Tuesday Market Sum

Tuesday’s Headlines

1. US markets charge higher behind banks and industrials

2. Big banks are bolstering their balance sheets

3. Small cap stocks face a key trendline ahead of earnings

4. Private equity’s Halcyon days

5. Holy oats! The non-milk crowd cashes in

Markets Today

If earnings were one of the big tests facing investors, the early outlook is pretty good so far. U.S. markets raced to strong gains, powering higher into the close behind better-than-expected earnings from JPMorgan. As one of the world’s biggest banks, it is a bellwether for the financial markets, and it appears prepared for the worst but ready to capitalize if the economy improves.

We also heard less-bad news from the state of Florida, where COVID-19 has made a vicious return. Daily cases trended lower for the first time in two weeks. Any positive signs like this light up cyclical stocks like industrials, manufacturing, and energy companies. Indeed, those sectors rallied hard, with companies including Caterpillar (CAT) posting strong gains in today’s session.

Tech stocks have not quite regained their momentum, but the rampant selling over the past few days has been quelled a bit. We are just in the beginning of this earnings season, which will be historically bad. But if companies tell us they are stabilizing and starting to grow, that enthusiasm can be contagious to all sectors of the market, helping companies of all sizes.

Headlines:

  • JPMorgan Chase reported second quarter profit of $4.7 billion or $1.38 per share, on revenue of $33 billion. Both were higher than forecast. The bank also set aside $10.5 billion for credit losses, which was also higher than estimates, as it sees troubling times ahead. “Despite some recent positive macroeconomic data and significant, decisive government action, we still face much uncertainty regarding the future path of the economy,” CEO Jamie Dimon said in the earnings release.

  • Wells Fargo (WFC) posted its first quarterly loss since the Great Recession as the bank set aside $8.4 billion in loan loss reserves tied to the coronavirus pandemic. The bank had a net loss of $2.4 billion in the second quarter, or a loss of 66 cents a share, worse than the 20 cents a share loss expected by analysts. Revenue of $17.8 billion was also weaker than analysts’ $18.4 billion estimate. Shares fell as much as 8% before recovering slightly.

  • Delta Air Lines trimmed plans for more summer flights as COVID-19 cases increased nationwide and a $5.7 billion loss for the latest quarter underscored the depth of the crisis facing the aviation industry. Delta will halve the number of extra flights it adds in August to 500, and capacity in the September quarter is expected to be 25% of the level a year ago, at best.

  • The U.K. economy grew by 1.8% in May, versus a 5.5% expansion expected by analysts. This is a very modest recovery after drastic dips of 20.3% in April and 6.9% in March, and the chart doesn’t really show promise of a rapid V-shape pattern. The service sector, which makes up 80% of GDP, showed the weakest growth of all at 0.8%. The economy was still a quarter smaller in May than in February.

  • China’s exports grew 0.5% year-over-year in June as economies all around the world reopened. Imports were up 2.7% from last year. Analysts expected a -1.5% drop in exports and a -10% drop in imports. “The data shows positive signs of a global economic recovery in the second half of the year,” said ING. Clothing and footwear exports increased, and import growth was mainly due to grains. The trade surplus reduced to $46.2 billion from $62.93 billion in May on strong domestic demand.

  • China says it will impose sanctions on Lockheed Martin. The government is angered by the U.S. defense firm signing a $620 million deal with Taiwan. Just yesterday, the island began testing its military capabilities in an annual drill that prepares it for a possible Chinese invasion. 

  • Boeing was awarded a $22.89 billion indefinite-delivery/indefinite-quantity flexible contract from the U.S. Air Force. The company has so far been paid $1.2 billion for eight F-15EX advanced fighter jets.

  • American Airlines is planning to warn employees this week about potential furloughs, according to CNBC. This would begin after Sept. 30, when the rules for federal aid receivers expires.

  • The Trump administration says COVID-19 vaccine manufacturing will start by the end of summer. The federal government is bolstering the candidates of five companies, including Moderna, Oxford University and AstraZeneca, Johnson & Johnson, Merck, and Pfizer.

  • Google is in advanced talks to buy a $4 billion stake in Jio Platforms, according to Bloomberg. The digital arm of India’s Reliance Industries has been a magnet for investors lately, attracting giants like Facebook, Intel, and Qualcomm, besides several private equity firms.

  • The British royal family is now selling a dry gin made with leaves sourced from the Buckingham Palace gardens. Priced at £40 a bottle, it’s only available for delivery in the U.K. Royal income is expected to drop by a third, or £18 million, this year due to closures of palaces visited by tourists. Workers have been reportedly informed there will be a pay freeze as well as a freeze on recruitment. 

  • Orange juice is the top performing commodity year to date with a gain of 33.6%. Working from home and lockdown restrictions have also meant we’re spending less on coffee. Combine the immunity-boosting vitamin C with some palace-leaf gin for a classic cocktail to digest the other performances.

  • Ford has launched the 2021 Bronco SUV, which it says is “built with the toughness of the F-series and the spirit of a Mustang.” It’s the first Bronco series since 1966 with classic two-door and four-door models. Gotta say, it’s kind of handsome:

The Broader Market From a Technical Perspective

The DJIA, Nasdaq, and S&P 500 get all the headlines, but the Russell 2000, known as the broader market, provides a clearer all-around picture of the health of public companies. It’s comprised of the bottom 2000 companies in the Russell 3000, which are small-cap companies, and although it is market weighted, like the Nasdaq and S&P 500, it is weighted by shares outstanding. This means that a member stock’s last sale price as well as the number of shares that can actually be traded (rather than the company’s full market capitalization) influence the index.

Think of small caps as the light-to-middleweight boxers of the stock market. A broad-based stock market rally is not complete without them. They participated in the March to June run-up with the rest of the market, but they have stalled in the past couple of weeks. Technical analysts, like Justin Timmer of Fidelity Investments, focus on the trend lines for major markets.

He notes that the Russell 2000 is clinging to its upward trend line right as earnings season begins. You won’t hear a lot about most of these companies in the financial media, but they are key components to the overall market and to the economic health of the country since they are large employers. 

If you want to track the Index, these two ETFs are useful to keep an eye on:

  • BlackRock’s iShares Russell 2000 ETF (IWM)

  • Vanguard’s Russell 2000 ETF (VTWO)

Here they are against the Russell 3000. It makes a difference when the FAANG stocks aren’t in your index.

Where the Big Money Hangs Out

Speaking of markets that don’t get enough attention, the private equity market is enjoying its Halcyon Days. Extremely cheap debt, trillions in patient capital, and bargains everywhere are fueling a private equity feeding frenzy outside of the stock market.

It’s actually been this way for awhile, but the pandemic and the government stimulus injected into the market has amped up the volume in the private money world. Firms led by Blackstone Group Inc. and Carlyle Group came into 2020 with $1.5 trillion in unspent capital, the highest year-end total on record, according to data compiled by Preqin. They own some of the biggest restaurant chains—many of which were recipients of PPP money. They are also big investors in real estate and in financial markets. Real estate, especially commercial real estate, is cheap and getting cheaper. Financial markets, if you haven’t noticed, are on fire right now. 

Private equity operates outside of the rules that govern public companies and under a different set of regulations. We don’t get to see their books, and we have no idea what’s going on inside their black boxes, until they decide to tell us. 

As the chart above from JPAM reminds us, the returns for private equity have trounced the public markets for decades. It also reminds us that the universe of public companies is getting smaller, while the assets in the private markets are getting bigger.

If you want to learn more about how private markets are winning through this pandemic, read Bethany McLean’s investigative report for Vanity Fair.

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