The mid-week low down
The disconnect between reality, or Main Street, and Wall Street/ stock markets, was back in play on Tuesday. The S&P 500 and the Nasdaq both closed at fresh record highs after US markets closed, yet US consumer confidence fell for the second straight month to its lowest level in 6 years. Since the US consumer is the backbone of the US economy, and even making allowances for the fact that the stock market is not a great reflection of the real economy, this disconnect looks far too large. So, what is a trader to do?
Amazon vs. Nordstrom, no contest
In recent notes, we have highlighted our view that fighting the prevailing trend is not worth it, stock markets tend to move in waves, and nothing seems to stop this wave from moving higher. We also recently spoke about how this rally is not following the traditional route for a market recovery. Usually, you see ‘value’ stocks, those defined as cheap based on their P/E ratio or another metric, start to follow the early leaders higher. In this case tech and retail, mostly Amazon and a few smaller consumer staples, have led the S&P 500 rally since March. Amazon has a P/E ratio above 125, however, it is a brave person who would ditch Amazon in favour of a bricks and mortar retailer that has a lower P/E ratio. For example, department chain store Nordstrom’s stock price is close to its lowest level for nearly 20 years, its P/E ratio is a mere 7.5, yet with people still avoiding public spaces, it’s tricky to know the future trajectory for Nordstrom’s earnings. Nordstrom reported Q2 earnings on Tuesday and earnings were worse than expected, falling 53% compared to a year ago. Considering many retailers are filing for bankruptcy including Brooks Brothers and JC Penney, it’s no wonder that online behemoth Amazon is still able to rally even as its stock price is close to a record high. To highlight the divergence between Amazon and Nordstrom, the latter’s share price slid 7% on Tuesday after its sobering results for Q2, while Amazon’s share price was up more than 1%.
The disrupters are winning the race
The stocks that are doing well right now are not the typical recovery play, such as traditional retailers, energy stocks or financials. Instead the biggest winners are mostly located in the tech sector, and some of them, particularly the smaller companies, are doing well precisely because of the disruption caused by the Covid-19 pandemic. Take Zoom, its share price was up more than 2% today, US consumer confidence be damned. When you buy Zoom, you don’t really take into consideration what the US consumer is thinking, or if they are worried about their job prospects, particularly if they work in the retail or hospitality sector. Instead, investors are still flocking to the video communications company because more and more companies are advising that employees won’t be returning to the office any time soon. Even when some offices open back up, flexible working is likely to remain in place for some time and business trips remain off the table, thus, Zoom may continue to grow in popularity and expand its user base for the foreseeable. The tech disrupters are the big winners from this stock market recovery, and indices without a critical mass of these companies are struggling, for example, the FTSE 100. The UK index was down 1% on Tuesday as weak US economic data weighed on companies in the UK.
While this may sound very pessimistic, and even dystopian, it shouldn’t. Events like this pandemic are totally different from the financial crisis. They have the potential to change the way that we all live in the long term, and that is why “new” companies, and the tech giants have benefitted; this pandemic has speeded up the digitization of the lives of billions of people around the world and this is what is reflected in the US stock market.
Back to other themes that could drive the market this week, here are three things to watch out for in the coming days:
Firstly, US-China relations seem to have warmed up. Both sides reaffirmed their commitment to a phase 1 trade deal, and this helped to push US stock indices into fresh record high territory. We believe that President Trump will not let the US/China trade deal falter and potentially impact the stock market rally and US economic data in the run up to the Presidential election in November. Thus, we expect more good news on this front, and a diminishing risk premium for global stocks.
Secondly, the central bankers online Jackson Hole symposium is also on the market’s mind right now. Three things are expected, the Fed is expected to trash its inflation target in favour of economic growth and low interest rates for longer, the ECB could signal that a larger bond purchase programme could be on the cards for September rather than December, and the BOE could give further direction about negative interest rates.
Lastly, watch the pound. The dollar has started to falter as we await Fed President Jay Powell’s speech on Friday. If he sounds dovish, which we expect, then we may see further dollar weakness. We believe that GBP/USD could be a beneficiary from any decline in the dollar, and it is up to $1.3150 on Tuesday after skirting around $1.3050 at the end of last week. We believe $1.3200 and above is possible, especially if BOE Governor Andrew Bailey suggests that negative interest rates are not going to be used any time soon to bolster the UK’s economic recovery.