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Looking Back, Looking Forward – September 06, 2020

Spurred by excitement from Apple’s & Tesla’s stock splits and Zoom Video’s record-setting earnings report, stocks got off to a strong start in September. Concerns of valuation excesses, however, soon got in the way. The S&P 500 ended its winning streak after five weeks of gains.

Stocks got out of the blocks quickly in September, spurred by excitement from Apple’s four-for-one and Tesla’s five-for-one stock splits. In a sign of the times, Zoom Video Communications (ZM) soared 40% after its quarterly sales more than quadrupled.

Concerns of rising valuation soon tripped stocks. Investors rotated out of the red-hot technology sector and into out-of-favor parts of the market like cyclicals, defensives, and value stocks. A Financial Times report escalated worries of excesses in valuation, attributing them to Softbank options trading.

The Labor Department reported the economy regained a higher-than-expected 1.4 million jobs in August. The unemployment rate fell to 8.4% from 10.2% the month before. The jobs report, however, could not turn the S&P 500’s fortunes; its winning streak ended after five straight gains.

For the week ending September 4, the S&P 500 (SPY) fell 2.3%.

Nine of the 11 sectors declined.

Sector returns for the week ending September 04, 2020

Leaders and laggards for the week ending September 04, 2020.

Materials (XLB) and utilities (XLU) were the two sectors finishing in the black for the week.

Energy (XLE), information technology (XLK), and communication services (XLC) lagged the S&P 500.

The number of declining stocks in the S&P 500 beat advancers by a wide 2-to-1 ratio.

The S&P 500’s top 10 winners included companies from the consumer discretionary, consumer staples, and materials sectors.

1. Consumer discretionary: PVH Corp. (PVH) up 11% and Carnival (CCL) up 8%

PVH Corp. (PVH) reported a profit of $0.13 a share versus analysts’ forecast for a loss of $2.42 a share from cost-cutting, strength in digital commerce, and improved inventory management. The apparel maker noted improving business trends in the current quarter in China and Europe.

Carnival’s (CCL) Italy-based brand Costa Cruises announced the start of sailings from Italian ports on Sunday, September 6. Carnival’s Germany-based AIDA Cruises expects to offer cruises starting November 1.

2. Consumer staples: Brown-Forman Class B. (BF-B) up 9%

Brown-Forman (BF-B), the owner of Jack Daniels whiskey and Corbel champagne brands, reported $0.67 a share in profit, beating analysts’ estimate of $0.31 as home consumption of spirits surged during the pandemic.

3. Materials: Eastman Chemical (EMN), LyondellBasell Industries (LYB), International Paper (IP), and Dow Inc. (DOW) up over 6% each

Companies in the materials sector fared well after the ISM reported a better-than-expected Manufacturing Index reading of 56.0 for August. Analysts at Citigroup and Tudor Pickering raised their price targets on Dow (DOW) and Eastman Chemical (EMN). They also benefited from the rotation into value & cyclical stocks.

ETFs also reflected the strength of the materials sector. Palladium ETF (PALL), Brazil small-cap ETFs (BRF and EWZS), and Copper Miners ETF (COPX) were among the week’s top performers.

Others in the list of the S&P 500’s top 10 winners included:

  • Asset manager Invesco (IVZ) up 6%
  • Biotech company Alexion Pharmaceuticals (ALXN) up 6%
  • Credit card provider Discover Financial (DFS) up 5%

Looking ahead to the week of September 8

* The upcoming trading shortened by the Labor Day holiday on Monday marks the end of the summer holidays. Trading volumes should increase as institutional investors return from vacations.

* The earnings calendar includes just two S&P 500 members, Kroger (KR) and Oracle (ORCL). Among companies rising to prominence during the pandemic, Lululemon Athletica (LULU), Peloton Interactive (PTON), and Slack Technologies (WORK) report.

* As for economic data, the consumer price index should provide a reading on inflation. Economists expect a relatively small increase in core inflation. They forecast month-over-month and year-over-year gains of 0.2% and 1.6%, respectively.

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