Monday Musings: August 3, 2020

Aug 03, 2020


Public Trust Credit Team

Strength of economic recovery remains contingent on additional fiscal stimulus and spread of COVID-19

The U.S. economy suffered its steepest contraction in more than 70 years in the second quarter with gross domestic product falling by 9.5% compared to the prior quarter and 32.9% on an annualized basis. Initial jobless claims edged higher for a second straight week, adding an additional 1.43 million claims for the week ended July 25. With Congress failing to reach a compromise on additional stimulus measures before unemployment benefits expired last week, the U.S. could now be headed for a longer and more gradual climb from the bottom than originally expected. Fed President Jerome Powell echoed this sentiment on Wednesday following the FOMC’s July meeting, stating that “the pace of the recovery looks like it has slowed since the cases began that spike in June.” 
Pent-up demand and increased home buying thanks to record-low mortgage rates helped drive a pick-up in consumer spending for the quarter, but with the recent resurgence in COVID-19 cases, it is no surprise that consumer confidence fell month-over-month to 72.5 (from 78.1 in June) as measured by the University of Michigan Consumer Sentiment Index. The rebound in household spending is welcoming along with the trend in the manufacturing sector with ISM Manufacturing printing at 54.2 for the month of July, the third consecutive monthly increase. This week, investors will focus their attention on the labor market with payroll numbers and the unemployment rate set to be released on Friday.

Corporate earnings for the second quarter have been relatively sound considering the challenging environment

According to research from BofA Securities, corporate earnings and sales have beat expectations more than originally anticipated by approximately 10.2% and 1.9%, respectively. Data on S&P 500 companies from FactSet indicated that 84% of companies have reported a positive earnings per share (EPS) and 69% reported revenue surprises with approximately 63% of companies having reported actual results as of July 31, 2020. The underlying theme of this quarter’s earnings is that S&P 500 companies have generally performed better than expected as many viewed Q2 as possibly having the worst performance for 2020 due to shutdowns and shelter in place orders. Many firms appear to have a better sense of planning and forecasting business performance given the macroeconomic outlook and containment measures associated with COVID-19 and have even provided financial guidance for the remainder of 2020. Sectors such as Technology and Consumer Staples performed well, given work from home mandates and restricted mobility. As employees continue working remotely and staying at home, both sectors should continue to benefit over the near term given the need for cloud computing and increased consumption of home and personal care items. 
The Consumer Discretionary and Energy sector environment is expected to remain challenged. Non-essential business closures (and partial closures) across the country as well as the depressed demand for travel nationwide will further hinder operations. Tailored Brands Inc. (owner of Men’s Wearhouse and Jos. A. Bank) and Lord & Taylor are two of the most recent casualties of COVID-19, both filing for bankruptcy protection as lockdowns have decimated demand on clothing apparel chains and department stores. Other industries, such as pharmaceuticals, have remained relatively insulated from the current health crisis, notably due to the inherent nature and stable demand for drug therapies and vaccines. This coming week, 129 S&P 500 companies are expected to report quarterly earnings.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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