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Dow Plows Higher as Bulls Defy ‘Exponential’ Spike in Virus Infections

Last Updated September 23, 2020 2:01 PM

By Francois Aure

Economist Bill Diviney sees Texas - the second-largest state economy - in a particularly bad situation. If his fears are correct, this could be a big problem for equities. | Source: REUTERS/Andrew Kelly

The Dow Jones secured another big gain on Tuesday.
Stock market bulls shrugged off terrible virus data – and launched Apple shares to record highs.
ABN AMRO believes the pandemic is in danger of spiraling out of control again in the U.S.

The Dow Jones enjoyed another big day on Tuesday, although the stock market’s bellwether index was unable to break out of its short-term range.

The stock market rally accompanied a raft of better-than-expected economic data, but – at least for some analysts – pandemic risks have begun to shift back into focus.

Dow Jones Rallies – But Fails to Break Out of Short-Term Range

Dow Jones, stock market — The Dow Jones rose even as virus data worsened around the U.S. | Source: Yahoo Finance

All three of the major U.S. stock market indices enjoyed moderate gains on Tuesday.

Here’s where they stood at 3:27 pm ET:

The Dow had gained 184.03 points or 0.71% to rise to 26,208.99.
The S&P 500 had climbed 0.63% to 3,137.55.
The Nasdaq had rallied 0.88% to 10,144.93.

PMI data impressed in the United States, but there was little reaction in the Dow. New home sales were also better than expected, posting a strong beat.

ABN AMRO: U.S. Virus Outbreak Is Getting Out Of Hand

Although most states are reopening at a dramatic pace, the virus data is proving impossible for Wall Street to ignore. While the official White House stance is that another lockdown is untenable , some analysts aren’t buying the optimism.

Bill Diviney, a senior economist at ABN AMRO, is paying close attention to the rate of infection . Unfortunately for Dow bulls, he says there is plenty of evidence that the pandemic is getting out of control.

The hotspots continue to be southern states, particularly Texas, California, and Florida. Indeed, we calculate that states representing just over half (53%) of US GDP now have virus replication rates (Rt) above one.

This is crucial, for as long as Rt is above one, growth in virus cases is exponential, and the pandemic will eventually spiral out of control once again.

Diviney sees Texas – the second-largest state economy – in a particularly bad situation. If his fears are correct, this could be a big problem for equities.

hospitalization rate chart from ABN AMRO Research — Texas hospitalizations are rising at a concerning rate. | Source: ABN AMRO

For this reason, it’s not surprising to see that bets against the S&P 500 are spiking.

Investors may have an eye on how oblivious traders were to surging cases in China in February and fear a similar risk-off event.

S&P 500, stock market, pandemic, virus — Investors continue to bet heavily against the U.S. stock market. | Source: David Ingles/Bloomberg via Twitter

Confirming this thesis, the safe-haven Japanese yen has seen a blatant bid over the last few weeks.

Dow 30 Stocks: Apple Is King

The Dow 30 was carried higher by an incredible 2.6% rally in Apple stock. Basking in record highs, Tim Cook’s company accounts for a huge portion of the Dow’s rebound.

Helping drive AAPL were some headlines from its Worldwide Developers Conference (WWDC). Investors are particularly excited about the prospect of the (almost) $2 trillion tech giant manufacturing its own chips.

Elsewhere in the DJIA, Boeing dropped 0.25% as American Airlines stock continued to dive.

Nike shares extended their big rally by another 2.6% ahead of the company’s earnings release this week.

Despite the renewed focus on the pandemic, Pfizer stock lost 0.6%. Although it’s one of the top vaccine candidates in the Dow Jones, PFE has endured a rough few weeks of trade.