Market Strategy 7/06/2020

Key Takeaways

• The first full week of July trading will likely focus on any progress (or lack thereof) on Covid-19 as well as what earnings will look like when Q2 earning season gets underway in earnest on July 14.
• Last week saw stocks stateside rally powerfully on back of positive surprises in economic data across a broad array of indicators.
• We discussed our outlook for the second half of 2020 last week with a member of the financial press and we include highlights in this note.
• Weak demand for energy as a result of the Covid-19 pandemic continues to impact US oil production and rig count even as oil closed above $40/barrel last week.

A powerful stateside stock market rally in a holiday abridged week chock full of key economic data, political rhetoric, demonstrations and an uptick in Covid-19 infections left bulls smiling at the expense of bears and skeptics last week.

Even as the news on the Covid-19 front challenged the economic re-openings underway in Texas, California, Arizona, Florida, and a host of other states, the underlying resilience of the US economy and the desire of millions of Americans to move towards—if not back right away—to “some kind of normal” pushed stocks higher.

The Dow Industrials, the S&P 500, the tech laden NASDAQ Composite (some 40% weighted in tech and tech related stocks), the S&P 400 (Mid-Cap stocks) and the Russell 2000 (small cap stocks) respectively rallied 3.25%, 4.02%, 4.62%, 3.53% and 3.85% on the week ended last Thursday.

From a strategist’s perch 100,000 feet above the ground it looked pretty clear—as bad (or uncertain) as things may seem enough things are being done to justify the market’s upside move.

Last week saw seven of the S&P 500’s 11 sectors beat the underlying index with four of the seven outperforming sectors belonging to the cyclicals and three to the defensive sectors. Information technology lagged the underlying benchmark last week as investors likely sought out further diversification.

International equity benchmarks broadly lagged US stock gains but produced positive returns on the week as relatively low valuations; monetary policy and fiscal stimulus deployed by governments around the world attract investors’ attention.

With bond yields at or near historical lows around the world investors globally are likely to bid stocks higher if not upwards in a straight line but acknowledging enough uncertainty and catalysts from time to time to justify taking profits without FOMO (fear of missing out) intermittently.

It would seem that for now into the visible horizon investors (notwithstanding trims and haircuts along the way) may pay more for each dollar of earnings than in earlier cycles when inflation, interest rates and economic growth were at much higher levels.

For now the need to stem the spread of Covid-19 remains essential to the progress of economic re-openings stateside and around the world. That appears clear to both Wall Street and Main Street. The near-term challenge appears at what pace to reopen and how to avoid reopening too soon, too fast, or recklessly.

Politics domestic and global along with Presidential election year risks challenge the recovery as well.

That said, the indomitable spirit of the American people along with their desire to socialize, dine, shop and go to work has already been established in the first tranche of the reopening process. With face masks, social distancing as well as extra precautions to be taken for those who are particularly vulnerable to the insidious virus the hurdles ahead appear manageable if enough discipline and cooperation can be raised.

From a health care perspective the experience recently gathered on Covid-19 by medical professionals as well as an unprecedented collaborative effort by the scientific community to develop effective vaccines and drugs of greater efficacy suggests significant progress is being made on a week to week basis.

As the first half of the year moved into the rear view mirror we were asked by a member of the press what our expectations are for the second half of the year.

We replied:

• We see plenty of variables on the landscape from Covid-19 to Q2 earnings season to domestic and geopolitics to consider.
• The market is likely to move higher from where it is if we get another round of rescue funding and the Fed remains committed to helping the economy to navigate the re-openings across the country. Without another round of funding? A market tantrum could occur. We expect funding will happen.
• Also needed for the markets to move higher is more progress in vaccine development and drugs of greater efficacy for those who have fallen ill to Covid-19. So far significant progress is being made but further advancement is needed.
• The presidential election will weigh in its importance with greater definition once the Democratic ticket has a named vice presidential candidate.
• The Democratic campaign platform will matter more to the market when it has better definition. The more centered politically and the more business friendly the better for the market’s consideration. The market’s sensitivity will likely be centered on the selection of the vice presidential candidate as well as likely cabinet member choices.
• The Republican campaign platform will likely be sensitive to second-term policy agenda items and prospects for any additions or deletions to the current cabinet roster.
• Covid-19 and how hard hit the states experiencing the recent resurgence during the process of reopening are a key consideration. The market and the folks on Main Street are happiest when the country is well positioned to manage the virus and get out of the proverbial woods.
• The trajectory of the economy and corporate earnings and revenues at the end of the day remain essential as we move deeper into the second half of the year.
• We continue to overweight US equities versus international equities while maintaining meaningful exposure to both developed and emerging international markets.
• We favor cyclicals over defensives but recognize that some defensives are good to own with the current uncertainty. Diversification is essential.
• Know what you own, why you own it and have right sized expectations as to how what you own will perform in a transitioning environment remains our mantra.
• Favorite sectors: Information technology, consumer discretionary, industrials and our contrarian pick: the Financial Sector.