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Tom L. Stringfellow, CFA®, CFP®, CPA, CIC | July 20 , 2020

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

Earnings Season Unfolding…

Investors are looking for an early read on market trends from the early releases of earnings data for the second quarter.  While still early in the quarter, estimates today are painting a dreary picture, with a very slow recovery into positive growth territory but probably not until next year.  At this writing, initial estimates of earnings for the quarter are expected to be around minus 44 percent over last year’s second quarter, ticking up to an estimated plus 12.4 percent for the first quarter of 2021.  As estimates become “real,” investors will react accordingly.  Last week set the stage for a relatively positive investor outlook as investors bid up three of the four major indexes.  The only laggard, for a change, was the more tech-centric NASDAQ.  Noticeable was the rotation away from tech (growth stocks) and into more value-centric companies, with leaders at Friday’s close including the industrials, materials, utilities, energy and financial sectors. Is this perhaps a signal that investors are beginning to sense the potential of a “real” economic and profit recovery by year’s end?

For some time now, the underlying basis of the market movement centers on the timing of vaccine relief, the next installment of a consumer relief package and the premise of a continuing dovish Fed.  The timing of the former is uncertain, but positive news on testing seems to be accelerating from a number of global pharmaceutical firms. That leads to the belief that it’s not a matter of if, but when.   And the risk of a tightening shift in monetary policy is off the table for a bit.  In the meantime, the economic data seems to be gathering momentum, with the caveat that the data being analyzed today is from a period mostly prior to the recent COVID-19 spikes witnessed across a number of states over the past few weeks.  Stay tuned for the next installment of a coronavirus relief package.

In terms of the week’s economic news, there are definitely a number of green shoots indicative of some success with the attempted reboot of the retail and manufacturing industries.  One example was last week’s New York Fed report highlighting that the manufacturing sector had recorded its first expansionary reading, also reaching its highest index level since November 2018.  New orders were up, as were shipments.  Another positive result of the restart in manufacturing was that inventories were down.  Data from the Philly Fed’s Business Conditions Index was off slightly (24.1 versus 27 the prior month), but new orders were up, as was pricing and hiring.  All of these are solid signs of a stabilizing economic base.

Also noteworthy were releases from the NFIB Small Business Optimism Index and the Fed’s Beige Book, both of which provide a broader sense of an economic recovery.  From the NFIB data, small business owners are becoming more optimistic, with positive outlooks for higher real sales, business expansion, growth in capital expenditures and inventory building.  The Beige Book report was also positive in terms of business environment improvement relative to where it was a few months past, but the results still indicate caution in terms of being able to get back to work safely.

There was good news too on the housing front, with the most recent data highlighting an increase in housing starts by 17.3 percent or 1.186 million units, while June building permits rose by 2.1 percent from May, up 1.241 million.  Meanwhile, pending home sales reported for May were up 44.3 percent after a drop of 21.8 percent in April.  Sales were strong across the country, helped by the historically low levels for interest rates and, also likely, cabin fever.  Expectations today are that this trend will continue to meet the demand of a growing population amid a shrinking single family housing inventory.

Increasing trips out of the house also led to a change in consumer behavior and consumption trends.  Despite a recent downtick in consumer sentiment, as measured by the University of Michigan Index (73.2 versus prior 78.1), consumers were opening their wallets again in June.  Retail sales were up 7.5 percent over May which had already notched the largest one month increase in sales on record.  June now holds the record for the second largest monthly increase.  The big changes in retail categories from the prior month were clothing (+105 percent), electronics and appliances (+37.41 percent), furniture (+32.41 percent), and bars and restaurants (+20.4 percent).  Interestingly, the laggards for the month were online sales (-2.4 percent), building materials (-0.3 percent) and liquor stores (-1.2 percent). 

How last week’s data influences the markets over the near term is dependent on the flurry of earnings reports due over the next several days, continuing positive reports on vaccines, and also the timing and features of the next installment of a coronavirus relief package.  The pressure is on to get something approved before the July 31 expiration of the (additional) $600 weekly unemployment insurance.  The markets will be watching for any signals of a breakthrough on this.

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