Headline Risk is Always an Issue

Kenny Polcari Uncategorized Leave a Comment

Things you need to know:

  • May marks the second straight month of gains – Investors shift to value names
  • China reports better macro data – causing markets to rise
  • Europe and US focus on re-opening
  • Civil unrest over police brutality causes US cities to come under fire
  • Try the Linguine Arrabiata

Stocks ended the month on another high note – adding to April’s strong performance  – making it two in a row now…..The Dow and S&P rose 4.3% in May, while the Nasdaq climbed 6.7% and the Russell added 6% suggesting that investors think we have seen the worst in terms of the virus and that once we begin to get back to work, that much of what we’ve lost will return – now is there still risk that small businesses will fail – absolutely – and that the return to economic prosperity will take longer than initially suspected – yes – but the fact is that the world is waking up and the engine of prosperity is waking up as well.  As of this morning the Nasdaq is now up 5.7% ytd, while the rest of the indexes remain in negative territory – the Dow is off by 11%, the S&P down 5% and the Russell suffering the most – still down 15% ytd.

What is interesting though is that the move so far off the lows has been driven by the desire for anything “tech” – well that was until two weeks ago – what we’ve seen in the past couple of weeks is a move to what some consider ‘value’ plays…..or stocks and sectors that have been lagging and – if the global economy is turning around – should make up for lost ground.  Energy, Financials, Consumer Discretionary & Healthcare – sectors that have been underperforming rebounded nicely in May and if the economy kicks back into high gear – then we can expect that these sectors will play catch up.

The fact is that as ‘value’ names wake up and garner the attention of asset managers and investors – the message is clear – investors are expecting a broadening out of the economic recovery whether or not that recovery actually means that people will return to working like we did before thus the continued excitement about technology.  Now is not a time to bet against tech, and it should have a place in everyone’s portfolio – but beware – if the recovery stalls out, if we get a resurgence in infections, if governments around the world stop their economies once again then you can expect that some of the first names to come under pressure will be those highflying technology names that have done so well ytd as asset managers will try cashing in.

Now that being said – I do not believe that will be the case – we have seen the countries begin to re-open, albeit cautiously, they are re-opening and we are not seeing what so many have dreaded and that is a positive. In the states – US companies are beginning to formulate plans to get back to work – we are learning of phases and safety measures that will be in place before any one steps back into any office IF they step back into the office  – one of the shifts in paradigms that is clear now- is that white collar work can get done remotely as long as companies provide the ability for their workers to remain productive – there is no reason for any of them to rush back to the office and they are not.  Blue collar workers do not necessarily have that option – I mean construction work, restaurants,  manufacturing work, salons, small businesses etc. all need a place to go – in order to work – and this will be the challenge – but it is a challenge that we will overcome and while it might take some time – the sense is that the bottom is in.

More geo-political issues are sure to create angst in the global markets as they always do rising tensions between the US/China is one thing, but rising tensions between China/Hong Kong is another thing… because in the US – any takeover of Hong Kong will certainly create new issues over favored nation trade status and trade agreements – and think about this – the Europeans haven’t weighed in yet either and that is a whole other issue.

On the national front…

Over the weekend – the US came under attack as civil unrest hit highs many have never seen.  Yes the country is outraged at what happened to George Floyd – an unarmed black man – in Minneapolis on Memorial Day  – and we should be… we are better than this, this is 2020 – this should not be happening at all… but the destruction we witnessed over the weekend should not be happening either, it is not indicative of how the majority of the country wants to fix it… Justice, change in policy, change in education, change in leadership, inclusion of diverse thoughts are all acceptable ways of bringing peace and healing – civil unrest, more innocent deaths and destruction is not. Whole cities coming under attack at night reveal nothing but destruction and heartbreak in the morning – causing pain for so many – and while this signals that something has to change – no one wants to see it our cities burn and our way of life destroyed. Period.

This morning – we wake up and find that global markets are not paying attention to the destruction seen in America over the weekend and nor are they paying attention to what Trump said in his Friday press conference about the takeover of Hong Kong by Beijing.  Investors are betting that this too shall pass as any ‘verifiable measures’ against China will be difficult to prove and the longer-term unintended consequences of the damage that could be done to HK and global trade will serve as a cautionary flag to American policy.    Asian markets all ended the day higher – On Sunday China reported that May PMI (Purchasing Managers Index) data came in at 50.6 – below expectations of 51 but still above the 50 mark – suggesting expansion.  In addition the Caixin/Markit Manufacturing PMI Index for May came in at 50.7 – above the expected 49.6 read put out by analysts… and that caused investors to get excited – sending Japanese stocks up 0.85%, Hong Kong stocks soared up 3.3%, China not far behind at +2.7% and the ASX up 1.1%.

European markets are higher as well… in early trading – with many of the peripheral markets closed for a public holiday.   Easing lockdowns, falling infection and death rates all helping the mood.  Unrest in America is not driving any of the action in Europe today –  but do not kid yourself – if this continues and the US delays re-opening or experiences a rise in infections that cause the nation to stall out  – then global investors will be paying attention and markets will respond but until that happens markets and investors are cautiously moving ahead.  As of 6:30 am – the FTSE is +1.2%, CAC 40 +1.24%, DAX closed, EUROSTOXX +0.74%, SPAIN +1.54% and ITALY +0.96%.

US futures are swinging between positive and negative all morning….at 7:35 am Dow futures are up 46 pts, S&P’s are up 3 pts, the Nasdaq is down 19 pts (there is that theme again – the shift into value from growth)  and the Russell is up 9 pts. Again – they are not pricing in any of the unrest seen over the weekend across the country – as the market sees it as temporary, that the country will address the unrest and bring justice for George Floyd by punishing the police officers at the center of this unrest and begin a new opportunity that will create and give birth to a whole new conversation about equality, racism and police brutality in this country.

What the market is focusing on is the re-opening or attempted re-opening after the weekend of destruction in major cities across the country – what will this destruction do to the timeline?  What will small business owners do now?  What will happen to the many stores and business that got robbed, looted and burnt to the ground in Boston, Chicago, LA, NY, Minneapolis, Miami, Philadelphia and Atlanta etc.? While this may be temporary – it is a real issue.

Investors are also focusing on the simmering tensions between DC/Beijing, DC/Hong Kong and China/Hong Kong. They are trying to sort out the latest economic activity reported by China over the weekend.  If PMI’s are now turning expansionary – can the rest of the world be far behind?

And are we any closer to a treatment or vaccine for the corona virus?  Unlike the last two Monday’s there isn’t an announcement this morning about some other new biotech that has begun human trials or has achieved any human results – so the conversations if there are any – will focus on the ones that we already know about.

Eco data today includes Markit US Manufacturing PMI – the expectation is for it to show a read of 40 – well into contractionary mode but better than the prior read.  ISM Manufacturing PMI is set to show a read of 43.7 up from 41.5 and ISM Non-Manufacturing is set to show a read of 44.5 up from 41.5.    Later in the week we will get ADP employment – which is set to show 9 mil more job losses while factory orders and Durable goods orders are expected to show losses of 14% and 17% respectively.  On Friday – we will hear from the gov’t and get the monthly Non-Farm Payroll report – which is expected to show 8 mil additional job losses on top of the already nearly 30 million losses experienced thus far… but the market is expecting those weaker numbers… so they should not be a surprise.  The surprise will be if those numbers are significantly different from the expectation.

Look – investors have discounted the virus and have predicted that the worst is over and infection rates are on the decline as the world gets ready to wake up… and so stocks have risen swiftly – but they are now trading above what some might consider full value….and if the country suffers under this continued unrest and is unable to get back to work then all bets are off and we could see the markets retreat.

Oil… rallied hard on Friday and has rallied hard all month.  By the end of the day on Friday – oil had risen some 62% for the month – going from $21.85 to $35.49… as demand is expected to surge as the world gets back to work and the production cuts instituted by OPEC, Russia and others takes hold.  June 4th brings another OPEC meeting and production cuts are expected to remain in place – just as summer kicks off and demand surges.  This morning oil is essentially unchanged – down 13 cts as the week begins.  We remain in the $30/$39 range for now and as we move higher, I suspect oil will find resistance at $39 but then it will push up and through to find equilibrium in the $39/$45 range at the height of summer.

The S&P closed at 3044 – after having traded as high as 3049 and as low as 2998.  We remain decisively above the trendline at 3000 – but did test it on Friday – as I had suggested we would.  I also said that  “My guess is that it will offer support unless this press conference suggests a new unexpected level of difficulty between the US and China…..While I suspect that Trump will come out swinging – it will all depend on how the markets perceive it.”    And investors are not yet convinced that there are more trade tension difficulties ahead – which is why we saw the markets test support and then rally, because if they were concerned then the trendline support would have broken down on Friday – when it had every reason to do so.  Today’s action may once again force a test of that level – due to the civil unrest seen over the weekend and investors will once again be watching to see if the markets will discount it or not.  If the S&P fails at 3000 then the next move would take it down another 1.15% to the trendline at 2960.  If we hold – which I believe we will – then the new range will be 3000/3050 until we get more clarity on the re-opening.

Take good care

Kenneth Polcari
Chief Market Strategist, Consultant

Linguine Arrabiata 

I thought it appropriate for today…. this sauce is simple to make and gets it anger from the red chili pepper…..You can serve this with any type of pasta you want – but spaghetti or linguine is best.

You will need:  olive oil, onion, garlic, red wine, sugar, crushed red pepper (or chili peppers if you want hot, hot, hot), lemon juice, oregano, s&p, crushed tomatoes, tomato paste and chopped parsley…..

Bring a pot of salted water to a rolling boil –

In a large pot (or deep sauté pan) on med-hi –  heat up olive oil and garlic…. sauté a bit – but do not burn – 3 mins or so….now add sliced onion and sauté until soft – like 5 mins more.  Next – add 1/2 cup of red wine, 1/2 tblspn of sugar, fresh squeezed lemon juice (about 1 tblspn) , oregano, bit of tomato paste and a 28 oz can of kitchen ready crushed tomatoes (not in puree – just crushed tomatoes), crushed red pepper (or crushed chili pepper if you prefer) – bring to a boil and then reduce to simmer and cook for 15/20 mins….

Add the spaghetti to the boiling water and cook for 8 mins or until aldente – strain – reserving a mugful of the pasta water.  Return pasta to pot and add back about 1/4 cup of the pasta water to re-moisten.  Stir…..Now add pasta directly into the sauté pan with the sauce – toss well – add a handful or two of grated parmegiana cheese and serve immediately in warmed bowls.  Enjoy with a nice bottle of Brunello di Montalcino.  Always have extra cheese on the table for your guests.

Buon Appetito.