California Scares the Market

By Alex Eule |  Monday, July 13

A Limit to Hope. Stocks began the day in the same way they've spent most of the last month: rallying in the face of troubling Covid-19 news. As long as the re-opening continues apace, investors see little reason to worry. 

The Nasdaq Composite soared to another record intraday. The tech-heavy index was up as much as 2% late this morning. The Dow Jones Industrial Average was up more than 500 points in mid-day trading.

And then the market got a surprise. California Gov. Gavin Newsom said he was ordering indoor operations closed statewide for restaurants, movie theaters, and museums. He ordered bars to close entirely. Meanwhile public schools in Los Angeles and San Diego said they would hold all classes remotely this fall.

In a joint statement the school districts said: "The skyrocketing infection rates of the past few weeks make it clear the pandemic is not under control." The statement carried a resigned tone: "This decision will impact our students in ways that researchers will take years to understand." 

Meanwhile, Walt Disney shut down Hong Kong Disneyland as Covid-19 cases began to increase across Hong Kong. The move was required by the government. The decision comes just days after Disney re-opened Disney World in Orlando. 

Between new closings and more parents stuck at home come the fall, investors seemed to rethink their optimism -- for one afternoon, at least. 

The Nasdaq finished the day down 2.1%. The Dow closed essentially flat. Tesla's volatile stock symbolized the change in sentiment. Shares of the electric-vehicle maker were up 16% at one point during the trading session. They finished the day down 3.1%. 

There was one hopeful note. The Food and Drug Administration granted fast-track designation for Covid-19 vaccines made by Pfizer and BioNTech. A vaccine from Moderna has already received similar fast-track treatment, which could expedite approval. 

California's re-closing casts a pall on second-quarter earnings season, which unofficially kicks off tomorrow with results from JPMorgan Chase,  Wells Fargo, and Citigroup. Delta Air Lines is also scheduled to report its second-quarter results in the morning.

For S&P 500 companies, analysts currently forecast an aggregate earnings decline of 44% versus a year ago. Keep in mind, the majority of companies tend to beat estimates in any given quarter. But this is no typical time.