August 2020
Marketing Briefing

U.S. Markets

Recap

For July, most major stock market indexes finished in positive territory and with considerably lower volatility than in recent months. The tech-laden Nasdaq rose 4.3% and remains the biggest winner of 2020, as many big tech stocks are benefiting from the prevailing shelter-at-home economy. The S&P 500 similarly climbed upward by 4.2%, and the DJIA rose 2.3%.

Earnings season is at the halfway mark with approximately 50% of the companies having reported their Q2 results. With about 40% of companies continuing to offer no guidance, this is anything but a normal earnings season. At the opening of this second quarter earnings season, the consensus estimate for S&P 500 earnings as a whole stood at -38%, its worst decline in earnings since the Great Recession.

In contrast to the broad story of the S&P 500, the dispersion of actual earnings reported thus far among the separate underlying industry sectors reveal some important insights for investors:

On July 30th, the Bureau of Economic Analysis estimated that second quarter GDP contracted by 32.9% — the worst quarterly performance ever. The service sector (led by healthcare) was the largest contributor to the plunge, followed by decreases in goods (clothing and footwear). It turned out that this is slightly better than the 34.7% decline economists were expecting, so the stock market largely shrugged off the numbers.

Early in July, the Department of Labor reported that the U.S. unemployment rate dropped to 11.1% in June 2020, a continued improvement from an all-time high of 14.7% reached in April. Then, in the second half of the month, the trend reversed when weekly unemployment claims by Americans increased for two consecutive weeks, as the surge in COVID-19 cases prompted several states to restrict the planned reopening of certain sectors of their economies.

For the month, Americans slashed spending, which resulted in outlays sinking at a nearly 35% annualized clip. With most Americans hunkered down at home, there was little need to drive, travel, or spend money on discretionary or non-emergency services. Thus, hard-hit segments were gasoline, clothing, dining out, health care, transportation, hotels and many other goods and services. A few consumer segments bucked this trend. Sales of autos and parts rose 6.7%, and purchases of recreational goods and vehicles skyrocketed 55%.

July reports on consumer sentiment offered little to suggest an imminent rebound in consumer spending. Prior to the pandemic, the University of Michigan’s closely watched consumer sentiment index had reached a level of more than 130. In June, the index clocked in at 78.1. At the end of July, it ticked down further to 72.5.

Looking Ahead

The economy will shrink notably this year. A variety of measures showed that economic growth waned in July, as the persistent and ongoing rise of COVID-19 infections across the nation sapped the recovery of momentum. There are huge headwinds, which mean a full recovery in the job market is a very long way off. Elevated unemployment will suppress consumer spending, while investment and trade are set to decline. Tensions with China also remain a key risk.

Investor confidence will be vulnerable to negative news. Inevitably, there will be some. Thus, choppy action can be expected for stock prices.

Fiscal and monetary stimulus should continue to help cushion the blow, however. Congress is under pressure to bring forth additional stabilization programs. Lawmakers are currently working on a fifth round of relief intervention that could dwarf the four previous rounds. The details remain subject to intense negotiations, but there is a broad consensus that both political parties want to pass another trillion-dollar package.

Additional policy efforts to stimulate demand or rapid progress on vaccines or therapeutics would have important effects in stabilizing the economy and spurring the pace of recovery.

Beyond those policy efforts, it is worth emphasizing that America has proven time and again that it has the flexibility to adapt to shifts in the economic environment, as well as the talent and human capital to innovate in new and unexpected ways.

 

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