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Markets, the Economy and Relief Efforts…
As of last Friday’s market close, it proved to be another remarkable week for investors, with nearly every index and exchange posting positive returns. The Dow Jones Industrial Average and the Russell 2000 (smaller cap companies) led the charge this time, with cyclical stocks gaining traction, and the week’s highlights included some breakout performances within the industrials, energy and financial sectors. Smaller and mid-sized value oriented companies tagged along for the ride, as investors ostensibly looked past the recent spike in virus numbers and following some positive economic data points reported over the prior week. Add upticks in manufacturing surveys overseas and some hopeful signals that there may indeed be light at the end of the COVID-19 tunnel. Foreign markets were also beneficiaries of a bit more investor enthusiasm.
With the market bounce-back from the March 23rd lows, it’s still worth keeping in mind that these rallies continue to trade on good news expectations. The earnings growth outlook for 2020 remains negative despite some positive changes over this past quarter’s estimates, which according to FactSet data, still look like an annualized rate of negative 33.8 percent. Despite only two sectors—health care and information technology—posting positive earnings growth at this point, the broader indexes (S&P 500, Russell Growth, NASDAQ and Russell 2000) are trading above their 200-day moving averages. This rather clearly reflects richer valuations, at least for a few companies.
Countering that cautionary note is the realization that the fixed income markets are also expensive, that monetary policy will continue to be (equity) market-friendly into the foreseeable future, and that there are still a good number of stocks within the various indexes that have not been on a stock picker’s radar for quite some time. Last but not least, a number of companies bought their own stock back in Q2 which, according to AlphaSense, amounted to 150+ companies repurchasing around $38.82 billion during the quarter.
A few positives in the news included an improving jobs report, albeit from still noteworthy depths. According to the Bureau of Labor, total nonfarm payroll employment rose by 1.8 million in July, and the unemployment rate fell to 10.2 percent, with gains primarily in leisure and hospitality (+592,000), retail (+258,300) and state and local government (+274,000). Also worth noting was a decline in the number of unemployed workers by 1.4 million to a still staggering 16.3 million. Embedded in the report was the note that while average earnings were up by 0.2 percent, hours worked dropped slightly, resulting in a slight increase in aggregate payrolls of +1.3 percent. Despite the high levels of unemployment, credit cards haven’t been the financing choice, as most recent data points to a $100 billion drop in balances from February’s record high. What is at record levels is total originated mortgage debt because of lower-rate refinancing opportunities.
On the manufacturing front, a number of global positives included an uptick in the U.S. ISM Manufacturing PMI data, which posted a rise to an index level of 54.2, (52.6 in June), the highest level it has been since June last year. New orders were sitting at their highest reading since 2018, while inventories were their lowest in four months (COVID-19). Certainly helping were auto sales, which were up for the past three months, but are still off 15 percent from last year (still an amazing recovery). Overseas, the data was as impressive, with 57 percent of reported global PMI data back into expansion territory, representing the most since April, 2019. China, the country that pulled out of the virus pandemic first, reported a nine-year high in its manufacturing index.
One of the more significant drivers of the market next week may be how Congress addresses the continuing impasse between both sides of the aisle and President Trump. Unfortunately, last week’s efforts resulted in lots of talk and no action as the Republicans and Democrats failed to negotiate through their differences, ranging from +/-$1 trillion and $3.5 trillion in relief. That impasse led President Trump to sign a series of executive orders on Saturday to jumpstart additional relief packages for those still unemployed. At this point, it is too early to speculate on market reactions to the level of aid or the delivery of the message.
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