Thursday Market Sum

Thursday’s Headlines

1. US markets fall on earnings guidance

2. Netflix disappoints with its future plans

3. US retail sales jump in June, but it may be stalling

Markets Today

Stocks stumbled throughout the session with the DJIA closing lower for the first day in four. Technology stocks lagged again, and we may see more of that, given less-than-stellar results from Netflix (see below). A better-than-expected second-quarter GDP report from China did little to lift sentiment as investors appear to be in a “sell the news” kind of mood lately.

U.S. retail sales spiked in June, but most economy watchers sense that was a peak, and results won’t be as sunny in July. Another 1.3 million Americans filed for first-time unemployment insurance last week, barely lower than the prior week. That’s not adding to the V-shaped recovery narrative, which most people are dismissing anyway.

While most investors aren’t expecting miracles this earnings season, they are hoping for encouraging guidance for the rest of the year. So far, that’s not what we are hearing from banks, healthcare-related companies like Johnson & Johnson, or tech stars like Netflix. Investors need reasons to believe, but those have been infrequent lately.

Headlines:

  • Netflix missed analyst expectations on earnings, but beat revenue expectations. Shares fell more than 12% after hours as the company provided weak subscriber growth guidance for the third quarter. The company also appointed Ted Sarandos, its chief content officer, as co-CEO, paving the way for him to take over for CEO and founder Reed Hastings.

  • The average rate on a U.S. 30-year fixed mortgage fell to its lowest level in almost 50 years of record keeping. It is the third consecutive week and the seventh time this year that rates on America’s most popular home loan have hit a fresh low.

  • 1.3 million Americans filed for first-time unemployment claims last week, roughly the same as the prior week, as businesses have struggled to rebound and continued to lay off workers. Weekly claims have declined from a late March peak of 6.9 million weekly claims, but remain historically high.

  • The European Central Bank has decided to leave interest rates and the €1,350 billion pandemic emergency purchase programme (PEPP) unchanged. The asset purchases are set to continue until at least the end of June 2021 and, in any case, until the central bank judges that the coronavirus crisis phase is over.

  • As oil demand recovers, OPEC and its allies have decided on tapering production cuts to 7.7 million barrels per day from August to the end of the year. According to an agreement signed in April, the group cut output by 9.7 mb/d in May, June, and July this year. 

  • Johnson & Johnson’s second-quarter profit fell 35% from the same time last year as the pandemic forced hospitals to postpone elective surgeries, hurting profits for the company’s medical device business. J&J earned $3.63 billion, or $1.36 per share, during the three months ended June 30, a 34.6% drop from $5.6 billion a year earlier. 

  • China’s economy returned to growth in the second quarter of the year, according to official data released today by the country’s National Bureau of Statistics. It expanded 3.2% year-over-year, beating analysts’ forecasts of 2.5% growth, after strict lockdown measures were lifted.

  • American Airlines says it has 20,000 more employees than it needs this fall when federal aid rules expire, according to The Wall Street Journal. The airline has sent potential furlough notices to 25,000 workers, including 9,950 flight attendants. This will be on top of the 5,000 management and support jobs it said it would cut in May.

  • The U.S. Commerce Department on Thursday said June retail sales—a measure of purchases at stores, at restaurants, and online—increased a seasonally adjusted 7.5% on the month. Retail sales totaled $524.3 billion in June, up from $487.7 billion in May and nearly back to pre-pandemic levels.

U.S. Retail Sales May Have Peaked in June

Retail sales were strong in June, as expected. Economies were reopening, stores were letting shoppers inside, Americans were buying trucks … it felt almost normal for a few minutes. Then, we know what happened two weeks after Memorial Day as cases spiked and economies were forced to close anew.

What we were buying last month tells us a lot about what we were doing without in the two months prior. Here’s the category breakdown, per the Commerce Dept.:

  • Clothing stores: +105%

  • Electronics stores: +37%

  • Furniture, home: +33%

  • Sporting goods: +27%

  • Gas stations: +15%

  • Food/beverage: -1%

  • Non-store retail: -2%

The early indicators for July are not strong. Morning Consult’s Weekly Index of Consumer Sentiment shows that confidence fell sharply in the past two weeks, especially among wealthier households.

You Are a Little Worried Right Now

The fastest bear market in history followed by the swiftest recovery for stocks ever recorded has you feeling more trepidatious than you have in several years. But while concerns about spiking valuations, a resurgence of the coronavirus, and the upcoming U.S. presidential elections are presenting daunting waves of uncertainty, you are mostly sticking with the stocks you rode into the crisis, and you are even adding to some risky bets as you navigate a tricky recovery.

You Are Favoring Tech, Communications, and Healthcare

Like a lot of investors, both retail and institutional, you have been favoring the mega-cap technology and communications stocks. Most of you have held your positions in those and even added some along the way. You are pretty confident that those sectors, and healthcare, will lead the stock market through the rest of the year.

A Few of Your Favorite Things

Most of you, across age groups, love your blue chip mega-cap stocks. Apple, Microsoft, and Amazon are your top picks, which comes as no surprise. They call that a crowded trade for a reason. But, we were curious to see AT&T and Disney on your lists. Not because they aren’t great companies, but they do not have the growth and the hype of the trillion dollar giants that lord over the indexes. For older investors, these may be long-term holdings that delivered solid returns and dividends over the years. But several younger investors claimed these as well. 

Read our write-up on the survey to see which stocks were favored by investors in different age groups. There were a lot of surprises on both ends of the age spectrum, and as it turns out, many of you are kind of risky.

Thanks again for taking the survey. We are going to bother you again in a few weeks for another round, because collecting this over time reveals some fascinating trends, as you will see.

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