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Stock Market Rally

Can You Count on the Stock Market Keeping Its Rally Going? 

Investors always look for the light at the end of the tunnel. It’s no different this time, with the lull the months of March and early April have witnessed as a result of Covid-19 coronavirus. While it is essential to look for the next big investing opportunity, even when there seems to be none around, you also need to be careful you don’t jump the gun. 

Since March, the Market Is on a Roll

After the coronavirus pandemic, the market did experience flashes of growth despite the overall bearish volatility. But since March 23, the S&P 500 has grown around 25%. There has been a continuous debate about how sustainable these gains can be, as a result of the Covid-19 fallout. Even the Nasdaq Composite is in the year-to-date (YTD) lead. Is this an indication that the bad times are past?

Not to Get Drawn Away by the Rebound 

According to prominent strategist Sophie Huynh, as quoted by MarketWatch, investors really shouldn’t be drawing too much from this since the rebound has been mainly surrounding the healthcare, staples and technology sectors. What’s characteristic about these sectors is that they benefit from an environment of low interest rates and kind monetary policies. The current work-from-home situation has also contributed to their growth. These influences aren’t exactly sustainable. 

The upside is limited now, Huynh reckons. She is waiting for a rebound concerning industrial, energy and discretionary stocks. These are stocks that really reflect economic growth recovery more than the other stocks. A total “risk off” is still some way off, she reckons. Currently she doesn’t see any sign of capitulation when compared to 2008 levels, but some of the risk-off has settled in.  

Unemployment Figures Keep Rising

As per reliable data, the total number of individuals who have filed for unemployment in the US is 25 million, when including the 4.4 million who have recently filed for unemployment. The Markit PMI services and manufacturing indexes have dropped, while sales of new homes have also sunk 15%.

Domino’s Pizza, Target and Eli Lilly 

As for the current situation, Domino’s Pizza ($DPZ) missed its same-store sales estimates. The company’s shares slumped 2% in premarket trading on last Thursday after the pizza chain reported first-quarter profit and revenue that rose above expectations but saw reduced U.S same-store sales. However, Target ($TGT) experienced an increase in online sales while pharmaceutical company Eli Lilly ($LLY) also reported earnings growth.  The shares of Eli Lilly rallied 1.5% during premarket trading Thursday – the drug maker had reported better-than-expected first-quarter profit and revenue and also provided an outlook for the full year, which was consistent with the forecasts. They witnessed revenue boost by an estimated $250 million due to increased customer buying patterns related to the COVID–19 pandemic.

Uncertainty for Target?

But there is still uncertainty for Target as it experienced big sales swings. The shift in shopping trends during the pandemic is the primary reason. In fact, the shopping trend shift has been from physical and online stores to only online. That has affected Target’s earnings, making it less profitable. So, the uncertainty continues for the period past the first quarter. 

On April 23, Target released a business update containing valuable information for investors as well as those following the broader retail sector. 

  • Their quarter-to-date comparable sales are up 7% though comps have reduced slightly in stores and digital sales have more than doubled. 
  • For the first few weeks of April, digital sales surged 275% whereas social distancing measures resulted in in-store comparable sales to fall by the mid-teens. 

The company noted that it has increased market share across all of its core merchandise categories. Nevertheless, changes in supply chain to cope with the rise in digital sales and higher wages and bonuses for staff have added up to incremental costs. Investments and expenses and the shift to lower-margin products like food and beverage as well as inventory write-downs for unsold apparel and accessories may lead to the company’s operating margin for the first quarter to fall by more than 5% points from the previous year. This is a threat to its quarterly profit caused by an operating margin of less than 1.4% compared to 6.4% the previous year. However, the company’s CEO reassures that even though the present crisis will put near-term pressure on their profitability, that pressure is far outweighed by doing right by their team and their guests. He said they were confident the actions they were taking at present will drive growth and greater guest affinity over the long term.

The market may give weight to factors such as reduced in-store sales for Target, uncertainty regarding the return of customers in full numbers to their stores, and the shift to lower margin online shopping. This could keep Target’s stock value uncertain, at least for now.

As a stock trader, you can find growth opportunities in the current situation. But it’s still too early to make any investment plan under the notion that we’re out of the woods. We still need more time to find that out for sure. Keep your eyes on the industrial and energy sectors. But with advanced direct access trading platforms offered by online broker dealers, you can easily get started in stock trading.        

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