Look out, everyone. There’s a new month in town, and it’s not starting out very auspiciously for investors.
After stocks enjoyed their best month since 1987 in April, May’s entrance reminded us of the harsh winds of March that we’d probably rather forget. The tech heavyweights that led things up are now kind of leading everything back down. It had been a great week up until yesterday, but the last two days wiped out most of the gains.
Remember that old twist on the “light at the end of the tunnel” analogy, where the light turns out to be a freight train heading right at you? Maybe that’s how investors felt after Thursday and Friday’s collective selloff ran over the rally that had been gaining traction. Of course more positive news could happen any time to get hopes up again, there’s just no way to know.
In a way, this week was the polar opposite of last, with selling late in the week following an early rally. There’s likely a bit of month-end profit taking playing into this, some technical pressure, and also some “sell the fact” unwinding following so many FAANG companies reporting. Those stocks rallied pretty hard through April and were looking a little overbought to some participants, so it’s not a shock to see them lose ground. The question is how much of this weakness ends up spilling over into next week, so you might want to consider taking a close look at the futures market Sunday night for clues.
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It’s also the first Friday in a while to suffer from the “Friday syndrome” that torched so many rallies earlier this year when many seemed cautious about carrying long positions into the weekend. One Friday doesn’t make a trend, but next Friday is payrolls day, so it could get interesting.
Amazon Leading Tech Lower
The first victim of Friday’s plunge became evident in futures trading late Thursday after trillion-dollar club member Amazon (AMZN) reported earnings. The company’s focus on billions of dollars in costs associated with the pandemic came as a bit of a reality check for the market, which had sent AMZN shares to all-time highs amid talk of how firm revenue looked.
Some companies in the tech space have done great, and investors have heard anecdotally about sales but not about costs. All the anecdotal stories focused on revenue being through the roof, but AMZN’s earnings suggested it hasn’t all been profitable revenue growth, and that the current economic data is affecting these companies as well.
The Information Technology sector is what led everything higher over the last month, and companies like Apple (AAPL), AMZN, and Microsoft (MSFT) are heavyweights that dominate the major indices. Their performance or lack thereof can have a huge impact on the overall market.
AMZN had great revenues, but expenses went up at the same time and a lot of them were employee-related and front loaded, meaning they could hurt the company’s current quarter. AAPL, also fresh off its earnings report, might have worried investors by indicating they’re not sure how many iPhones they can sell in current conditions.
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To bring back another old friend some would rather forget, trade tensions with China came back into the headlines Friday as The Washington Post warned that the administration might be considering new trade restrictions as President Trump has begun blaming China for the pandemic. Geopolitics tied up the market for long stretches last year before yielding to the virus. Still, apparently we’re not out of the woods when it comes to the trade war.
Volatility, which had died down pretty dramatically, surged on Friday with the Cboe Volatility Index (VIX) once again approaching 40 after falling to the low-30’s earlier in the week. This served as a reminder that things could remain choppy for a while, with so much unknown.
The market was already lower Friday before Tesla (TSLA) CEO Elon Musk delivered a head-scratching statement about his company’s stock price being too high. It’s hard to think of any other CEO who’s ever said that, but Musk did and the stock suffered for it. This might serve as another reminder to investors about being careful what you get into. Fundamentals drive markets over the long term, so trading on emotions or headlines can be a double-edged sword.
While the week ended and the month began on a sour note, let’s not forget some of the positive news that helped fuel the rally earlier this week. Positive news on drug trials and strong earnings from companies like MSFT, Facebook (FB), and Alphabet (GOOGL) shouldn’t be forgotten so fast. Together, these three have trillions in market valuation and exert a really strong influence on the major indices.
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AAPL fell Friday despite the positive news that it plans to increase its dividend and continue buying back shares. The company also beat Wall Street’s consensus on earnings and revenue. Seeing this kind of news from what’s arguably the most closely watched company in the world could be taken as a sign of confidence that AAPL can weather the storm, as we noted this morning.
The Depowered…
Though AMZN and AAPL arguably led the charge lower beginning with yesterday's earnings releases, it's the Energy sector at the bottom of the sector leaderboard Friday. Crude oil futures (/CL) had a decent day as the front-month U.S. contract clawed back to nearly $20 a barrel by the time trading closed. Still, Energy companies like Exxon Mobil (XOM)—which reported earnings early Friday—and ConocoPhillips (COP) both plunged around 7%. Phillips 66 (PSX)—which also released this morning—fared even worse, with shares falling over 9%.
Even though June crude futures are knocking on the door of $20, it could be hurting Energy firms that futures contracts farther out into the year have pretty much all descended from the $30’s into the $20’s over the last few weeks, a sign that investors might expect the supply/demand picture to stay out of balance for a while. In other words, no matter how you slice it, the oil services industry is in for a tough slog.
Energy had the worst day of any sector, falling 6%.
…and the TurboCharged
While big tech and Energy stocks lost significant ground Friday, some of the companies that tend to have traded in the opposite direction of the tech behemoths made progress. Several major stocks had pretty decent days, one of them being Clorox (CLX). That company had a great quarter like AMZN, but without the added employment and shipping expenses.
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Two other stocks that have traded against the grain recently are Walmart (WMT) and Costco (COST). It’s amazing that every time the overall market goes down, these are two that people seem to turn to, and, as if on cue, they both turned up Friday. That’s been the story and it got a new chapter written Friday. However, it’s not necessarily the happiest story if you’re a bull, because those are the kinds of companies that sell staple products that typically do well when people are hunkering down in a crisis. It might be seen as a better indicator when you see companies in the travel and entertainment sectors do well, because that could point toward people having faith in this crisis starting to go away.
The market is arguably in better shape from a technical perspective than it was back in March. Recent selloffs tended to get met with buying interest amid positive feelings that the Fed has investors’ backs. That said, the S&P 500’s (SPX) test and failure to break through its 200-day moving average earlier this week could have weighed on stocks Friday, along with a failure to stay above the 2940 area, which was about where a long-term top was reached in the fall of 2018 before everything fell out of bed in the final quarter of that year.
We’re now about halfway through earnings season, and it’s like baseball great Yogi Berra once said, “You never know.” Investors just haven’t learned a ton from earnings. Only that there’s more costs and companies don’t know what’s ahead. That’s a strong reminder that we’re not out of the woods.
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One other interesting note and then you’re free to enjoy your weekend: The 10-year Treasury note did a pretty decent job hanging in above 0.6% this week, though that’s incredibly low historically. The fact that it didn’t challenge its all-time lows set back in March even as stocks fizzled Friday could be a positive sign heading into the new week.
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