I hope your Memorial Day was safe, pleasant, and that you managed to avoid the news.
If you didn’t, you’d be forgiven for expecting markets to open deep in the red this morning. As I’m writing this, the leading CNN headline, for example, is “COVID-19 cases are rising in 18 states.”
CNN’s Business section leads with “Markets are pushing higher as lockdowns ease. But huge risks remain.”
That’s this week’s market-moving Reality Gap.
As you can see, the News Media is focusing on the negative parts of the reopening. That’s not to say they’re wrong – cases are rising in some states, and there are plenty of risks ahead of us.
But these headlines give a very skewed impression of what’s happening in the markets. Because despite all that, the Dow was up 500 points Tuesday and another 350 in premarket trading on Wednesday.
Unlike the News Media, Traders are clearly focusing on more positive aspects of the economy reopening. The stimulus from the Fed and Congress is helping there, pumping plenty of money into the system, and for now – keeping a floor under the market.
This gap between the cautious tone set by the media and the optimism and stimulus pushing up the markets will be with us for a while longer. Unless a big surge of COVID cases actually happens in a reopened state, the markets will keep rising.
Not all stocks will keep rising, however. For example, Costco Wholesale Corp. (COST) reports its Q1 earnings on Thursday. In the early days of the lockdown, Costco was going strong on a surge in sales and positive headlines.
But the stock has been mostly flat since. Traders may be looking to “sell the news” once the positive earnings hit. That’s what happened to Netflix Inc. (NFLX), another great stock in the early days of the pandemic. After its good earnings, the streaming company dipped for a couple of weeks, before recovering again.
Costco looks to be on the same trajectory. If it drops after earnings, buy the dip, though you may need to wait a few days for it to find a bottom.
Ulta Beauty Inc. (ULTA) also reports on Thursday. Before the pandemic, this makeup and beauty product store was mostly a bricks-and-mortar business. The lockdowns put a stop to that part of the business. But Ulta has long been one of the better-run beauty companies, and they quickly strengthened their online presence.
I expect their earnings report will be better than expected on the back of those online sales – and I suspect they’ll be able to talk about a good trajectory since the close of the first quarter books.
Cannabis stocks have been another silent success story during the lockdown. Aurora Cannabis Inc. (ACB) jumped on unexpectedly good earnings last week. Canopy Growth Corp. (CGC) reports its earnings on Friday, and the stock has had a strong run since ACB reported. There’s still room for a positive surprise for CGC.
Great trading, stay safe out there, and God bless you,
D.R. Barton, Jr.