By Steve Goldstein, MarketWatch
Right now, there is a tug of war playing out between cyclical stocks and what has become the defensive play, the technology sector, on a seemingly daily basis.
“Washington and the Fed continue to push money into the system. And if the economy stays weak, then bonds and defensives will do quite well,” says Bill Callahan, investment strategist at Schroder Investment Management in New York. “If cases slow down and the economy recovers, you’re going to see explosive moves higher in more cyclical equities and commodities,” says Callahan. For now, he jokes, big tech stocks are “the new Treasurys — any hint of bad news sends the tech stocks soaring.”
From a strictly markets perspective, the recent increase in virus cases has come at a good time, he says.
“From a humanitarian perspective, we don’t want anyone to get sick, and from an economic perspective, we don’t want anyone to have to shut down, but the second spike may have come at a really good time for markets, because it gives Washington the cover to do another huge round of stimulus that gets spent in the real economy,” he says.
The market experience from April shows that investors just need signs of progress, not certainty, on coronavirus. “Eventually we know that the cases will peak and move down. And I think that the market is really going to like that, and I think that, in particular, some of the more cyclical stocks will like it,” he says.
In terms of which sectors would benefit, Callahan highlights the travel and leisure, financials and energy sectors, without identifying particular companies. “40 dollars a barrel [for oil] doesn’t work for anyone,” he says of energy.
The key point he makes, however, is that a full recovery isn’t needed. “If you’re a professional investor, it’s really hard to go to your investors and say, ‘Well, I bought banks instead of Amazon, and that’s why I underperformed,” he says. “People don’t want to hear, ‘Well the valuations looked whatever.’” So, everybody is kind of on one side of the boat with the safety tech trade. So when you get better news, that snapback, that closing of the gap between performance is going to be fast and violent.”
For now, he advises trimming the position on some of the winners and start looking at stocks that are trading as if “it’s the end of days.”
The news on the coronavirus front wasn’t good on Wednesday — increases in deaths, new cases and the positive test rate in the U.S., according to data from the COVID-19 tracking project.
Tesla /zigman2/quotes/203558040/composite TSLA -4.84% reported a surprise profit for the second quarter, giving the electric-car maker four consecutive periods of profitability and putting it on track to enter the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.31% .
Software giant Microsoft /zigman2/quotes/207732364/composite MSFT -2.70% reported record revenue in its fiscal fourth quarter, and guided to revenue in its key divisions that either met or exceeded Wall Street estimates. AT&T /zigman2/quotes/203165245/composite T +1.77% reported a lower-than-expected profit and Twitter /zigman2/quotes/203180645/composite TWTR -3.81% reported stronger-than-forecast subscriber numbers.
Jobless claims data showed the first increase in weekly claims since late March, as U.S. initial jobless claims rose 109,000 to 1.42 million in week ended July 18. Meanwhile Republican lawmakers are debating the extent of extra jobless benefits as they craft a new stimulus bill.
The mayor of Portland, Oregon, was tear-gassed by federal agents in another night of protest, while President Donald Trump said he would send more officers into cities.
Stock futures /zigman2/quotes/209948968/delayed ES00 -0.55% seemed to be losing steam as the open approached.