Positive Economic Data and Better than Expected Earnings Reports Encourage Market Rally
Market Recap week ending 8/7/2020
US equity markets rallied across the board last week. Investors cheered positive results out of Dow component Disney and also reacted nicely to some better than expected economic data. A sense that a fiscal stimulus package would emerge out of Washington also kept traders on their toes throughout the week, but in the end, Democrats and the White House were unable to agree. US and China relations continued to sour as President Trump announced more technology bans on several Chinese companies, including the popular application company, Tik-Tok. For the week, the S&P 500 gained 2.45%, the Dow rose 3.8%, the NASDAQ increased by 2.47%, and the small-cap Russell 2000 led gainers with a gain of 5.99%. US Treasuries sold off but continued to trade within a tight range. The 2-year note yield gained three basis points to close at 0.13% while the 10-year bond yield rose two basis points to close at 0.56%. Gold prices increased another $41.70 to close at $2027.20 an Oz. EIA inventory figures showed a draw of 7.4 million barrels, which helped to propel WTI 2.6% higher or $1.04 to close at $41.70. There were no changes to our model portfolios during the week.
According to Factset, 89% of S&P 500 companies have reported 2nd quarter earnings, and 83% of those companies have produced better than expected earnings results. These results are well above the norm, and if this percentage holds, it will be the highest level of this metric since 2008 when Factset started to compile this data. A similar outperformance on sales expectations is also occurring, with 63% of the reported companies outpacing their sales expectations. Disney stood out this week on the earnings front with stellar results and also announced record subscribers to their online offering. The news sent shares up over 10% and helped to push the Dow higher too.
ISM manufacturing data and ISM Non-manufacturing data showed further expansion in July. ISM manufacturing increased to 54.2 from June's 52.6 and was better than the consensus estimate of 53. Similarly, Services came in at 58.1 well above Junes 55.2 reading and better than the consensus estimate of 55.2. The Employment situation report showed non-farm payrolls increased by 1.763 million; the figure fell short of the consensus estimate of 2 million. The Unemployment rate decreased t0 10.2% in July from June's number of 11.1%. Average hourly earnings saw a nice uptick of 0.2%. Initial claims fell by 249k to 1.186 million but was the 20th consecutive week of claims over 1 million. Continuing claims fell nicely to 16.107 million from last week's revised 17.018 million.
Democrats and the White House failed to find an agreement on further fiscal stimulus during the week, and as negotiations continued, it appeared both sides grew further apart on their demands. Rhetoric on Friday out of the administration suggested that President Trump would use executive orders to extend the supplemental unemployment benefits and also provided some direct stimulus to American families. It is expected that if the President uses executive orders that it will be challenged in court.
Tensions between the US and China continued to ramp up as President Trump ordered a ban on several Chinese companies. Tik-Tok, a mobile app that is quite popular, garnered much of the headlines after the announcement. Microsoft also announced that it was looking at the possible acquisition of the company, which would likely be scrutinized by both countries. The ban is set to take place in 60 days.
