Stocks are falling this morning, finally, after bursting upwards in a 2-session buying frenzy following the release of the May jobs report last Friday. The Dow, S&P, and Nasdaq Composite have fallen 1%, 0.8%, and 0.1%, respectively, as of midday.
Only the “stay at home” stocks are rising. Losses elsewhere have dragged down the major indexes, despite another good day for market-leading FAANG companies, all of which are up over 1%.
If the hot streak is to continue, bulls need other sectors to help Big Tech. The market’s laggards – primarily value stocks – had two catch-up sessions on Friday and Monday as recession fears subsided in response to the stunning 2.5 million May jobs gain.
To analysts, it was a triumph. And rightfully so.
“Recent data points like the jobs report and not-as-bad-as-feared company updates have fueled the view that the worst of the declines could be behind us,” said RBC Capital Markets analysts on Monday.
“The risk-on trade really is gaining traction. Valuations have spiked to historical highs in many industrial sub-sectors, signaling a strong recovery is potentially taking hold.”
And with a “risk-on” environment – a market where stocks outperform bonds – still kicking, FOMO (fear of missing out) has made the reopening gains even stronger.
Now, however, FOMO seems to be turning into FOSO (fear of selling-off) as traders attempt to take profits. Massive returns came to those who bought-in near the bottom, especially in a few key sectors.
Airlines, in particular, soared. American Airlines (NASDAQ: AAL) erupted for a 40% gain last Thursday.
Today, AAL’s down over 10%, mirroring its peers which are also plunging.
Speculators drove up cruise line operators, too. Carnival (NYSE: CCL) and Norwegian Cruise Line (NYSE: NCLH) have posted dizzying gains since their May lows. Both stocks are falling this morning.
Bulls appear ready to take a breather even amid ongoing reopening efforts. Covid-19 hasn’t officially been conquered quite yet, leaving the door open for uncertainty to creep in as the extended rally becomes more elongated.
“Equities continue to trend higher in anticipation of improving economic conditions,” Terry Sandven, U.S. Bank Wealth Management’s chief equity strategist, said.
“But I think it’s premature to declare happy days are here again. What gives us caution is the duration of Covid-19 remains unknown. We don’t have treatments, we don’t have prevention and we’re a little bit at the mercy of how fast the virus spreads.”
For now, the coronavirus has taken a backseat to the Black Lives Matter movement. Americans were told not to gather in large groups to protest the Covid-19 lockdowns. These days, however, state officials say it’s okay to protest police brutality despite widespread fears of a “second wave” of the virus.
The U.S. economy, though enjoying a smooth reopening thus far, has only begun to recover. Another coronavirus outbreak would likely spell disaster for a larger recovery.
Even a single shred of legitimate uncertainty could cause investors to start selling. If it looks like the economy is in jeopardy of not completing the “V-shaped” recovery economists are hoping for, a wicked correction could quickly ensue.
The market needs to figure out what the appropriate value is for stocks. This morning’s losses suggest that bulls may have overdone it.
Hopefully, the “zeroing in” process doesn’t last too long. Or, worse yet, jump-start a bigger sell-off that takes the market to the other extremes.
