Markets mixed as jobless claims, China tensions rise

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down today’s market action with Sevens Report Research Founder Tom Essaye.

Video Transcript

[APPLAUSE] [BELL RINGING]

ALEXIS CHRISTOPHOROUS: And we know what that means. Trading now underway on this Thursday at the New York Stock Exchange. We saw a mixed picture here heading into the futures-- heading into trading, rather. Dow futures were up. NASDAQ futures were down. And right now, we've got the Dow Industrials up by about 200 points.

All right. Let's welcome in Tom Essaye now of "Sevens Report" along with Brian Sozzi and Jared Blikre. Good morning to you all. Tom, I'm going to start with the day's economic reports. I guess no big surprise there-- a 5% contraction for the economy in Q1, and we've got jobless claims continuing to be big. 2.1 million Americans applying for unemployment benefits, but that number is trending lower. Should this be translating into a rally on Wall Street right now?

TOM ESSAYE: Probably not at these levels. I mean, I think that the market has more than priced in that April is probably the worst of the economic data. I think really, what we need to begin to focus on now is when do things return to something like normal. I mean, a good exercise for everybody to do is to go look at a weekly jobless claims chart. And they're so big. You look at the financial crisis, and it looks like a little blip on there.

So it's a good reminder that historically, data is still generationally bad. And while it looks like the worst is behind us, which is great, we really need to start to see more improvement. The market, like the total jobless-- total continuing jobless claims came down, but they've got to come down a lot further than where they are.

BRIAN SOZZI: Tom, trucking stocks and bank stocks-- they're kind of on fire right now, but do you think those are the right moves? Are they-- what I'm trying to get at-- are they fake moves given where the economy is?

TOM ESSAYE: Yeah, I think that basically, what you've seen is you've seen a bit of a rotation to value. Value are banks and industrials right now and energy. But that's a bit of a bird of a different feather. But you're looking at industrials and banks and financials, and people are buying the value.

But here's the thing. They are cheap, but they're cheap for a reason. They need economic growth to do well. And while we hope that the economy will restart relatively soon, that's also a pretty aggressive bet, because again, these economic data is really bad. So I think that really, what we're seeing in the trucking and the financials is a bit of a rotation into value. But to me, it's not sustainable until we see better economic data.

ALEXIS CHRISTOPHOROUS: You know, Tom, I'm sure you're watching what's happening over in China. The state legislature there approving a national security law not making Hong Kong a semi-autonomous any longer. This could open up lots of trade issues now between the US and not just China, but also Hong Kong. Do you think the market is ignoring this right now? It seems to be like they are. And should they be?

TOM ESSAYE: The market's definitely ignoring it, and I don't think they should be. And the market seems to be taking the same approach that it took with the trade talks it seems like a lifetime ago, but just two years ago, where essentially, the market is assuming that Trump and the Trump administration are just sort of banging the drum in some sort of an effort to help their poll numbers and that they're not really going to do anything significant to the Chinese from a sanction standpoint or anything like that.

That's what the market thought with the trade talks and the trade war. Trump proved them wrong. So I think that, again, the market needs to be careful here about what it's going to-- what it expects from the administration and what could actually happen. To me, this is an underappreciated risk.

ALEXIS CHRISTOPHOROUS: I want to go over to a Jared Blikre now for an early look at what's happening three minutes into the trading day. And also, Jared, I know we've got some news coming out of American airlines. Again, I guess this shouldn't be a big surprise. They're going to be cutting thousands of jobs. It looks like it's going to come from their management and administrative staff, though.

JARED BLIKRE: That's right, Alexis. And they're going to cut about 30% of those management and support staff they were talking about. They're also providing some other measures here, other cost-saving steps, including requiring staff to take off up to 50% of their vacation by September 30, also not allowing untaken days to roll into 2021.

You can look at the chart here. They have been outperforming. Basically, we have a rally that's been going on for about 10 days. They're up again today. If we look at the entire travel sector, though, kind of under pressure. And here's that 10-day look, though. You can see this has been a large source of the rally that we have underway, those travel stocks bouncing back. But we don't really have the breadth of leadership that we had before.

And we see that when we take a look at the NASDAQ here. And this is over the last 10 days. A lot of green here as we did have that rally that got underway. But if you look at today, the FANG stocks under pressure. Even without the social media intervention that President Trump is supposed to sign today, that executive order, they have been underperforming this entire week as the market goes higher.

If you take a look at the sectors that are leading today, really not seeing strong leadership-- utilities, health care, materials, staples outperforming. Financials and industrials had been big supporters of this rally, but not today, necessarily. And then to the downside, communications services, which has a lot of those Twitter and FANG stocks that have to do with social media, as well as energy and consumer discretionary and tech. Without the big tech names going forward, I don't see how this rally can really get much steam. And I'd say it is in danger of rolling over as long as we don't have those big, mega-cap tech stocks participating, Alexis.

BRIAN SOZZI: Tom, let me get your take on these social media stocks. I'm sure you've been following what's been unfolding between the president and Twitter. Stocks are coming under a little bit of pressure here. What's the trade?

TOM ESSAYE: Yeah, I think the trade is to sort of stand back a bit and see how this all shakes out. It seems like regulation of the social media names, some of the search names too as well, has been coming for a long time. I don't know if this is it, per se, but it's another step in that direction.

And to me, there are better places in the market where you can go, especially in tech. You can go to a Microsoft. You can go to an Apple, or you can go to some of these stay-at-home stocks. And you don't really need to take on that social media risk and that regulatory risk with the social media name. So I still like tech. I just like a different subsector.

ALEXIS CHRISTOPHOROUS: When do you think we're going to start seeing a rotation back into cyclicals? I guess we started to see a little bit of that recently, Tom. But what's it going to take to just move money around in this market now and make this rally, if it continues, a broader-base rally?

TOM ESSAYE: Yeah, I think there has to be a compelling evidence that we're going to see a revitalization of growth. And if you look at what happened out of the financial crisis, we're sort of starting down the same path where really, you had tech and secular growth stories, really, the big leaders in the market. And that makes sense, because investors' dollars are going to companies who really don't need the broader economy doing well to outperform.

So I think really, what we have to see is we have to see the economic data, not just trough. But it has to get much better. Now, could that happen in six months? Sure, I hope it does, absolutely. I think financials and industrials and trucking stocks will all be fantastic buys then. But for me, I think we need to see more proof before you're going to move out of tech, which is working great and has massive tailwinds, and move into these cyclicals at this point. There's just not enough evidence that the economy is going to restart yet.

ALEXIS CHRISTOPHOROUS: All right. We're going to leave it there. Tom Essaye of the "Sevens Report," always good to see you. Take care.

TOM ESSAYE: Thank you very much, guys.