July: Better than expected
It brings a whole new meaning to the words “better than expected” – a 32.9% (annualized) drop in 2Q U.S. gross domestic product (GDP) actually managed to exceed the expectations of many analysts.
It was that kind of month, one dominated by bad news that could have been worse and markets that were generally inclined to shrug it off.
Perhaps feeling patriotic, stocks rallied sharply following the July 4th weekend, with the S&P climbing 1.6% and the Dow Jones Industrial Index adding 1.8%. The Stoxx Europe 600 was also up 1.6%, supported by a rebound in German factory orders. Chinese stocks demonstrated an even higher level of euphoria, with China’s Shanghai Index soaring 5.7% to its highest level since 2018. All this movement to the upside came in the face of generally dismal economic data and concerns over a growing number of coronavirus cases in the U.S., particularly in parts of the country that had moved to reopen at least several major parts of their economies.
But by mid-month, U.S. stocks were up about 40% from the March 2020 low and just 4% off the February high. A “V-shaped” recovery if there ever was one that was no doubt helped in large part by the Federal Reserve, which continued to follow through on its promise to “do whatever it takes” to support growth by shoveling money into the economy. Rates on the 10-year treasury remained at or near historic lows.
To be fair, not all of the economic news from July was bad. June home sales were actually higher than those for the prior year. Unemployment fell to 11.1%, as 4.8 million jobs were added. And baseball restarted, with the New York Yankees and the Washington Nationals meeting on July 23rd, the first Major League game since the start of the pandemic. (The Yankees won 4-1 in a rain shortened game, which one hopes is not some sort of metaphor for both the upcoming season and the months to come.)
As the world continued to struggle to restore some sense of normality, a few longer-running issues again resurfaced. President Trump threatened to ban the popular Chinese video sharing app TikTok in the U.S., bringing the long-running trade dispute with China back to the fore. Domestically, Democrats and Republicans debated the scope of a proposed fifth stimulus package, and were about $2 trillion apart as the month came to an end. One sticking point: the $600 in additional weekly unemployment payments set to run out at the end of July, money that has supported consumer spending over the past several months.
Additionally, COVID-19 continued to dominate the headlines, with the number of cases showing signs of accelerating as economies in the South and the Southwest opened back up. The specter of a second lockdown spooked investors and consumers as well. The Conference Board’s consumer confidence index fell more than expected to 92.6 from 98.3; analysts had been projecting a July reading of 95. In its report, Bloomberg noted that about 32% of consumers expected the economy to improve over the next six months, down from 42.4% a month earlier.
July’s end provided a reality check for the bulls as earnings started to roll in. U.S. equities began the week on the back foot with disappointing numbers from companies like McDonald’s and Harley-Davidson. Technology stocks provided a ray of light. Facebook, Amazon, and Apple all blew through their earnings numbers even as their chief executive officers were testifying (remotely) before Congress, where the House Judiciary Subcommittee on antitrust was investigating their companies’ growing economic power. It’s worth noting that these stocks, along with Google and Microsoft, recently made up just under 25% of the S&P 500, and were up around 30% on average this year. The average return on the other 495 stocks in the index: -9%.
Still, S&P 500 companies have mostly been exceeding their albeit lowered expectations, with 80%+ beating half way through earnings season. At the end of it all, S&P 500 earnings are projected to have fallen about 40% in the quarter. For now, the market appears to be running on expectations that the economy, and earnings, will generally improve. Optimists and pessimists will argue over the pace of the recovery and when or if a vaccine for the coronavirus will be available, but there is an emerging consensus that things are moving in the right direction, however unevenly. That was reflected in the month’s final week when the market continued to trend higher.
The economy has suffered an enormous shock as evidenced by 2Q GDP but there are some reasons to believe that maybe the worst may now be behind us. Of course, that will be dependent on the path of Covid-19 related cases and the impact on the economy.
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