Market Commentary 8/11/20
An Oxford Harriman & Company Commentary
U.S. Experiences COVID-19 Resurgence in July Leading Some to Speculate in a Pause of the Recovery
The U.S. encountered a COVID-19 resurgence during July as week over week case counts continued to grow. New weekly case growth initially trended down during May and the first half of June following the implementation of social distancing measures in April. However, as parts of the U.S. economy started to reopen, weekly case count growth started to trend higher in mid-June. As was the case in June, the growth rate continued higher during July. 1
Should cases continue to increase, this may have potentially serious investment implications for the U.S. economy, should the increases continue. On July 30, the Bureau of Economic Analysis reported the U.S. economy shrunk at an annualized pace of -32.9% during the second quarter of 2020.2 This follows the -5% economic contraction during the first quarter of 2020. The economic contraction shows the negative impact from social distancing measures and nationwide shutdown orders during the first half of 2020. 2
Labor Market Faces an Uncertain Future
We believe the U.S. labor market may face a long road to recovery. Weak consumer demand is forcing companies to review their operations and cut both costs and capacity. Lower capacity generally requires less employees, which means more furloughs and layoffs. The airline industry, which faces historic weak travel demand, is a prime example of excess labor. The U.S. airline industry recently announced tens of thousands of announced and planned furloughs and layoffs.3 The pain is being felt across other industries as well as both the energy and hospitality industries are also announcing significant plans in labor force reduction. Consumer spending represents almost 70% of the U.S. economy. A weak labor market and low wage growth could prolong the economic recovery.
Unemployment data shows COVID-19’s impact on the labor market. More than 54 million individuals filed for unemployment benefits since March 21. The picture becomes even more concerning when measured by continued jobless claims, which represent the number of individuals filing for unemployment who already filed an initial claim. Continued jobless claims totaled 17 million on July 18, 2020, vs 1.7 million on July 20, 2019. 2 On August 8th the Wall Street Journal reported “The number who were unemployed between 15 and 26 weeks rose by a seasonally adjusted 4.6 million to 6.5 million people last month, according to the Labor Department. The July reading is the highest on record for the category in data going back to 1948, and it is nearly double the prior peak, set in 2009 at the end of the last recession.” 5
The risk is unemployed individuals move into the 15-26 weeks and greater than 27 weeks groups, which could result in those individuals losing valuable labor skills.
Federal Reserve Stands Ready to Support the U.S. Economy, but Fiscal Stimulus Remains Important
The Federal Reserve played a big role in the market’s rebound higher from the March 2020 lows. The decision to cut interest rates is credited with calming investors and allowing the bond markets to function again so companies could raise money, and the fixed income markets could maintain liquidity. Do not expect the Fed stimulus to end anytime soon. Following the Fed's July meeting, Fed Chair Powell said the Fed remains committed to "use its tools and act as appropriate to support the economy". 4 This follows the Fed’s previous guidance that it expects interest rates to remain near zero through 2022.4
During his July meeting press conference, Fed Chair Powell noted the importance of additional fiscal stimulus. Congress is currently negotiating a fifth fiscal stimulus bill. While there is a growing consensus the U.S. needs another round of fiscal stimulus, Republicans and Democrats appear far apart on multiple issues. As a result, the $600 per week unemployment benefit lapsed at the end of July. Passing another stimulus bill would be a positive market catalyst, and further delays may raise concerns in the financial markets.
U.S. Dollar Falls
The U.S. dollar has recently weakened due to the U.S.’s COVID-19 resurgence and low U.S. interest rates. The COVID-19 resurgence means the U.S. recovery could take longer, while low interest rates mean an investor may be able to earn more income elsewhere. All else equal, a country’s currency tends to be stronger when its economic growth is stronger and interest rates are higher.
The recent U.S. dollar weakness marks a significant change from the past five years and may have major implications for investors should this trend continue. International stocks tend to perform better when the dollar is weak. U.S. companies with a higher percentage of international sales also tend to perform better because of currency translation gains when they bring profits back to the U.S. The U.S. dollar is often regarded as a safe haven currency.
Market Direction Tied to Virus Trajectory
The global financial market outlook is tied closely to the virus’s trajectory. Developing a vaccine and slowing the spread of the virus would be positive for the stock market. A delay in developing the vaccine or continued COVID-19 resurgence would be negative. If public officials need to reimpose social distancing measures to contain the virus, the global economy will likely shrink further. This is why investors are so intently focused on COVID-19 case counts and vaccine development right now.
The coming months will be critical in determining the virus’s trajectory. Grade schools, high schools, and colleges are preparing to return to class, and there are heated debates about how the school year will look for students. The return to school increases mobility and brings together larger groups of people, both of which could result in COVID-19 cases spiking. Consumer confidence will also play an important role in the economic recovery. Higher consumer confidence, both in the economy and the handling of COVID-19, means consumers will be more willing to spend money. Right now, the risk for financial markets remains to the downside due to COVID-19.
Earnings Revisions a Positive Sign
On a more positive note this quarter’s earnings revisions have improved. The revisions trend has notably improved as announcements have been made, with estimates for the current period (2020 Q3) and beyond continuing to be revised higher.6 This is a positive shift in the post-pandemic earnings picture 6 According to Zacks Research “Total earnings for 205 S&P 500 members that have reported Q2 results already are down -40.2% on -7.6% lower revenues, with 76.1% beating EPS estimates and 64.9% beating revenue estimates.” 6
We are still in the second quarter earnings period, and we will continue to monitor and comment on the earnings for the quarter, as well as on future guidance and revisions.
President Trump Signs Executive Order Over the Weekend
As previously mentioned, the next round of stimulus is having a major influence on markets right now. We view the news this weekend regarding President Trump’s executive order as mixed.
We believe the market expects another stimulus bill to be signed, and that the lack of a new bill may be a disappointment for the markets.
1. Centers for Disease Control and Prevention - https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/cases-in-us.html
6. Zacks Earnings Trends 7-29-2020
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. CAR-0820-01045
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