In lieu of our usual Weekly Bulletin, we are publishing special reports to discuss the market reaction to evolving news on the coronavirus outbreak. We would stress the following observations as developments continue to unfold.
Stocks rose again last week and remain focused on improving economic data and a positive start to earnings season, despite the rise in new COVID-19 infections. While the high infection rates in several major states (FL, TX, and CA) present a headwind
to the recovery (especially for travel and leisure), we remain confident that a sustainable economic recovery is unfolding.
This recovery is supported by unprecedented monetary and fiscal stimulus both here in the U.S. and across the globe. We expect the next stimulus bill to pass Congress before the August recess and likely amount to about $1.5 trillion. We expect fiscal stimulus to continue supporting the economy until we get through the pandemic—especially considering the upcoming election. We also see little political will to have a second major lockdown which would strain the economy.
Incoming Economic Data Supports Recovery Narrative
The major economic news last week came from retail sales
and housing which continue to exhibit a sharp rebound from the lockdown lows. Retail sales rose 7.5% in June, above the consensus of 5.2%. It was the second straight gain, following the collapse in March and April due to the pandemic and the recession
that ensued. Following the latest increase, retail sales are just 1.0% short of their pre-recession high.
Meanwhile, the housing data continues to impress. The NAHB Housing Market Index (a measure of homebuilder confidence) surged a near-record 14 points in July, its third gain in a row, to 72, well above the consensus of 61. The index is now just four points shy of its pre-recession high of 76, reached in December 2019. Current and expected home sales, as well as traffic of prospective buyers, all increased this month. The rise in builder confidence suggests a pickup in housing starts in the next several months and was confirmed by last Friday’s healthy increase in housing starts and permits.
The significant improvement in these major economic readings strengthen the argument that an economic recovery began late in the second quarter. Given the improvement in retail sales and housing final demand, we anticipate the manufacturing business surveys will signal a new economic expansion when the preliminary July data is released later this week. With record-low mortgage rates and significant pent-up demand, we expect housing to play a major role in the broader economic recovery.
Positive Start to Earnings Season
Second-quarter earnings are projected to be the worst of the current crisis, with S&P 500 earnings-per-share expected to be down 43% versus the same quarter last year. However, company results have been topping forecasts by +13%, more than any
quarter since the first quarter of 2010 (right after the financial crisis). This is consistent with incoming economic readings that have been better-than-expected.
While early in the season, earnings so far have exceeded estimates by 13.0% in aggregate, with 76% of the reported companies beating their lowered projections. Earnings for the defensive sectors (Consumer Staples, Health Care and Utilities) and the secular growth Technology sector are expected to fare better than the cyclicals (Energy, Industrials, Materials, Financials, and Consumer Discretionary).
While virus headwinds will remain with us for the foreseeable future, we expect the second quarter to mark the low in economic activity and corporate profits. Given our outlook for improving economic conditions, defensive growth oriented Health Care and Technology sectors remain well positioned while Industrials should benefit from improving manufacturing conditions in the second half of 2020.
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