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Business

Wall Street Week Ahead: Investors eye consumer discretionary stocks as U.S. reopens

NEW YORK (Reuters) – Investors are taking a closer look at the market’s consumer discretionary companies as a reopening U.S. economy fuels hopes of a turnaround for some of the sector’s hardest-hit names.

Many companies in the sector have been battered by the country-wide coronavirus-fueled lockdowns that have weighed on growth and damaged retail spending over the last several months, though the stocks of a few, like Amazon, have soared.

A gradual lifting of lockdowns in some states has stirred hopes for a bounce back for the retailers that make up much of the sector.

Some investors, however, say it may be months before consumers return to their previous shopping habits, making it unlikely that the companies will see a pickup in revenues in the near term.

Firms ranging from middle-income retailers such as Gap Inc and American Eagle Outfitters Inc to high-end destinations like Tiffany & Co and Vail Resorts Inc are expected to report results in the week ahead.

“This particular group is full of landmines,” said Jamie Cox, managing partner for Harris Financial Group. “There is not going to be a lot of investor follow-through until we get some certainty with what future revenue prospects are going to be.”

Shares of the Gap, for instance, are down 43% for the year to date. A recession that persists through the fourth quarter of this year would reduce the company’s revenues by 40%, according to a note by research firm Trefis.

Next Friday’s U.S. jobs report is expected to show that the unemployment rate rose to 19.8% in May, smashing April’s record 14.7%, according to a Reuters poll. Non-farm payrolls are expected to drop by 7.4 million, adding to the 20.5 million jobs lost the previous month.

Cox is focusing on dominant players such as Amazon.com Inc, Walmart Inc and Target Corp, which have a mix of essential items such as groceries as well as electronics and games that can appeal to customers who may face extended lockdowns during a potential second wave of the virus.

Overall, retail companies in the S&P 500 are up 12.9% for the year to date, a gain powered largely by Amazon’s 31% rally. Apparel companies, by comparison, are down 16.2% over the same time.

Brian Jacobsen, senior investment strategist for the Wells Fargo Asset Management Multi-Asset Solutions team, says retail companies will likely show rising expenses over the next several quarters due to items like more frequent sanitation of stores and technology purchases aimed at increasing the productivity of employees working from home.

“It’s really going to be a challenge to get a clear read of the direction for quite a while,” he said.

Despite those headwinds, investors may still gravitate toward companies that are able either to tap the capital markets for funds or draw from their financial reserves, said Randy Frederick, vice president of trading and derivatives with the Schwab Center for Financial Research.

Retailers such as J. Crew and J.C. Penney have already filed for bankruptcy due in part to the coronavirus pandemic, leaving more opportunity for companies that are able to survive and grab market share, said Frederick.

“You’re getting set up for potential upside surprises,” he said. “You may take a step back and look at this and say, ‘No matter how awful these numbers may be, at least they’re still in business.’”

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Business

Small-business loan terms eased under U.S. House-passed bill

WASHINGTON (Reuters) – The U.S. House of Representatives on Thursday approved legislation increasing the amount of time, to 24 weeks from the current eight weeks, for small businesses to use Paycheck Protection Program (PPP) loans spurred by the coronavirus outbreak.

The legislation, passed by a vote of 417-1, now goes to the Senate. The program, created in March, helps support small businesses during the pandemic and encourages them to retain employees.

Last week, senators worked on a bipartisan bill extending the time frame to 16 weeks, instead of the 24 weeks embraced by the House.

If the Republican-controlled Senate passes a bill that varies from the Democratic-led House’s, the two chambers would have to reconcile differences before sending it to Republican President Donald Trump for signing into law.

Meanwhile, the Democratic-controlled House failed to pass legislation opposed by most Republicans requiring public reports on PPP loan recipients.

The House-passed bill comes as states have begun loosening efforts to control the spread of the novel coronavirus, which has raced across the United States and the world.

More than 100,000 people in the United States have died from COVID-19, the illness caused by the coronavirus. Over 1.7 million U.S. cases have been reported.

Under the PPP program, loans for restaurants, hotels and other businesses would convert into federal grants if recipients adhere to a set of conditions, including spending the loan amount within the required time.

Many businesses have been unable to meet the eight-week requirement.

A total of $659 billion has been provided by Congress for the loan program, which is part of broader coronavirus emergency aid totaling around $3 trillion so far.

The House bill that passed on Thursday includes other changes giving businesses more flexibility in using the aid.

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U.S. weekly jobless claims drop, but economic recovery still elusive

WASHINGTON (Reuters) – The number of Americans seeking jobless benefits fell for an eighth straight week last week, likely as some people returned to work, but claims remained at astonishingly high levels, suggesting it could take the economy a while to rebound as businesses reopen.

The Labor Department’s weekly jobless claims report on Thursday, the most timely data on the economy’s health, also showed a decline in the number of people receiving unemployment checks in mid-May. The data, however, excludes gig workers and others collecting benefits under a federal government program.

These workers do not qualify for the regular state unemployment insurance. The various programs, different reporting periods and protocols at state unemployment offices make it hard to get a clear pulse on the labor market.

Economists said the government’s Paycheck Protection Program, part of a historic fiscal package worth nearly $3 trillion, which offered businesses loans that could be partially forgiven if they were used for employee salaries, was also creating confusion.

“We are entering the confusion stage for the employment and unemployment numbers,” said Joel Naroff, chief economist at Naroff Economics in Holland, Pennsylvania. “Reopening of the economy is taking people from government payrolls to private sector payrolls, which is good. But the PPP is creating problems with understanding what exactly is happening.”

Initial claims for state unemployment benefits fell 323,000 to a seasonally adjusted 2.123 million for the week ended May 23, the Labor Department said. Claims have declined steadily since hitting a record 6.867 million in late March, but have not registered below 2 million since mid-March.

Economists polled by Reuters had forecast initial claims falling to 2.1 million in the latest week. Layoffs persist in the insurance, educational services, public administration, transportation and warehousing, agriculture, construction, manufacturing and retail trade industries.

The astonishingly high level of claims, nearly three months after the shuttering of non-essential businesses to control the spread of COVID-19, points to a long recovery for the economy.

That was underscored by other data from the Commerce Department on Thursday showing business spending on equipment plummeting in April and the economy contracting at a much steeper 5.0% annualized rate in the first quarter instead of the previously estimated 4.8% pace.

Data in hand, including on the housing market, manufacturing and consumer spending has left economists expecting gross domestic product could drop in the second quarter at as much as a 40% rate, the worst since the Great Depression.

Stocks on Wall Street were trading higher, but simmering tensions between the United States and China kept investors on edge. The dollar eased against a basket of currencies. U.S. Treasury prices dipped.

LONG-TERM DAMAGE

A record 40.767 million people filed claims since March 21.

“We think these filings in the 10 weeks since the mid-March coronavirus pandemic lockdown tells the true story of the wreckage out there in the country and the enormous long-term damage done to the economy,” said Chris Rupkey, chief economist at MUFG in New York.

The number of people still receiving unemployment benefits after an initial week of aid dropped 3.860 million to 21.052 million in the week ending May 16. The so-called continuing claims number is reported with a week lag.

Economists cautioned against reading too much into the sharp decline, noting that some states required residents to file for benefits on a bi-weekly basis, which they said was injecting volatility into the data. The drop in continuing claims was concentrated in Florida, California, Washington State and Ohio.

“We doubt this is due to hiring and may reflect more the fact the continuing claims numbers are state benefits and don’t include the people claiming the Pandemic Unemployment Assistance,” said James Knightley, chief international economist at ING in New York.

The Pandemic Unemployment Assistance (PUA) program is the federal government initiative that pays unemployment checks to gig workers and many others for coronavirus-related job and income losses.

These workers do not qualify for regular state unemployment insurance and are not included in both the weekly jobless claims and continuing claims figures. There were 1.193 million claims submitted last week under the PUA program, on top of the 7.793 million applications processed in the week ending May 9.

Including gig workers and other claimants, a staggering 31 million people were receiving benefits under all programs in early May.

The continuing claims data covered the period during which the government surveyed households for May’s unemployment rate.

Continuing claims increased roughly by 3 million between the April and May survey periods, suggesting a rise in the jobless rate from a post-World War Two record of 14.7% last month.

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Business

Wall Street gains amid economic hopes; tech shares decline

(Reuters) – The Dow and S&P 500 rose on Wednesday, powered by banks stocks, as optimism for an economic recovery as lockdowns continued to ease overshadowed worries of simmering U.S.-China tensions.

Declines in technology shares limited the advance, with the Nasdaq underperforming the other major indexes.

The S&P 500 financial index .SPSY provided the biggest boost to the benchmark index, sending it past the psychologically key 3,000 level in intraday trading for a second day in a row. In contrast, heavyweights Amazon.com (AMZN.O), Microsoft Corp (MSFT.O) and Facebook Inc (FB.O), which have led the recent rally, were down.

“It’s the tech stocks that are probably most sensitive to Chinese growth,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in St. Louis.

“If the market is going to go higher from here, you’re going to have to have broader participation, but you are going to need those large-cap tech companies to be along for the ride, because they make up such a large portion of the benchmark,” Samana said.

The easing of lockdowns, optimism about an eventual COVID-19 vaccine and massive U.S. stimulus have powered the recent stock market rally, with the S&P 500 .SPX on Tuesday ending at its highest level since early March.

Even so, U.S. tensions with China have cast a cloud on markets. President Donald Trump said Tuesday that Washington would announce its response to China’s planned national security legislation on Hong Kong before the end of the week.

The Dow Jones Industrial Average .DJI rose 317.75 points, or 1.27%, to 25,312.86, the S&P 500 .SPX gained 21.81 points, or 0.73%, to 3,013.58 and the Nasdaq Composite .IXIC added 6.73 points, or 0.07%, to 9,346.95.

Facebook Inc (FB.O) and Twitter Inc slipped as Trump threatened to shutter social media companies a day after Twitter attached a warning to some of his tweets, prompting readers to fact-check the president’s tweets.

Advancing issues outnumbered declining ones on the NYSE by a 2.70-to-1 ratio; on Nasdaq, a 1.81-to-1 ratio favored advancers.

The S&P 500 posted five new 52-week highs and no new lows; the Nasdaq Composite recorded 35 new highs and eight new lows.

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World News

Trump offers to mediate 'raging' India-China border dispute

WASHINGTON/NEW DELHI (Reuters) – U.S. President Donald Trump said on Wednesday he had offered to mediate a standoff between India and China at the Himalayan border, where soldiers camped out in a high-altitude region have accused each other of trespassing over the disputed border.

“We have informed both India and China that the United States is ready, willing and able to mediate or arbitrate their now raging border dispute,” Trump said in a Twitter post.

The standoff was triggered by India’s construction of roads and air strips in the region as it competes with China’s spreading Belt and Road initiative, involving infrastructure development and investment in dozens of countries, Indian observers said on Tuesday.

Both were digging defences and Chinese trucks have been moving equipment into the area, the officials said, raising concerns about an extended standoff.

There was no immediate response from either India or China to Trump’s offer. Both countries have traditionally opposed any outside involvement in their matters and are unlikely to accept any U.S. mediation, experts said.

China’s ambassador to India, Sun Weidong, struck a conciliatory note, saying the two Asian countries should not let their differences overshadow the broader bilateral relationship.

“We should adhere to the basic judgment that China and India are each other’s opportunities and pose no threat to each other. We need to see each other’s development in a correct way and enhance strategic mutual trust,” he said, speaking in a webinar on China’s experience of fighting COVID-19.

“We should correctly view our differences and never let the differences shadow the overall situation of bilateral cooperation.”

The two countries are engaged in talks to defuse the border crisis, an Indian government source said. “These things take time, but efforts are on at various levels, military commanders as well as diplomats,” the source said.

The Chinese side has been insisting that India stop construction near the Line of Actual Control or the de facto border. India says all the work is being done on its side of the border and that China must pull back its troops.

Trump in January offered to “help” in another Himalayan trouble spot, the disputed region of Kashmir that is at the center of a decades-long quarrel between India and Pakistan.

But the U.S. offer triggered a political storm in India, which has long bristled at any suggestion of third-party involvement in tackling Kashmir which it considers an integral part of the country.

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S&P 500 tops 3,000 pts on hopes of economic recovery, COVID-19 vaccine

(Reuters) – U.S. stocks jumped and the S&P 500 breached 3,000 points on Tuesday as optimism about a potential coronavirus vaccine and a revival in business activity helped investors overlook simmering Sino-U.S. tensions.

The benchmark index traded above the key psychological level and also above its 200-day moving average, a closely watched long-term trend indicator, for the first time since March 5.

All 11 S&P sector indexes gained in early trading, with cyclical financials .SPSY, industrials .SPLRCI and energy .SPNU stocks jumping more than 3%.

The S&P 500 has risen about 37% from its March lows on a raft of central bank and government stimulus, and is now just about 11% below its February record high.

On Monday, California decided to reopen in-store retail businesses and places of worship from one of the most restrictive shutdowns in the United States.

“People have been locked up and when they see sparkles of hope like vaccines, that drives optimism probably ahead of where it should be and clearly ahead of the economy,” said Richard Steinberg, chief market strategist at Colony Group in Florida.

At 10:01 a.m. ET, the Dow Jones Industrial Average .DJI was up 575.66 points, or 2.35%, at 25,040.82, the S&P 500 .SPX was up 54.53 points, or 1.85%, at 3,009.98, and the Nasdaq Composite .IXIC was up 126.77 points, or 1.36%, at 9,451.36.

U.S. biotech group Novavax Inc (NVAX.O) jumped 17.3% as it joined the race to test coronavirus vaccine candidates on humans and enrolled its first participants.

Merck & Co Inc (MRK.N) added 1.5% as it announced plans to develop two separate vaccines.

But with U.S. unemployment soaring beyond 14% and macroeconomic data pointing at a deep recession, analysts warned financial markets could be betting on too fast a recovery.

“Business cycles don’t simply end in two to three months – in a way that’s what some of these sectors are pricing. It’s going to be very slow,” said Patrick Fruzzetti, managing director and senior research analyst at the Rosenau Group.

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Beaten down travel-related stocks soared, with S&P 1500 airlines index .SPCOMAIR up 10.3% and cruise operators including Carnival Corp (CCL.N) more than 12%.

Advancing issues outnumbered decliners more than 9-to-1 on the NYSE and 5-to-1 on the Nasdaq.

The S&P index recorded 13 new 52-week highs and no new low, while the Nasdaq recorded 83 new highs and four new lows.

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World News

Russia seeks 18-year jail term for ex-U.S. Marine accused of spying

MOSCOW (Reuters) – Russian prosecutors asked a court on Monday to sentence former U.S. Marine Paul Whelan, who is on trial accused of spying for the United States, to 18 years in a maximum security prison, his lawyer said.

Whelan, a U.S. national who also holds British, Canadian and Irish passports, was detained in December 2018. He says he was set up in a sting and has pleaded not guilty to the charge.

His trial, which began on March 23, has been closed to the public as its content broaches classified information.

The court will announce its verdict on June 15, Whelan’s lawyer Vladimir Zherebenkov said after Monday’s hearing.

U.S. authorities have called the charges against Whelan spurious have called on Russia to release him, describing the case as a “significant obstacle” to improving bilateral ties.

Whelan, who turned 50 in custody this year, has used his appearances at hearings to allege he has been ill-treated by prison guards and been denied medical attention.

Russian authorities have accused him of faking health problems to draw attention to his case.

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Politics

U.S. discussed conducting its first nuclear test in decades, Washington Post reports

(Reuters) – The Trump administration discussed last week whether to conduct its first nuclear test explosion since 1992, the Washington Post reported late on Friday, citing a senior official and two former officials familiar with the matter.

The topic surfaced at a meeting of senior officials representing the top national security agencies after accusations from the administration that Russia and China are conducting low-yield nuclear tests, the Washington Post said wapo.st/2Xljjro.

The meeting, however, did not conclude with any agreement to conduct a nuclear test. A decision was ultimately made to take other measures in response to threats posed by Russia and China and avoid a resumption of testing, the report added.

U.S. officials could not be reached immediately for a comment.

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Business

Wall Street ends mixed as China-U.S. tensions weigh

(Reuters) – Wall Street ended mixed on Friday in a mostly tame finish to a week of strong gains, as investors gauged China-U.S. tensions and amid ongoing uncertainty about the pace of economic recovery from the coronavirus.

President Donald Trump’s warning on Thursday that the U.S. would react strongly to China’s plan for a national security law in Hong Kong has raised concerns over Washington and Beijing’s possibly reneging on their Phase 1 trade deal.

Late in the session, stocks edged lower after the U.S. Commerce Department said it was adding 33 Chinese companies and other institutions to an economic blacklist for human rights violations and to address U.S. national security concerns.

The increasing rhetoric between Washington and Beijing has knocked Wall Street off multi-month highs, although the three main indexes still all rose around 3% for the week, fueled by optimism about an eventual coronavirus vaccine and the easing of virus-related curbs.

“We still think COVID-19 concerns are in the driver’s seat, but we could see U.S.-China relations move back into the front seat,” said Eric Freedman, chief investment officer at U.S. Bank Wealth Management.

U.S. stock exchanges will be closed on Monday for the Memorial Day holiday.

The Nasdaq index is down about 5% from its Feb. 19 record high, helped in recent weeks by gains in Microsoft, Amazon and other heavyweight companies seen coming out of the economic downturn stronger than their smaller rivals.

The S&P 500 real estate sector index jumped 2.2%, leading the 11 sectors, while energy dropped 0.7% as oil prices sank about 3%. [O/R]

A 1.9% drop in Chevron weighed on the Dow.

The Dow Jones Industrial Average fell 0.04% to end at 24,465.16 points, while the S&P 500 gained 0.24%, to 2,955.45. The Nasdaq Composite climbed 0.43% to 9,324.59.

For the week, the Dow added 3.3%, the S&P 500 rose 3.2%, and the Nasdaq climbed 3.4%.

Mixed earnings from retailers Walmart Inc, Best Buy Co Inc and Home Depot Inc earlier this week showed online shopping gaining traction with the lockdown orders, a trend that could damage brick-and-mortar players already feeling pressure from internet rivals.

On Friday, Chinese e-commerce giant Alibaba Group reported better-than-expected quarterly profit, but its shares tumbled almost 6%. Smaller rival Pinduoduo Inc’s U.S.-listed shares surged over 14% after the company posted upbeat results.

Nvidia climbed 2.9% after forecasting strong quarterly revenue as demand surges for its data center chips.

KKR & Co rose 1.1% after India’s Reliance Industries said the private equity firm would buy a 2.3% stake in its digital unit for 113.67 billion rupees ($1.50 billion).

Data analytics software maker Splunk Inc jumped over 12% after it said it expects more demand for its cloud services.

Volume on U.S. exchanges was 8.75 billion shares, compared to the 11.2 billion average for the last 20 trading days.

Advancing issues outnumbered declining ones on the NYSE by a 1.17-to-1 ratio; on Nasdaq, a 1.30-to-1 ratio favored advancers.

The S&P 500 posted six new 52-week highs and no new lows; the Nasdaq Composite recorded 62 new highs and nine new lows.

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Wall Street set for muted open on simmering U.S.-China tensions

(Reuters) – U.S. stock indexes were set for a near-flat open on Friday as investors weighed hopes of more stimulus to revive an ailing economy against simmering Sino-U.S. trade tensions.

China on Friday unveiled details about its plan to impose a national security law in Hong Kong that could see mainland intelligence agencies set up bases in the global financial hub, raising fears of more pro-democracy protests.

Reports of the law on Thursday had drawn fire from President Donald Trump, toppling Wall Street’s main indexes from multi-month highs that were hit on optimism around a revival in business activity with the easing of coronavirus-led lockdowns.

“Market sentiment is really vulnerable to expensive valuation at the moment,” said Andrea Cicione, head of strategy at TS Lombard.

“After the shock of the COVID-19 lockdown, we have to go through a regular recession with high unemployment, low capex, low demand and that’s not what’s priced in at the moment.”

At 8:37 a.m. ET, Dow e-minis were up 21 points, or 0.09%. S&P 500 e-minis were up 2.5 points, or 0.09% and Nasdaq 100 e-minis were down 9 points, or 0.1%.

A swathe of mixed retail earnings from Walmart Inc, Best Buy Co Inc and Home Depot Inc earlier in the week had shown online shopping gaining traction due to the stay-at-home orders.

On Friday, Chinese e-commerce behemoth Alibaba Group reported a better-than-expected quarterly profit, but its shares slipped 1.6%. Smaller rival Pinduoduo Inc’s U.S.-listed shares gained 1.2% after its own upbeat quarterly earnings report.

Hewlett Packard Enterprise fell 7.3% after missing second-quarter revenue and profit estimates, hit by global lockdowns since February.

Data analytics software maker Splunk Inc rose 5.8% after saying it expects higher demand for its cloud services as people around the world take to working from home.

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