Market Commentary for the week ending August 7th, 2020
- Stocks, bonds, gold, commodities, real estate…EVERYTHING was higher this week with investors showing an appetite for risk.
- The employment picture is improving with 1.76 million jobs added in July.
- Second quarter company revenue fell -8.9% with huge differences from sector to sector.
Second Quarter Company Revenue Summary
We now have earnings reports from more than 94% the companies in the S&P 500 for the first full quarter since COVID-19 ravished the economy. On average revenue fell -8.9% but the results varied greatly from sector to sector and company to company with some sectors and companies benefiting greatly from the environment and others got slaughtered.
In an effort to see how companies and sectors faired for the quarter I looked at their revenue, or total sales, compared to the same period a year ago. Revenue was used instead of earnings because revenue is much more consistent and far less impacted by one-time events and accounting adjustments that can dramatically impact earnings.
Source: www.YCharts.com ; includes 471 of the S&P 500 companies; revenue is per share
The accompanying graph shows the revenue change by industry. The energy sector has been destroyed by both a drop in the price of oil and the sharp drop in travel and everyday commuting. Consumer defensive stocks such as Clorox (CLX), Walmart (WMT), and General Mills (GIS), posted the biggest overall gains averaging +5.1%. Surprisingly, the technology sector only grew by +2.7%...surprising given the huge rally we’ve seen in the prices of technology stocks.
In Disney’s (DIS) quarterly earnings report management said the company now has more than 100 million paying subscribers to its streaming services. 57.5 million of those subscribers are to its relatively new Disney+ service that launched less than a year ago. The company’s other streaming services include ESPN+ and Hulu with more on the way.
This Week’s Performance Highlights
Everything moved higher this week…U.S. stocks, international stocks, real estate, gold, commodities, and bonds even eked out a fractional gain. Furthermore, every sector in the U.S. markets was higher led by Industrials gaining +4.7%. No doubt there has been tremendous momentum higher helped by improving economic reports, record low interest rates, and government stimulus. There have been some concerns including increased tensions with China as well as congress’s inability to agree on another stimulus program to maintain increase payments to the unemployed.
- Large U.S. stocks continued to power higher with the S&P 500 gaining 2.5%, the NASDAQ Composite the same, and the Dow Jones Industrials topping the charts at +3.8% for the week. Four Dow stocks that have been year-to-date losers, Disney (DIS), Raytheon Technologies (RTX), Boeing (BA), and American Express (AXP), all gained between +6% to +11% this week.
- The big winners this week were U.S. small-cap stocks surging +6.0% in a sign investors are embracing more risk. Small stocks offer potential for big returns accompanied by significant risk. As an example, Pitney Bowes (PBI), was the second best performing stock in the Russell 2000 this week gaining +87.7%. This is a huge move but this is a stock that once traded near $70 in 1999 and is now just above $6.
International stocks rallied this week as well with developed country stocks higher by +2.6%. In the Eurozone, one of the three major international developed regions, Germany’s market was the best performer higher by +3.4% putting it back into positive territory for the year. As the accompanying graph shows, there is significant differences in performance among the biggest Eurozone markets with 4 still in negative territory while 5 are now higher.
- Emerging markets gained as well but lagged behind others up +1.3% this week with the best being South Korea jumping +6.0%. Although these markets lagged behind this week, they are outperforming developed markets for all of 2020 down just -1.7% compared to developed markets loss of -7.1%.
- Gold continues to rally reaching new record highs once again up +2.9% this week and higher by +33.5% year-to-date. It is a bit unusual for this perceived safe-haven to be sharply higher like this while at the same time stocks rallied sharply.
- Although both were higher by +1.5%, commodities and real estate stocks continue to be the worst performers of 2020 down -32.7% and -18.2% respectively.
- Bonds posted a small +0.1% gain for the week higher now by +8.1% in 2020.
The July employment report came in better than economists had expected with 1.76 million jobs added during the month. This did mark a sharp slowdown from the month before when 4.79 million jobs were added presumably due to the increased number of COVID-19 cases. The unemployment rate fell to 10.2% from 11.1% though a broader measure of unemployment that includes those who can only find part-time work is at 16.5%.
In the private sector, restaurants added the most jobs, 502,000 in the month, followed by retail’s 258,000 job gains. Government employment showed a 301,000 increase but this appears better than expected due to a mathematical seasonal adjustment. In spite of all the gains, there continue to be approximately 12.7 million more people unemployed than there were pre-pandemic.
Weekly initial jobless claims fell to the lowest since the coronavirus outbreak coming in at 1.19 million compared to 1.44 million the week before. The most recent read on continuing claims, reported with a 2 week lag, showed 31.3 million people receiving benefits which was up from 30.8 million the week before.
Factory orders climbed 6.2% in June showing the manufacturing sector is continuing to improve from its lows. This was better than expected but below the 7.7% gain the month before. A separate report suggests the strengths continued into July.
People are buying more cars and trucks with motor vehicle sales in July coming in at 14.5 million compared to 13.1 million the month before. This could be a trend that persists if people move away from big cities and avoid public transportation.
Upcoming Economic Reports
- Retail Sales
- Consumer Price Index
- Producer Price Index
- Initial and Continuing Jobless Claims
- Industrial Production