Marius Paun | London, UK | Senior dealer | Wednesday, 05th August 2020
The fresh US stimulus package together with the latest developments regarding COVID-19, not only vaccine trials but also infection figures, continue to make headlines on a daily basis. The bullish momentum in US stocks was also driven recently by the better than expected economic reports and ongoing strong earnings. In particular, last Thursday saw blowout sales and earnings numbers reported by Amazon, Apple, Facebook and Google which reassured investors all is good at the very top. Nasdaq has now reached a fresh all-time record high and S&P 500 is within touching distance of doing the same.
It was widely expected the US Congress would pass yet another relief bill HEALS Act worth around $1 trillion which proposes an extra $200 per week in unemployment insurance which replaces the expired $600 in earlier bills. It also proposes a second $1200 economic payment. The new stimulus comes after $3 trillion HEROES Act introduced in May. Disappointingly, the US Congress failed to agree on it last Friday when the deadline has passed and many lost their benefits provided by the previous packages. However, the politicians vowed to suspend the planned August recess so they can keep working on the bill. This week they resumed talks with a final agreement yet to be reached.
The earnings season was a particular catalyst for pushing US stocks higher. Apple shares rallied 2.5% expanding their gains following shockingly good results for the quarter and after announcing a four for one stock split. The tech giant is now less than $150 billion short of reaching a $2 trillion market capitalization. Microsoft jumped close to 6% after it announced it plans to buy US operations of Chinese owned TikTok, the short video app which has fallen out of favour with the White House.
Interestingly, Mauldin Economics points out that much of the S&P 500 returns come from just 10 companies: Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Nvidia, Netflix, and Adobe.’ As a group, they are up 35% since the beginning of the year. As a group, the other 490 companies are down more than 10%. At the same time Apple, Amazon and Microsoft jointly amount to over 15% of the S&P500 and are together worth $5 trillion. To put things into perspective that is almost as big as Japan’s economy and more than the entire German economy!’
On the economic data release front, things were also supportive so far. Earlier in the week, ISM Manufacturing Index came in at 54.2, better than 52.6 seen last month and surpassing expectations of 53.5. The non-farm payrolls numbers for July are due this Friday. It will be closely watched as always but this time, the fact that last week jobless claims’ data showed the job market stalling in late July, adds an extra layer of interest.
The M&A activity among the S&P500 constituents was mentioned as picking up. That could signal that top management remains confident about the future, despite ongoing worries about a second coronavirus wave in the US or abroad where many companies have a sizeable customer base. It also shows that geopolitical spats, mainly between the US and China, does not dent the confidence in going out to look for buying opportunities.
A few words about inflation. CNBC reported the US Fed is ‘expected to make a major statement to ramping up inflation soon’. It is thought to be a pledge not to raise interest rates until inflation hits at least 2%. Currently, inflation is closer to 1% and coupled with the fact that the jobless rate is at historically high levels could mean the Fed might need years to hit its inflation target again (2%).
The chart shows the all-time high of 3396.88 reached on February 20th is now a distinct possibility. As the coronavirus pandemic spread worldwide, a violent selloff followed to a low of 2184 on March 23rd. That was a 39% drop in less than six weeks. Since then S&P500 enjoyed a steady rebound.
The short-term moving averages are back above the longer-term one after briefing crossing below in June. Both are still pointing upwards. The price is above both indicators.
Bulls have re-established control. It took a while until the psychologically important 3000 marks was breached but that’s behind us now. The next area of resistance is around 3369. Undoubtedly the big prize is the all-time high at 3396.88 which could be retested sooner rather than later. On the way down support, just above 3300 will be eyed by the bears. A successful cross below that will bring into focus much stronger resistance turned support at 3226.