Markets, Economy

Weekly Kickstart (06/08/2020-06/12/2020)

6/8/20 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 4.91 percent to 3,193.93. That left the benchmark index down just 1.14 percent 2020-to-date, and 5.68 percent below the record close. For many the continued “melt-up” in equities has been perplexing given the deluge of seemingly negative news headlines recently, but perhaps this is just another example of why stocks are often described as a forward-focused discounting mechanism, i.e. valuations that depend less on what has already happened and more on what is expected to happen. Additional evidence of this can be seen in the way markets have repeatedly overlooked disappointing corporate earnings data lately. Indeed, with nearly all of the companies in the S&P 500 having now reported their Q1 2020 profit results, 64 percent have exceeded their average earnings per share (EPS) estimate, according to FactSet, and in aggregate companies reported earnings that were 1.5 percent above forecasts.


Both of those figures are below the 5-year average, and as a whole the S&P 500 is on track to post its largest year-over-year decline in earnings since Q3 2009. On the industry level things are a bit more mixed as six sectors have reported year-over-year growth in earnings, led by Utilities and Healthcare, and five sectors have reported a year-over-year decline in earnings: Consumer Discretionary, Financials, Energy, Industrials, and Materials. Another thing to remember is that since the lockdown protocols did not really ramp up until the last few weeks of Q1, the Q2 earnings data will be much more representative of the financial fallout from the coronavirus, and analysts currently anticipate a significantly larger earnings decline of -43.1 percent in the second quarter. However, as we have frequently argued Q2 likely also marked the trough in overall economic activity, and corporate earnings are already projected to start returning to positive territory as early as Q1 2021. Further, investors this earnings season have generally been rewarding positive EPS surprises more than average and punishing negative EPS surprises less than average, another sign of confidence that the coronavirus-related disruptions, albeit severe, will be mostly transitory. Of course none of this means that it will always be smooth sailing for equities, and there are indeed numerous potential excuses for a pullback in the near-term, but the longer-term prospects continue to improve, especially if another GDP-destroying lockdown can be avoided. Many regular investors, though, may benefit from continuing to use rallies as opportunities to review their portfolio and make sure it is properly aligned with their risk tolerance, nearness to retirement, and other unique variables. As always, we are here to help with any questions you may have.


To recap a few of the things we learned about the economy last week, the positives included that mortgage purchase applications climbed for the 7th consecutive week, gauges of both manufacturing and service-sector activity stabilized, construction spending fell by less than expected, credit card utilization moderated, productivity growth was revised higher, corporate layoff announcements declined, nonfarm payrolls growth surprised to the upside, the national rate of joblessness retreated, and initial jobless claims decreased for the 9th straight week. As for the negatives, the nation’s trade deficit widened, continuing claims increased, and average hourly earnings declined. This week the pace of economic data slows down but there are still a few important reports on employment, small business, consumers, and inflation scheduled to be released, along with a likely market-moving announcement on monetary policy from the Federal Reserve on Wednesday.

*Note: Blog updates will be limited over the next two weeks while I am traveling*


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Sources: Econoday, FactSet, FRBSL

Post author: Charles Couch