The numbers are in – and we’re facing a new coronavirus surge.
But even after a weekend full of headlines about it, markets opened flat this morning.
So get ready for another round of Big Media stories about how “disconnected” the market is from reality. Of course, when Big Media says “the market is disconnected,” they really mean “the market is wrong.”
When they supply bad news about Covid-19, they demand the markets follow suit and crash.
That’s the Reality Gap of the week. The long awaited and feared second surge of coronavirus cases is now happening – but despite expectations, that hasn’t brought the market down yet. And I don’t expect Covid-19 news to give the market a significant pullback anytime soon.
True, we did get a sell-off around noon on Friday. That’s when Florida announced yet another sharp increase in the number of coronavirus infections.
But Florida had been breaking infection records for a week at that point.
Friday around noon was also when Apple Inc. (AAPL) said it would close 11 stores across Arizona, Florida, and the Carolinas because of rising coronavirus spread there. That may well have had more to do with the pullback than Florida’s Covid-19 data.
Maybe for the markets, Covid-19 isn’t real until Apple says it is – much like it was back in February.
See, traders just don’t seem to care much for Big Media’s “disconnection” narrative. Sure, stocks will be more volatile now. You saw that in the last two weeks, with big down days followed by big up days.
But people just aren’t that afraid right now. There’s a lot of optimism about states and businesses reopening – among investors and non-investors alike.
And most importantly, the stimulus continues to feed the stock markets. Businesses haven’t run out of the Paycheck Protection Program money yet, last month’s $1,200 checks are still giving people a boost, and consumer demand remains high thanks in part to the extra $600 in unemployment benefits.
Not to mention the trillions of dollars the Fed has pumped into stocks and bonds.
That’s not to say this will go on forever. I can’t imagine we won’t have another pullback at some point this year.
But it may well be a while, maybe until the real second coronavirus wave hits in the fall. That could give us another pullback of 10%-20%. Maybe even the 30% we saw in February.
The pullback will end up creating more wealth than destroying it (but only if you do this)
In the meantime, the financial world is awash with money and it’s all finding its way to the stock markets.
Stay optimistic on stock prices with full awareness that volatile headline risk still exists.
That said, keep an eye on these two earnings reports this week…
After markets close on Thursday, Nike Inc. (NKE) is reporting its second-quarter results. Their rebound these past few months has been astonishing, with the stock last week getting close to the all-time highs from January.
That means traders are already pricing in amazing results. But with Nike’s global reach, there’s a lot of potential for Covid-19 disruptions, and anything short of a perfect report may be a disappointment.
Expect traders to “sell the news” with Nike.
Darden Restaurants Inc. (DRI) also reports on Thursday. As the owner of Olive Garden, Longhorn Steakhouse, and other restaurant chains, Darden will be a good bellwether for how well the reopening is going. The “pent up demand” story has started to wear thin over the last week or so – I can’t imagine traders liking what DRI has to say on Thursday.
Great trading, stay safe out there and God bless you,
D.R. Barton, Jr.