After Records, Stocks Fall Amid Worry About Coronavirus, Stimulus

It’s been another record-breaking week on Wall Street, and now it seems that investors are taking a breather from a pretty strong rally.

While there may be an element of profit-taking in this morning’s retreat, it also seems like investors and traders may be worried about the extended valuations we’ve been seeing in equities. Perhaps they’re easing back a bit just in case there are hiccups in vaccine rollouts or if U.S. President Joe Biden’s stimulus plans get watered down.

Investors also seemed worried after European markets faltered as data showed that coronavirus-related restrictions have been pressuring business activity in the eurozone. The U.K. prime minister said the nation’s third wave of lockdowns could drag on until summer. There have also been increasing restrictions in Germany and Hong Kong, and the U.S. president said the pandemic will get worse before improving.

Rising worries about the coronavirus helped flip the risk switch to “off”, pressuring oil futures and the yield on the 10-year Treasury while Wall Street’s main fear gauge, the Cboe Volatility Index (VIX), moved higher.

Blue Chips (and Microchips) Falter

Sizeable pullbacks in Dow Jones Industrial Average components Intel (NASDAQ:INTC) and International Business Machines (NYSE:IBM) weren’t helping things either.

IBM was down more than 8% in premarket trading despite earnings coming in handily above expectations. Revenue fell 6% year on year, marked a fourth consecutive quarterly drop, and came in below analyst expectations. Amid macroeconomic uncertainty as the pandemic continues, sales were impacted from pressure on larger software transactions and project delays in some services engagements, the company’s CEO said on a conference call.

Meanwhile, Intel (NASDAQ:INTC) shares were roughly 5% lower this morning. Yesterday, the chip-maker was the second-best performer in the Nasdaq Composite, rising nearly 6.5% on the day with much of the gains coming in the minutes before the bell after the company ended up releasing its full earnings a few minutes early.

Earnings handily beat analyst expectations. Revenue was also better than forecast, helped by record PC-centric sales. While INTC investors welcomed the news, as well as better than expected data-centric results from the company, shares quickly lost much of the day’s gains in after-hours trading, losses that continued into this morning.

Investors apparently didn’t warmly receive comments from the company’s incoming CEO that INTC will manufacture most of its 2023 products itself even as it plans to expand its use of external foundries for some technologies and products. Some investors may be wanting the company to outsource more manufacturing and focus on designing chips. INTC is facing stiff competition from Taiwan Semiconductor (NYSE:TSM) and other chipmakers, with INTC’s manufacturing having struggled to keep pace.

Keeping Tech’s 'On' Button Glowing

Tech leadership was in fashion again yesterday. Apple (NASDAQ:AAPL) shares rose nearly 3.7% ahead of earnings next week, helped by Morgan Stanley (NYSE:MS) boosting its price-target for the tech bellwether. Facebook (NASDAQ:FB) was also up ahead of earnings next week, and Amazon (NASDAQ:AMZN) had a strong showing.

The tech gains helped push the Nasdaq Composite and S&P 500 Index to new record closes. The tech-heavy COMP outperformed the broader index even after an amazing 2% rise the previous session following impressive earnings from Netflix (NASDAQ:NFLX) that helped propel the rest of the FAANG stocks.

The outperformance of tech even as the small-cap Russell 2000 index faltered raises the question of whether the rotation we’ve been seeing—into the reopening trade and out of the mega-cap technology shares—might be cooling. That shift has come to prominence as stocks tied to economic cycles have gained in popularity amid growing optimism that congressional stimulus and vaccines will help the economy get back on its feet.

But the stay-at-home trade—which has benefited big-tech as well as other companies that can do well as more people shop, dine, work, learn, and entertain themselves at home—wasn’t quite dead on Thursday. Peloton Interactive (NASDAQ:PTON) rose 1.5% and Zoom Video Communications (NASDAQ:ZM) rose very slightly. Those companies have become the poster children for companies that can benefit from the stay-at-home economy.

While the stay-at-home trade wasn’t coming apart on Thursday, the cyclical Energy sector was the worst performing on the day, Alphabet (NASDAQ:GOOGL) only recorded a slight gain, and NFLX apparently succumbed to some profit taking. Those factors suggest that the gains in other tech companies had more to do with upcoming earnings optimism than with a more profound shift in the tug of war between the reopening trade and stay-at-home investing. We’re likely to continue to see that ebb and flow continue until enough of the population has been vaccinated that investors are more confident in the economic recovery.

Domino Effect: Much has been said about the U.S. economy benefiting from existing and potentially future coronavirus stimulus. But how might other nations be affected by Congressional aid for the average American? The current playbook for stimulus is for direct payments to households, Chris Wallis, CEO of Vaughan Nelson Investment Management, noted yesterday on the TD Ameritrade Network.* That type of stimulus encourages consumption of goods more than it does consumption of services, he said. If people use the direct deposits to buy more clothing and gadgets, it seems that will in turn stimulate the Chinese economy as well as other emerging markets that either export finished goods to the U.S. or supply China with raw materials.

Material Effect: The Materials sector may not get much glory. After all, companies in it only have a $2.5 trillion combined market cap compared to the big kahuna Information Technology, with its $13.8 trillion valuation. But the Materials sector can be a key component of a diversified equities portfolio. At the moment the sector is outperforming the wider market, up more than 22% on the year through Thursday’s close compared with the SPX’s gain of around 15.7%. Although many companies within the sector are involved in producing commodities, Materials has fared far better than the Energy sector. Indeed, the low oil prices have been a boon to miners and metals companies even as prices for the gold, copper and steel they produce have been rising, helping that industry to the top percentage performance within the Materials sector over the past year. With cyclical stocks coming back in favor, it seems like Materials might have more room to run as long as the economic recovery stays on track.

Less Powder to Keep Dry: Recent quarterly reports from big banks indicate that the rest of earnings season may end up being generally better than expected. Because banks are involved in essentially every part of the economy, their quarterly performance can help set investor expectations for reports from different kinds of companies. But perhaps more importantly, the fact that large financial institutions have reduced the money they have socked away for potentially bad loans seems to be a bright sign for the general economic recovery. “These reserve releases indicate that the big banks are far more optimistic about economic and business conditions for the coming periods,” according to Zacks Investment Research.

It’s kind of a double-whammy. There’s the stimulus effect from the shifting of resources out of sequestered reserves and into loans to businesses and households. And then there’s the signal effect of big banks apparently seeing sunnier skies in the horizon.

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