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Stocks Signal Potential Shift in Senitment

Friday, August 07, 2020 04:30 PM | Bobby Raines

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Stocks Signal Potential Shift in Senitment

Aug. 7, 2020 - Major indices posted modest gains again this week.

The Nasdaq set a new record high, while the S&P 500 continues to climb back toward the record high set in February.

This week wasn't entirely business as usual though. Tech stocks, which have helped lead the rebound were among the biggest gainers, but joining them this week were industrials, financial services and energy. Those three, which are all bets on resumption of economic activity, have lagged the broader market significantly during the recovery.

There were also signs of weakness in some of the market's recent darlings. Datadog (DDOG) and Fastly (FSLY), two relatively small cloud-computing companies both lost close to 20% after reporting earnings. Even Tesla (TSLA), which has rallied massively in the last couple of months, posted a paltry 1.5%.

The S&P 500 gained 2.45% on the week, while the S&P 500 equal weight index gained 2.51%. This comparison has becoming increasingly useful as a handful of companies with giant market capitalizations has pushed the cap-weighted index higher while the rest of the index hasn't recovered nearly as much. Since the Feb. 19 record high, the S&P 500 is down 1.03%, while the equal-weight version is down 7.45%

It is hard to know if this week's break of recent patterns represents a real shift in sentiment, or is something more related to portfolio balancing after the first of August.

Economic news

The economic docket was pretty full this week. The Purchasing Managers indices from Markit and the Institute for Supply Management showed a very modest expansion of manufacturing in July. Services activity also rose last month. Somewhat troublingly, employment in both manufacturing and non-manufacturing sectors fell by the ISM count.

Those data points were contradicted somewhat by the monthly Employment Situation Report, released today, which showed the economy adding 1.76 million jobs in July. The unemployment rate ticked down to 10.2% from 11.1% in June.

This was a good jobs report with every sector tracked by the Bureau of Labor Statistics adding jobs with the exceptions of mining (more on that below). That said, the unemployment rate remains higher than it was at any point since the Great Recession.

While the news this week was generally good, the economy remains in an incredibly precarious, weakened position.

Those mining jobs we mentioned above? That includes the oil and gas industries, where Baker Hughes reported Friday that the number of active rigs is near a 15-year low. Demand for oil, which is primarily used as a fuel for transportation remains incredibly low as people aren't driving and planes aren't flying.

Congress, so far, has failed to reach a deal to extend economic stimulus measures that ran out at the end of July. Shorter-term (non-monthly) sources of data such as the data from the TSA about how many passengers are flying, and consumer-spending numbers from JP Morgan already showed a decline in the pace or recovery, or even some slippage. With millions of people out of work and programs designed to prop up both small businesses and household spending expiring or expired, it seems almost certain that the recovery will stall here if there is not some renewal of that aid.

The market seems to have a deal priced in. It is hard to know how long the market will remain relatively quiet as talks drag on, in the past, volatility has helped deals get done. It will be interesting to see how next week plays out.

All told this week, the S&P 500 added 2.45% while the Dow Jones Industrial Index rose 3.8%. The Nasdaq gained 2.47%.

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