Markets skated through a deluge of Q2 earnings, a Federal Reserve policy meeting, economic data, and the continued barrage of rising COVID cases to finish the week in mostly positive territory. For the week, the TSX rose .9% with a year-to-date return still in negative territory (-5.4%). The S&P gained 1.7%, pushing the index positive year-to-date (1.3%). The Nasdaq was up 3.5%, adding to the already impressive gain year-to-date (19.76%). Finally, the MSCI EAFE lost .7% for the week, further depressing year-to-date return (-9.4%). The two-week trend of value and small-cap leading growth and large-cap ended with a whimper, at least for the time being, with positive earnings from technology stocks. Benefiting from the pandemic stay-at-home orders and ensuing work-from-home environment, Amazon, Facebook, Apple and Alphabet reported substantial gains in revenues. Energy stocks suffered the most with two of the largest, Exxon and Chevron, reporting quarterly losses.
FactSet reports 63% of the S&P 500 companies reported results for Q2. Of those companies reporting, 84% reported positive earnings surprises, and 64% reported positive revenue surprises. The above-average positive earnings surprise is the highest since 2008 when FactSet began tracking this factor. The estimated earnings decline on June 30 for Q2 was -44.1%. Earnings guidance for Q3 was negative from seven S&P companies, and positive for 25 of the S&P 500 companies issuing guidance. From a valuation perspective, the forward P/E ratio for the S&P 500 is 22 times. The five-year ratio is 17 times, and the 10-year average is 15.3 times. (The full FactSet report can be read here.)
The Federal Reserve statement released this week remained consistent with previous comments ensuring that they would do “whatever it takes,” holding rates low for the foreseeable future, continued asset purchases and taking whatever steps are necessary to support the weakened economy due to the pandemic.
The long-awaited GDP number for the second quarter was released this past week. On an annualized basis, it came in at a negative 32.9%. The shutdown, which began in April and May resulted in a 9.5% shrinkage in US GDP. This is the largest quarterly GDP decline since 1947. This unprecedented contraction came from the total collapse of consumer spending, particularly in services as people were forced to stay at home.
Statistics Canada released the May GDP, which came in at a positive 4.5%. Even with a positive posting in June, Q2 is expected to be negative. The consensus is a negative 12%.
While the worst may be behind us, based on recent weekly data like initial and continuing jobless claims, we are far from being out of the woods, and a quick rebound or “V” shaped recovery is looking doubtful as each week passes. The weekly initial jobless claims rose for a second consecutive week, 1.43 million versus 1.42 million in the previous week; however, the continuing jobless claims fell to 30.2 million from 31.8 million. This comes as many jurisdictions are rolling back re-opening amid a flood of new COVID cases. The US Congress debates the continuation of the addition of Federal unemployment benefits above benefits paid by the states. Many Republicans want to reduce the incentive for the workers to stay at home rather than return to work because of the additional $2400 per month or $600 per week bonus Federal Government benefit currently due to expire. Small businesses report that it is difficult for employees to return to work for lesser wages than they are receiving from unemployment. This issue, of course, has raised the issue of universal income.
With COVID still front and center, the upcoming US election looming, and protesting and defunding the police movement gaining momentum across individual states, along with weak economic fundamentals, one must wonder if the equity markets can remain at current levels much longer.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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