The Nasdaq composite rallied 4% last week, and as we have discussed in recent notes, the S&P 500 and Dow industrials underperformed on a relative basis for three months. The S&P 500 gained 1.8% on the week, while the Dow Industrials managed a more meager gain of 1% for the week. That weekly gain for the Dow came as a result of Friday’s rally.
US equity markets ended last week on a positive note, and in the process left the market in a confirmed uptrend heading into the weekend. The positive price performance on Friday came as a result of a significant intraday reversal, which made those price gains that much sweeter for bulls. For example, the Nasdaq composite rallied from an intraday selloff of nearly 1% to a gain of .7%. Perhaps more significantly, the reversals and gains on the day for both the Dow Industrials and the S&P 500 were more dramatic. Friday was a rare example of the Nasdaq composite actually underperforming compared to the Dow Industrials and S&P 500 during this COVID-19-centric rally. For the day on Friday, the Dow gained 1.44%, while the S&P 500 gained 1.05%. The Russell 2000 posted an impressive gain of 1.7%.
We saw strength in financials and airlines on Friday – both sectors that have significantly underperformed the broader market since the March 23 lows were established. The Dow’s gain was led by J.P. Morgan and Goldman Sachs. Making Friday’s trading session even more unusual was the fact that the enterprise software sector lagged behind the leadership provided by financials.
It is not a coincidence, though, that we saw financials rally on Friday.
This week we hear from financials as we step deeper into Q2 earnings season. On Tuesday alone this week we hear from J.P. Morgan (JPM), Citigroup (C), and Wells Fargo & Company (WFC). Goldman Sachs (GS) and U.S. Bancorp (USB) report on Wednesday.
Consensus estimates for financials have all been sharply reduced over the previous few months.
For example, Goldman Sachs consensus EPS for Q2 2020 is $3.82, versus last year’s results from the same quarter, which were $5.81. The question is, with Goldman trading with a P/E of 11, a dividend yield of 2.4%, and currently 18% off its 52-week high, will the results released on Wednesday trigger any additional price weakness? Or, does Friday’s closing price of $205.56 more accurately reflect its true value in the eye of investors? If we see a financials narrative that speaks to better-than-expected Q2 results and constructive guidance for Q3 and Q4, we could see a breakout trade for the S&P 500 by the end of this week.
With recent market internals as weak as they have been among the NYSE, and Dow Stocks, it is no wonder both have massively underperformed the Nasdaq Composite, whose advance/decline line has risen sharply from its low established on March 18–five days before COVID-19 fueled the lows registered by US equity markets on March 23. On Thursday of last week for example, the A/D for NYSE listed stocks was a negative 3-1. That broad internal weakness has acted to keep overall index performance underwhelming, even on those days where you may have one or two large cap issues delivering solid price action.
This week’s economic calendar highlights:
Tuesday: The CPI reading for June is released by the Bureau of Labor Statistics. Econoday consensus is 0.5% on a M/M basis. May’s reading was -0.1%. Econoday is calling for the Y/Y CPI reading of 0.6%.
Wednesday: The Federal Reserve releases the Industrial Production figures for June. Econoday consensus (M/M) is 4.3% versus May’s anemic 1.4%. Manufacturing and capacity utilization are both expected to tick higher in the monthly reading as well.
Thursday: Weekly Jobless Claims are due out. New Claims – Level last week were 1,314K. Econoday consensus for the week ending 7/11 are little changed, 1,323K. The Philadelphia Fed Business Outlook Survey for July is expected to tick down to 20. Retail sales for June are also released on Thursday. Econoday consensus is 5.3%.
Friday: June Housing Starts are released. Econoday consensus is 1.190 M.