COVID-19 Effects On The Economy – Market Outlook For August 2020
– We will discuss COVID-19 effects on the economy thus far.
– July posted solid gains for the month, despite a surging second wave of the Coronavirus.
– Q2 earnings have been better than expected, especially in the tech sector.
– GDP showed the economy contracted at a staggering rate of 32.9% in the second quarter.
– More forward-looking economic data improved, but there are signs of deterioration in the labor market.
Solid Earnings and Another Positive Month, Despite A Terrible Economy
The stock market and the economy are not the same thing and this recession has borne out that statement emphatically. In this month’s market outlook we will look at several aspects of COVID-19 effects on the economy. Q2 GDP marked the single worst quarter for the economy in history. Unemployment touched levels not seen since the great depression and still hovers above the worst levels of the great recession of 2008. With this backdrop, the NASDAQ has hit all-time highs and the S&P sits not far from its own record. While expectations for a V-shaped recovery have been the primary force behind the rally, returns in July received a boost from better than expected earnings, especially in FAANGM stocks (Facebook, Apple, Amazon, Netflix, Google, and Microsoft).
These companies represent a rapidly increasing share of the overall stock market and for good reason based on recent results. The highlight came from Amazon, which posted blowout second quarter results as earnings per share came in at $10.30 per share vs. expectations of $1.46 and revenue rose to $88.9B vs. expectations of $81.6B. The rest of the FAANGM also posted strong results with only Netflix missing on earnings, but more than making up for it with a revenue beat and strong net-new-subscribers. With about a third of companies in the S&P500 having reported earnings, revenues are 3% ahead of expectations and earnings are beating by 13.5%.
V-Shaped Recovery could be derailed by the second wave of coronavirus and stimulus withdrawal.
Initial Jobless Claims March – July 2020
Economic data generally released in July showed for the most part showed continued improvement,. The index of leading economic indicators (LEI) rose again in June, bolting on to a record increase in May. Durable goods orders, a measure of manufacturing strength, rebounded sharply, housing reports showed a lot of strength and the economy added a record 4.8 million jobs in June. However, the aforementioned reports were from June and did not reflect the negative effects from the second wave of new coronavirus cases. Initial Jobless claims, which come out weekly, actually increased in the last two weeks of July. To make matters worse, unemployment benefits may fall sharply if Congress does not act. A pre-mature withdraw of stimulus certainly has the potential to derail the nascent recovery, especially if it leads to wide-spread evictions and defaults. The job market resembling anything close to normal is a very long way off.
Where do we go from here?
Downside risks are increasing for equities, but economic data, earnings and Fed support have offered plenty of justification for the rally that has taken place so far. We remain constructive on equites, especially the tech sector, but think the biggest part of the rebound has passed. Sideways action or a modest rise in stocks would be healthy to let economic fundamentals catch up to the soaring market and we think that is the most likely path forward. This biggest risk to our outlook could come from continued deterioration in initial jobless claims, especially if unemployment benefits are substantially reduced.
What should I do?
We think the most healthy approach, albeit not the easiest, in highly uncertain times is to focus on the long-term. In the next few months there will be no shortage of noise from coronavirus headlines and as the election heats up. Avoid the temptation to overreact to headlines. Markets are forward looking and by the time news has made it to the headlines it has very likely already been priced into your investments.
To learn more about the writer of this article, Cormac Murphy, CFA, visit: https://adamswealthadvisors.com/team/cormac-murphy/
Or connect with him on LinkedIn: https://www.linkedin.com/in/cormac-murphy-cfa-33897914/.
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