U.S. equities finished stronger this week with three of the four main indexes closing higher, led by the Nasdaq +3.70%, S&P 500 +1.75%, Russell 2K +0.89% and Dow Jones -.15% amid a very busy week of earnings. With the move higher in the S&P 500 over the course of the week, the benchmark closed out July +5.51% on the month, its fourth straight month of gains and its best July since 2010. Consumer Discretionary and Utilities were the best performing sectors in July, gaining 9.00% and 7.81%, respectively. The index has now rallied 46% since the March 23rd lows and was about 115 points off all-time highs.
While investors digested a magnitude of Q2 earnings
reports, we saw outperformance over the five days from Technology, REITs,
Consumer Discretionary, and Communication Services. Large Tech names provided
leadership to the upside with strength in hardware and semi-conductor names,
while other stocks like Facebook & Amazon buoyed their respective sectors
(Consumer Discretionary and Communication Services). Overall, the large FAANG
names did not disappoint with Apple (+14.7%), Facebook (+9.95%) and Amazon (+5.2%)
all reporting impressive earnings and guidance. The Merrill Lynch FANG Index
closing up 3.66%. The U.S. Dollar was lower for a sixth straight week as the
DXY Index (U.S. Dollar Index) touched its lowest levels since May 2018 and
posted its worst month since July of 2010.
Energy and Materials led to the downside, closing lower by 4.23% and 1.81%, respectively. Energy weakness was broad-based with crude oil closing lower by 2.5%, as large cap heavy weights like Chevron and Exxon traded lower after earnings reports. Materials underperformed with industrial metal and chemical names weaker. However, precious metals such as silver and gold helped provide some cushion to the downside with gold finishing higher by 4.7%, recording its eighth straight week of gains, and setting a new all-time high on Friday of $1,975.86. Financials were also weaker with banks and insurers among the largest decliners.
Investors took the very busy week in stride analyzing the following developments:
- Q2 earnings reports
- COVID-19 headlines
- Economic Data
- FOMC Meeting
- Lack of Progress on the next Coronavirus stimulus bill
Market participants dissecting a flood of earnings reports throughout the week continued to see better-than-expected earnings surprises. According to FactSet, with about 63% of S&P 500 constituents reporting, roughly 84% have reported a positive earnings surprise, the highest percentage since they began to track the metric in 2008. Although the results released thus far have come in surprisingly well, one thing appears to be clear, the Q2 pre-season estimates published by analysts were far too pessimistic. In short, while more companies are reporting larger “beats”, investors need to recognize that it comes off of a negative backdrop with unusually wide dispersion amongst analyst, managers, and investment professionals.
There were multiple updates on the COVID-19 front throughout the week including:
- The potential plateauing of cases in several U.S. Southern hotspots
- Candidate vaccines from Pfizer/BioNTech and Moderna moving to Phase 3 trials
Markets remained resilient and investors optimistic in the wake of U.S. deaths surpassing the grim 150K number. Trends in daily new-case rates declined in Arizona, Texas, Florida and California which helped buoy sentiment and overcome the negative headlines referencing the climbing death toll. Despite daily deaths in the states mentioned above remaining near peak levels, there is often a two-week delay between case count and deaths, leading some to expect the death toll to slow. Still, the market remained fairly optimistic on the vaccine side, with the potential drug candidates from Pfizer/BioNTech and Moderna advancing to Phase 3 trials. Despite Fauci calling out various midwestern states (such as Indiana, Tennessee, Ohio and Kentucky) which have recently shown an increase in positivity rates, he did give comments Friday saying he was cautiously optimistic we could have a vaccine by fall or early winter.
Economic data was also a major focus this week as the long awaited Q2 GDP number was not as bad as feared and showed the economy contracted at a 32.9% annualized rate. The decline came in ahead of consensus expectations which called for a 34.6% drop. Other data released throughout the week included initial jobless claims of 1.43M, which was its second weekly increase after a period of decline since April 4th, leading some to believe the economic rebound may be slowing. July’s consumer confidence registered at 92.6 versus June’s 98.3, as expectations looking further out softened.
There was a lot of attention throughout the week on the
lack of progress in negotiations between Republicans and Democrats in order to
reach a formal agreement for a fifth stimulus bill. The two primary parties
remain at odds with one another as various aspects of the last stimulus package
expired on August 1st. Senate leadership revealed their $1T proposal last
Monday, remaining very far apart from Democratic expectations, after they had
passed a $3.5T package through the house in early May. While high level talks
between representatives from each party continued throughout the week, no signs
of compromise seemed to emerge, primarily because reports indicate the GOP
itself is split on its own parties’ proposal.
While there were very few meaningful developments from
the FOMC meeting this week, as expected, it is worth noting that rates were
left unchanged near zero percent. The only real change made to the official,
released statement was that the course of the economy will still largely depend
on the virus. During his press conference, Chairman Powell reiterated that the committee will not
raise rates anytime soon and that the central bank will continue to make
“sizeable” purchases of Treasuries and MBS’s. Ultimately the chairman struck a
dovish tone saying the “fed will do what it can for “as long as it takes”.
U.S. stocks finished broadly higher after better-than-expected manufacturing data helped boost sentiment globally. Markets were once again led higher by the Nasdaq which posted gains of 1.47% followed by the Dow Jones and S&P 500. The Nasdaq once again traded to new all-time highs closing above 10,900 and posting its fourth straight session of gains. Tech was the big leader after some help from heavyweights Microsoft and Apple, as both extended their gains from last week. Healthcare was the only other outperformer in Monday’s session, receiving a boost amid earnings, positive COVID-19 headlines and M&A news. Headlines were more single-stock related, however had a positive flow-through effect after McKesson reported an earnings beat and a raise, Varian Medical Systems (VAR) announcing they will be acquired by Siemens Healthineers for $16.4B, and Eli Lilly & Co announcing the start of their Phase 3 trials for their Coronavirus treatment.
Top Performing Names on Monday within XLK (Technology ETF)
All other sectors lagged broader market gains as only Industrials, Energy and Financials ended in the green, while all others closed lower. The July ISM Manufacturing headline of 54.2 was the highest point since March of 2019 and came in ahead of estimates, which called for 54. The 1.6-point gain month-over-month was the third straight month of growth, while eight of the 11 components improved sequentially. Additionally, adding to the risk-on tone was the addition of 47K new COVID-19 cases, the smallest daily increase in almost a month.
There were very few developments on the next stimulus bill as the White House and Democrats have said that although they have made “some progress” during Saturday’s discussions, however, there still remained substantial differences including:
- Enhanced unemployment benefits (which still seem to be the most contentious issue)
- Whether or not to provide further state and local government aid
- Even more interesting was a Washington Post article that revealed the Trump administration is potentially examining options for unilateral action if no agreement can be reached.
- Initial jobless claims have appeared to settle in around 1.4M per week for the past two months. While we remain well off the high’s seen in late March and April this number still remained elevated versus historical standards.
THIS WEEK INTERNATIONAL
Europe – The Euro-area economy contracted to 12.1% in the second quarter, versus 3.6% in the first quarter. Italy, Spain and France did better-than-anticipated and the region is recovering faster than expected according to recent economic data. In fact, the European Commission Economic Sentiment advanced to 82.3 in July, versus 75.8 previously, boosted by coordinated monetary and fiscal stimulus efforts.
The Eurozone Manufacturing PMI was 51.8 in July, up from 47.4 in June, marking the awaited return to expansion territory. Consumer goods was the best-performing sector according to IHS Markit. Spain registered a 27-month high with 53.5 manufacturing PMI in July, while Germany registered a 19-month high with a 51.0 PMI print. However, Greece and the Netherlands remained in contraction territory with respectively 48.6 and 47.9 PMI readings in July. Despite better headline PMI, IHS Markit reports that companies continued to operate below capacity and cut jobs in July to adjust for the demand shock.
According to Chris Williamson, Chief Business Economist at IHS Markit, the third quarter is promising for the Eurozone by stating “Eurozone factories reported a very positive start to the third quarter, with production growing at the fastest rate for over two years, fueled by an encouraging demand.
Growth of new orders in fact outpaced production, hinting strongly that August should see further gains.”
The Euro STOXX Index was up 1.73% last week, led by Technology, Hardware, and Air Freight and Logistics.
APAC – The Caixin China Manufacturing PMI rose to 52.8 in July, versus 51.2 in June. Factory employment continued to improve despite a challenging economic environment. In light of improving conditions, analysts estimate that the People’s Bank of China is less likely to ease at the next policy meeting.
The Chinese government has identified infrastructure investment as the main vehicle for economic recovery. According to initial reports, about $2 trillion will be deployed over the next five years in the development of 5G infrastructure, artificial intelligence, big data centers, industrial internet, ultra-high voltage, intercity high-speed rails and rail transportation, and electric vehicle charging infrastructure.
The Shanghai Composite was up 3.54% last week, led by industrials, up 4.79%.
In Tokyo, July consumer prices rose 0.6% year-over-year versus +0.3% estimate. Housing was up 0.6%, while medical care and entertainment prices were up 1.1% and 2.1% respectively.
The Au Jibun Bank Japan Manufacturing PMI was 45.2 in July, up from 40.1 in June. New orders fell at the slowest pace since February and 21% of survey respondents reported a manufacturing output expansion. The NIKKEI 225 was down 4.58% last week.
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