The following is an excerpt from Zacks Chief Strategist John Blank’s full Jun Market Strategy report To access the full PDF, click here
What’s a stock trader to do?
It’s June. Surely you are mindful about all of this tumult.
Don’t worry too much. The New York and Washington Federal Reserve Banks – formerly the staid banker’s lender of last resort – have now become the 1st default crisis buyer in public fixed income capital markets.
Consider this timeline. In 2007, the Fed’s balance sheet was about $1 Trillion in size:
- Facing an epic housing finance crisis, it grew by $1T in 2009
- Facing a follow-on European debt crisis, it grew by $2T after 2013
- In the last three months of 2020, it grew another $3T
When the 10-year U.S. Treasury offers a paltry 0.80% annual yield, where do stocks go?
To June 5th, the YTD S&P 500 index loss has receded to just -3.7%. On May 5th, that YTD loss was a larger -12.0%. On April 5th, the YTD decline was a whopping -23.0%.
We have now reeled back nearly all of the coronavirus losses. A stock market correction is a drop of -10% or greater. If prices drop -20% or more, this gets called a bear market. What to call this distrusted three-month long stock market rally? That remains a stumbling block.
A “Don’t Fight the Fed” rally may be the most appropriate. But there is more kick to this:
- Over March, the S&P 500 fell -16.3% due entirely to virus shutdowns. Swift Fed action stabilized corporate bond markets.
- In early April, the Federal Fiscal CARES stimulus act passed. Since then, the U.S. Congress got a 2nd supplemental funding bill passed, with more small business loans.
- In early May, international travel shutdowns remained the norm. Some U.S. state governors gingerly lifted their “Stay-at-Home” decrees.
- In early June, a number of European travel shutdowns are ending, and all 50 U.S. states are open for business.
After reaching 30k to 35K coronavirus cases a day across April, the U.S. is seeing roughly 20K cases a day in early June. The most-dire scenarios have been put to bed, for now. Hospitals are coping well. ICUs beds are widely available.
Zacks June Sector/Industry/Company Telescope
The Zacks Industry Rank setup in early June, predictably, was nothing to write home about.
As more reopened economic sectors gain traction, in more and more big U.S. states, this too shall pass. Take this month with a grain of salt.
The best groups are Utilities, Info Tech and Health Care. Those are the obvious “Stay-at-Home” plays.
Financials gained a notch, but still look shaky overall. Ditto Consumer Staples high “Stay-at-Home” plays, at the late point in COVID time.
Materials, Consumer Disc., Energy, and Industrials feel the most stress. There are some shiny niches though. Metals Non-Ferrous and Pipelines are worth looking into.
(1) Utilities went back to Very Attractive. Utilities-Gas Distribution looks excellent. Electric Power is looking good.
Zacks #2 Rank (BUY): Sempra Energy (SRE - Free Report)
Sempra Energy is a Southern California-based energy services holding company involved in the sale, distribution, storage and transportation of electricity and natural gas.
(2) Info Tech rose to Very Attractive from a Market Weight. Misc-Tech and Computer-Office Equipment were the best, followed by Computer-Software Services.
Zacks #2 Rank (BUY): Fortinet (FTNT - Free Report)
Headquartered in Sunnyvale, CA, Fortinet is a provider of network security appliances and Unified Threat Management (UTM) network security solutions to enterprises, service providers and government entities worldwide.
(3) Health Care stayed Attractive. Drugs led again, and by a wide margin.
Zacks #1 Rank (STRONG BUY): Abbvie (ABBV - Free Report)
North Chicago, IL-based AbbVie has become one of the top-most pharma companies after it acquired Botox maker Allergan in a cash-and-stock deal for $63 billion in May 2020.
The deal is expected to transform AbbVie’s portfolio and lower its dependence on Humira, its flagship product, which has already lost patent protection in Europe and is due to face biosimilar competition in the United States in 2023.
AbbVie has one of the most popular cancer drugs in its portfolio, Imbruvica, and its newest drugs Skyrizi (risankizumab) and Rinvoq (upadacitinib) position it well for long-term growth.
(4) Financials rose to Unattractive from Very Unattractive. Finance and Investment Funds look best.
(5) Consumer Staples fell to Unattractive from Attractive. But Consumer Products-Misc. Staples remained the strongest industry group.
(6) Communications Services fell to Very Unattractive from Market Weight. Telco Services and Utility-Telephone moved lower.
(7) Materials fell to Very Unattractive from Market Weight. Metals Non-ferrous (the gold miners) are the sole strong spot.
(8) Consumer Discretionary stayed at Very Unattractive. The Other Consumer Discretionary group remained the best group. Lots of poor industry groups here.
(9) Energy remained Very Unattractive again. Oil & Gas pipelines are the major exception. They look great.
(10) Industrials remained Very Unattractive. The turn in cap-ex is not showing up yet. Machinery, Conglomerates and Industrial-Products & Services are Market performers.
Allow me to sum up the situation — This isn’t your college economics textbook Fed.
2020 events have already thrown a lot at the stock market and the Fed: An impeachment trial, a global pandemic, country-wide domestic protests.
In light of all that, it sounds absurd to write this. Don’t forget the November U.S. presidential election! That’s yet another source of volatility to price in.
Believe it or not, January top-down Wall Street consensus thought a contentious November election was the major 2020 market-relevant risk.
But also keep this mantra, front-and-center, driving your stock trading tactics: Don’t Fight the Fed.
They can see what you see. And they are “first-in” these days.
Warm regards and happy trading.