for value, a stock that has a P/E of 15 or higher or a dividend lower than 2.5% might present reasons for skepticism,” said Ryan Campbell, education content manager, TD Ameritrade.
Other warning signs might include lower profit margins than a company’s peers, a falling dividend yield, and earnings growth below the industry average. There could be benign explanations for any of these, but you need to do a bit more research and make sure they don’t point to any red alerts that might mean future share weakness.
Some danger signs might not be with the stock, but with you. The company may be doing nothing wrong, but if you invest hoping for major sales and earnings growth and accidentally choose a mature company in a mature industry, you’d own that mistake. The same is true if you buy shares in a company but don’t take time to really figure out what it does.
“If you don’t understand how a company makes money, you might want to re-think investing in it,” said JJ Kinahan, chief market strategist, TD Ameritrade. “You should understand how it makes money.”
Additionally, it helps to evaluate possible outside risks that even a solid company might face. Look into the industry a bit, read some recent news articles and analyst reports, and see if you sense danger signs.
Even if a company seems to be dominating its industry, you wouldn’t want to invest if it’s the equivalent of buying the best horse and buggy maker. Again, the Analyst Reports tab on tdameritrade.
com can help give you a sense of what’s driving the company and its industry.
Trend Isn’t Always Your Friend
It’s also important to understand your motivation for investing in a particular stock, because sometimes you may be letting emotions and perceptions get in the way of figuring out if it’s a good investment. This often happens when a stock is in a high-flying industry that’s getting a lot of attention and drawing excited investors. There’s often a sense of not wanting to miss out. But that’s another danger sign.
One example of investors investing emotionally was the so-called “dot.
com” boom, when many investors threw caution to the wind and leaped into Internet stocks without really figuring out how or whether these companies could ever generate cash flow or profit.
In some cases, investors loved the product they were using and may have decided the rest would naturally follow, but that’s a common fallacy.
“Just because they have a great product doesn’t mean it’s a great investment,” Kinahan said. “You have to do some research. As with anything worthwhile, you have to put in some work.”
Poor Chart Action
There are also some danger signs of a more technical nature that you might be able to see on charts, also available on the TD Ameritrade site.
For instance, experts often tell investors to try to buy a stock when it’s relatively cheap, although picking a bottom is never really possible. But it sometimes pays to be patient and watch the charts carefully before swooping in.
“People try to pick a bottom, but if a stock is on a bad decline, you don’t have to buy the bottom,” Kinahan said. “You can wait for a little trend. Wait for it to rally a few days in a row, because often there’s what’s called a dead cat bounce, meaning it bounces for a day and then gets plastered. You may want to make sure [the initial rally from lows] isn’t just short-covering.”