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S&P 500 Slides as Stimulus Talks Stall, Economic Worries Outweigh Positive News

By Jason Hall – Oct 19, 2020 at 7:24PM

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Investors are responding to the growing likelihood that a deal for federal stimulus won't happen before the November election.

The S&P 500 Index (^GSPC -1.03%) closed down 57 points, or 1.6% on Oct. 19, falling sharply in afternoon trading on growing worries about the wave of COVID-19 cases around the world, coupled with the increasing likelihood that Congress and the White House won't reach a deal for a second round of economic stimulus before the upcoming election. 

While no individual S&P 500 stocks fell sharply -- one of today's biggest losers was apparel maker VF (VFC -1.67%), down 4.3% after reporting earnings Friday after trading closed -- the sell-off was broad, with more than 450 of the 503 stocks in the index closing down on the day. Tech and energy stocks had a tough day, even with some positive news, including (AMZN -8.43%) reporting a hugely successful Prime Day event last week, and ConocoPhillips' (COP -2.87%) deal to acquire Concho Resources (CXO) for $13 billion including debt. 

Family on the couch looking at their phones.

Amazon cashed in on millions of people still stuck shopping from home. Image source: Getty Images.

Huge Prime Day not enough to get investors excited about Amazon 

Analysts are starting to report their estimates for the e-commerce giant's two-day sales event. Normally held in the summer, Amazon kicked it to the autumn this year because of the coronavirus pandemic. By every measure, it's looking as if Prime Day was a massive success. Piper Sandler analyst Thomas Champion estimates that Amazon brought in $10.6 billion in sales during Prime Day, selling 260 million items. Champion estimates it generated $3.5 billion in sales for small- and medium-size businesses that sell on Amazon's platform -- and the total sales could be big enough to boost Amazon's gross merchandise volume by 7% on its own in the fourth quarter. 

Amazon shares fell 2% today, joining the rest of the stocks at the top of the S&P 500 in market cap. Of the 100 largest companies in the index, 98 lost value today, with every one of the mega-cap tech stocks worth $1 trillion or more falling at least 2% today. 

ConocoPhillips lands a whale; oil stocks head lower 

First rumored last week, it's now official: ConocoPhillips is acquiring Concho Resources in an all-stock deal that values the latter at $9.7 billion, plus just over $3 billion in debt. The price ConocoPhillips has agreed to pay, 1.46 of its shares for each share of Concho, is a 15% premium to pre-rumor prices and will give the company an even larger stake of low-cost oil reserves in the Permian Basin. Combined with its existing holdings, ConocoPhillips will control more than 20 billion barrels of oil it can produce for less than $40 per barrel, and its average per-barrel production cost is now below $30 per barrel. 

The benefit of this sort of acquisition is that ConocoPhillips can eliminate a significant portion of Concho's overhead, which just became redundant, while also probably having cheaper access to debt. In short, it's an example of the rich getting richer, with ConocoPhillips soaking up an even bigger swath of some of the best, cheapest acreage in the Permian while many second-tier producers continue to struggle with less profitable assets, and high overhead and debt expense that make them unprofitable at current oil prices. 

COP Market Cap Chart

COP Market Cap data by YCharts

While ConocoPhillips' stock has fallen far more than Concho's over the past year, the deal still represents a bargain price, considering the ultra-low-cost assets being acquired. Concho's market cap has fallen more than 64% over the past three years. 

Investors should still step lightly in the oil patch. There's a big difference between being able to produce oil profitably at current prices and still having the prospects to be a market-beating investment. 

VF bounces back; stock still falls

Like most apparel makers and retailers, VF had a brutal second calendar quarter, with coronavirus lockdowns leaving many of its own stores, along with most of its resellers, closed for multiple months. This is why investors were looking forward to seeing the Dividend Aristocrat's progress in the months since stores have been able to reopen. 

The good news is, the company's results in its fiscal second quarter ended Sept. 30 did improve, and the $0.62 per share it earned in the quarter was far and away enough to cover the $0.49-per-share quarterly dividend VF announced in its earnings release. On the downside, revenue was down 19% from last year, and net income was down by more than half, as demand for apparel and footwear has been slow to recover during the ongoing coronavirus pandemic.

There were some bright spots: 

  • Sales in China increased 16%, up 21% in mainland China.
  • Direct-to-consumer digital revenue -- i.e. company-direct e-commerce sales -- increased 44%.

Even with sales and profits still down, and the risks of another wave of COVID-19 cases weighing on the global economy in the autumn, VF has recovered much of its lost sales and has stabilized its results more than enough to keep investors happy. The company also maintains a strong balance sheet, with plenty of cash and liquidity to ride out further economic weakness should it persist. 

VFC Total Current Assets (Quarterly) Chart

VFC Total Current Assets (Quarterly) data by YCharts

Earnings ahead

This will be a busy week of earnings. Netflix (NFLX -0.27%)Procter & Gamble (PG 0.31%)NextEra Energy (NEE -1.23%), and Chipotle Mexican Grill (CMG 0.20%) head the list of companies set to report highly anticipated quarterly results this week. But they're far from the only ones; 90 companies in the S&P 500 are expected to announce results before the end of the week. 

Between the typical volatility of earnings season and the additional uncertainty of the coronavirus pandemic, a deep recession, and a presidential election only two weeks away, investors should expect to see plenty of volatility to come, both with stocks moving higher and falling. Now's an excellent time to focus on holding, and not try to time your away around the market's ups and downs. Tune back in here for a closer look as we more deeper into earnings season. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jason Hall owns shares of Chipotle Mexican Grill. The Motley Fool owns shares of and recommends Amazon, Chipotle Mexican Grill, and Netflix. The Motley Fool recommends NextEra Energy and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

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