1. US markets split as tech stocks rise again
2. US budget deficit swells to record highs
3. China’s stock markets have attracted speculators
4. Cyclical rally has faded
5. Consumer discretionary stocks see wild swings amid bankruptcies
The market fell back to its recent pattern of tech stocks charging higher while most other sectors crumbled as virus fears and mounting layoffs kept investors away. The U.S. reported 1.3 million new unemployment claims in the past week, which was lower than the prior two weeks, but still higher than it should be in this phase of the recession. More layoffs are coming from big banks, airlines, and other sectors that have not been able to get traction as the pandemic proves to have stamina.
Oil and gold prices both gave up ground today, as some investors shifted their attention to the U.S. dollar, which rose slightly on the day. Chinese stock markets continue to outperform the rest of the world thanks to encouragement from Beijing and more global investors looking East for returns.
Speculators have also been whipping things up in the consumer discretionary sector, which is mired in layoffs and bankruptcies. When some of the strongest returns are coming from one of the most troubled sectors in the market, there is something odd about that pattern.
Speaking of odd, why is this photo of rapper Flavor Flav and U.S. Treasury Secretary trending on social media? 2020 is odd!
- The Trump administration plans to finalize regulations this week that will bar the U.S. government from buying goods or services from any company that uses products from five Chinese companies, including Huawei, Hikvision, and Dahua, according to Reuters. Any company that uses equipment or services in their day-to-day operations from these five companies will no longer be able to sell to the U.S. government without obtaining a U.S. government waiver.
- The U.S. federal budget deficit in June 2020 was $863 billion, according to the Congressional Budget Office. This is compared to a deficit of $8 billion in the same month last year. It was $2.7 trillion in the first nine months of fiscal year 2020, $2 trillion more than the deficit recorded during the same period last year.
- Walgreens Boots Alliance said it plans to cut about 4,000 jobs in the U.K. and suspend stock buybacks as demand fell off in its international business during the drugstore chain’s latest quarter. The pharmacy chain said the coronavirus pandemic sliced out around $700 million to $750 million in sales for its quarter ended May 31, with most of the impact tied to its retail-pharmacy business overseas.
- Tesla CEO Elon Musk said the company is “very close” to developing fully autonomous vehicles. “I’m confident that we will have the basic functionality of L5 (level 5) autonomous driving this year,” he said. “There are no fundamental challenges.” He made the statement during a video played at the World AI Conference in Shanghai.
- Starbucks said Thursday that it will require customers to wear facial coverings at all company-owned locations, starting July 15. Starbucks is joining the growing list of companies that require customers to wear masks, including Costco and major airliners. On Monday, the Retail Industry Leaders Association urged governors to step in and require consumers not affected by a medical condition to wear masks when shopping or in public spaces.
- Wells Fargo, the largest employer among U.S. banks, is preparing to cut thousands of jobs starting later this year, according to Bloomberg. Pressure to dramatically reduce costs is coming to a head inside the bank, prompting executives to draft plans that may ultimately eliminate tens of thousands of positions.
- Google has abandoned plans for a cloud computing project for China and other politically sensitive countries, according to Bloomberg. The “massive strategy shift” affects hundreds of workers involved in the initiative, known as “Isolated Region,” which sought to address nations’ desires to control data within their borders.
- The vacancy rate for Manhattan’s apartments in New York City jumped to the highest on record in June as people ditch The Big Apple. Available listings surged 85% from a year earlier to 10,789, Miller Samuel and Douglas Elliman said. The median rent slid 6.6% to $3,242, the first drop in 18 months.
Speculators Eye Chinese Markets
China’s stock markets have been the best performing indexes all year. They fell, then recovered, faster than European and U.S. markets, and have been steadily rising for the past two months. On Monday, the Chinese government urged its citizens to buy stocks through state-run media. They listened. So did other investors around the world.
Yesterday, China’s state media struck a more measured tone, with at least two newspapers urging investors to be rational. The Securities Times—one of China’s most widely circulated financial publications—said investors should be mindful of potential risks and not use the market as way to make a fortune overnight.
That warning may have come a little too late. China’s Volume Speculation Index, which looks at how much volume is flowing into Chinese vs. U.S. equities, surged to its highest levels in three years. If you look at the chart above from Sentiment Trader, you’ll notice that the Shanghai Composite, one of China’s largest indexes, usually falls when that index spikes.
Cyclicals Have Stalled
Stock market rallies inside recessions are historically led by cyclical stocks, which ebb and flow with economic cycles, and financial stocks. Cyclical stocks include industrials, retailers, restaurants, and consumer discretionary, among others. They should build momentum as the economy strengthens.
For two weeks in June, cyclicals and financials had some momentum as a recovery was in sight. As cases spiked in the second half of the month, however, consumer spending fell, manufacturing slowed, fears of another shutdown surfaced, and the rally faded. Tech stocks, as we know, have carried the markets since then.
The stalling of cyclical stocks is not just a U.S. phenomenon, either. It’s happening all over the developed world as hopes of a V-shaped recovery have faded. That was not the case coming out of the last two recessions, as you can see in the chart above. This time, it’s really different.
Consumer Discretionary Disconnect
Here is yet another data point on how the stock market and the economy are completely disconnected right now. Consumer discretionary stocks, which include speciality retailers, travel and leisure companies, and restaurants, had been among the market’s best performers since the lows of late March. They had also fallen the hardest, so they had room to run.
But they haven’t experienced another major sell-off (at least not yet…), despite the fact that the consumer discretionary sector is also experiencing the most bankruptcies in the entire market. In fact, companies like Hertz and JCPenney saw their stocks soar under heavy volume as soon as they filed for bankruptcy. They became fodder for day traders and stock flippers, which love to throw chum in the water to attract other fish (more investors). The stocks rise on the hype, the smart money bails at the top, and everyone else wonders what happened.