News & Insights

President and Chief Investment Officer

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:

Tone Deaf Markets…

First-Half Lookback and Year-End Outlook 2020

Pausing for a few moments to reflect on the first six months of this year has proven to be quite the challenge.  Just thinking back to the number of “100-year” events that have roiled our lives, economies and markets over this short time span is daunting.  Add in the year-to-date jobless numbers, the on-and off quarantines and the daily COVID-19 caseload reports, and the past several months have blunted our perspective when it comes to today’s headlines. 

The year started off with a (positive) bang as January’s outlook for consumers, corporate earnings and the markets were all positive.  China was our friend again, job growth was good and on an upward trend and unemployment levels were at multi-decade lows.  The Fed had reversed its earlier monetary tightening policy and interest rates were dropping again, providing another boon for housing, borrowers and financial assets.  By mid-February the markets were reflecting all this good news, with the S&P 500, Dow Jones and NASDAQ all pushing toward new highs.  A month later the story had changed, and dramatically.

As March progressed, the global markets were in free fall, dropping in most cases to multi-year lows.  It was the worst period for the S&P 500 in more than a decade, and it was the most volatile month on record as the virus breached China’s borders and become a true worldwide pandemic.  Countries were locked down, travel stopped, stores closed and companies let go employees or sent them to work at home.  By March 21, more than 3.3 million workers filed for unemployment insurance, and within five weeks, total initial claims had spiked to 26 million.  Not so surprising then that investors cashed out of stocks and corporate bonds looking for any safe harbor.  What was so surprising was the speed with which it all transpired.  Fortunately, in a matter of weeks a safety net was also in place from both the Fed and Congress, with billions of dollars quickly authorized for stimulus efforts, market liquidity and paycheck protection programs.

As a new normal quickly evolved, most companies were caught off guard, especially those tied to “brick and mortar” storefronts.  Commerce continued but reflected a change from commuting to living, vacationing, shopping and working from home.  Air travel was grounded, as were dining out and quick trips to the store, as people accelerated or began home deliveries, web-based meetings and live streaming.  This sudden economic transition wasn’t immediately understood by investors until the March 23 lows, but early into the second quarter the markets began rallying around the companies that were the beneficiaries of a new industrial revolution – the newly decentralized workforce.  These trends were and continue to be the primary drivers providing the underlying support for the markets to date.

Just looking at the broader equity index returns through last Friday’s close, on a year-to-date basis the return for the S&P 500 was down 0.28 percent while the Dow Jones is down 7.4 percent and the Nasdaq 100 has delivered a return of 24.64 percent.  It is important to know that the few top index-weighted companies driving the markets and the new economy, Amazon and Netflix are both up 60-plus percent for the year.  Add in Microsoft (up 36 percent) and Google (up 13 percent), and one gets a sense of what has supported the markets, and frankly the consumer, through the pandemic.   To add further scale to the magnitude of the depths of the sell-off and the corresponding market recovery, from the March 23 lows to last Friday, performance for the S&P 500 was up 43 percent, while the Nasdaq 100 saw a return of 55 percent.

For investors who sought safer harbors during the early days of the pandemic, returns for most fixed-income assets were also positive in the second quarter. A prominent benchmark for bonds, the Bloomberg Barclays US Aggregate Bond Index, actually saw positive returns for the seventh straight quarter, and up 6.14 percent through the first six months of 2020. 

Whether these performance trends continue over the balance of the year remains to be seen, creating uncertainty which adds to investor stress and market volatility.  The primary unknown with a global impact is the potential timing of a successful vaccine, which could allow some normalcy to return to lives, economies and markets.  There are daily headlines on vaccine trials and growing case counts, with the latter adding to concerns of another nationwide shutdown.  Overseas there are also virus spikes, but economies are slowly showing evidence of a recovery.  At home there are also “green shoots” that are providing some reassurance:

• Air travel is slowly recovering, with 626,516 travelers screened by TSA on July 1 versus 93,170 on April 7.  Still a long way to go considering that one year ago the numbers were more than 2.5 million, but it is improvement.
• People are getting back on the road as gasoline sales are rising at an average of 6.4 percent per week since the low point in April, when demand was sliced in half.
• Houses are selling again courtesy of low rates, and possibly cabin fever, with mortgage applications up 33 percent in June versus last year.  The May home sales data reported a record monthly increase, up 44.3 percent, the highest level since the data series began in January 2001.  Given the lean inventory and relatively clean consumer balance sheets, this trend may continue, while adding to future household related construction and consumption.
• Data from the Conference Board’s Consumer Confidence Index was up over expectations (98.1 vs. expectations of 91.5) with forward expectations sitting at a four-month high.  Much of the gain is attributable to a number of states opening up for business.  This may reverse in part though, given the recent spike in COVID-19 cases in certain states.
• The number of applications that the Census Bureau believes will turn into true employer businesses spiked the week ending July 4, up 104.5 percent over last year, to 38,970. 
• Improving manufacturing data is tracking positive (albeit from a very low base).  The most recent ISM composite rebounded by 9.5 percentage points to 52.6 (50 is considered expansionary).  This was the highest reading since last March as positive data included imports, exports, production and new orders.
• Lastly jobs.  While nothing worth bragging about, the worst news does seem to be getting better.  Reported job openings (JOLT data) for May surged to 5.4 million new jobs.  Meanwhile June’s employment data pointed to 4.8 million new hires, and initial jobless claims seem to be declining, albeit from an extremely high perch.  Initial claims for the week ending July 4 was 1.3 million versus the prior week’s 1.4 million.

As to the market climate, investors are looking past the terrible data toward next year.  We are still early into earnings season, and we are not expecting anything positive apart from those companies that have been able to respond to the new economic reality.  Earnings estimates for Q2 are pretty dismal, with quarterly comparisons (versus last year) at a negative 44.6 percent.  For calendar 2020 expectations are for a negative 21.5 percent.  By next year estimates start rising, with expectations for Q1 at a positive 12.2 percent and for the full year a positive 28.7 percent.  This expected recovery is also what’s helping drive the markets today.