Wall of Worry

Investors in US equities have been handsomely rewarded since late March – particularly those with overweight exposure to large cap tech specifically, and the Nasdaq more generally speaking. The robust rally off the lows of late March has been meteoric – historic in fact.

Q2 Corporate results continue to provide underpinning to the markets’ uneven run higher. We are halfway through second-quarter earnings and over 75% of the companies reporting have significantly beaten lowered earnings expectations. Not only have companies beat expectations, they have done so by roughly 20% – which by any measure is high. Last week was a good example: Apple (AAPL), Facebook (FB), and Amazon (AMZN) all delivered meaningful beats versus expectations. Those earnings releases fueled a significant trade higher by week’s end – on Friday afternoon in particular.

As we have discussed, the Nasdaq has been in the driver’s seat in this Covid-19-centric rally. The S&P 500 is only 3.4% below the closing high it notched in February, however. Leadership in the S&P 500, not unlike the Nasdaq composite, has been provided by large cap tech. The S&P 500 also has in its ranks the healthcare giants like Pfizer (PFE) UnitedHealth (UNH), and a slew of pharma companies – all of which have been in play since COVID-19 hijacked the narrative.

The historic COVID-19 rally that many have enjoyed may be running a little low on support at the wrong time. Recent economic data here at home has indicated that the US economic rebound has run into some headwinds due in large part to scattered resurgence of COVID-19, uneven approaches outlined to confront it, and a public that has grown thoroughly exhausted by its impact on everyday lives.

Another factor that is playing into weakening investor sentiment comes in the form of civil unrest, relentless violence, social unease, and political uncertainty. The protests that have been a result of George Floyd’s senseless and horrific murder have taken on a global character. In some cases here in the United States those very protests have morphed into a fusion of BLM and ANTIFA.

Adding to the widely shared sense of confusion and social exhaustion is the fact that the Presidential election is less than 100 days away. Honestly, the thought of that alone, given the near insurrection that has materialized in urban areas recent months, is worrisome. Though still very early on, recent polling has revealed that President Trump’s support is rising in swing states. If President Trump is re-elected, what does that mean for average Americans? What will it mean for the urban areas that simmered with hostility when President Trump was initially elected in 2016? “Not My President” was a slogan that seemed to sum it up. I cannot imagine that the streets will be less unsettling with protests and name calling.

It isn’t simply an election year; it is an election year with more variables than even the most seasoned political strategist can manage. Even the simple but profoundly important act of voting has come under review with expectations that COVID-19 will remain a challenge. Unfortunately, there is now a widely held concern over the validity of the outcome regardless of who wins. The deep divisions across race, economics, politics, and religion abound in ways that seem more dangerous than at any time I can remember. We continue to witness uneven economic performance as we attempt to emerge from the COVID-19 swamp. The White House, Senate, and the House are all in play.

  • If you are thinking that we are living in unusual times, you are right. It is not your imagination. A few questions that are topical:
  • When will we be in a position to finally officially re-open for business as a country?
  • What will be the impact of COVID-19 on election turnout?
  • What will the impact of mail-in voting be, if in fact it becomes a reality?
  • How will Supreme Court Justice Ruth Bader Ginsburg’s ongoing health concerns inform the election?

The old adage “Wall Street Climbs a Wall of Worry” does provide comfort in times such as these. I suspect this wall is climbable, it might take a bit longer than was expected to be the case at the end of March.

This week’s economic calendar highlights:

The Institute for Supply Management will release the ISM Mfg. Index for July on Monday at 10:00 am.

Econoday consensus is 53.5 which would be an improvement over June’s reading of 52.6. Frankly, given the pervasively negative outlook for both the domestic and global economies that have taken shape in recent months, I would consider any reading above 50 to be a moral victory.

The ADP Employment Report is due out at 8:15 am. International trade data for tangible goods is released at 8:30 am. Econoday consensus stands at $-50.3 B. If consensus is accurate, that would reflect a significant improvement over May’s results. As you remember, May’s data was disappointing – coming in at $-54.6 B. As is nearly always the case, on Wednesday we receive the EIA Petroleum Status Report. Last week’s results, for the previous week, reflected a draw of 10.6 M barrels of crude. Distillates and gasoline were nearly unchanged coming in at 0.7 M and 0.5 M barrels, respectively.

Weekly jobless claims for the week ending 8/1 are released Thursday morning at 8:30 am. Econoday is calling for a total of 1,442 K claims for the week. Though the four-week moving average has reflected some topline improvement over the past month, the fact is that we are not seeing any significant improvement in recent weekly readings and that has given markets pause. That pause has consistently been reflected in equity market pricing – particularly on Thursday mornings.

The monthly Employment Report for July is due out at 8:30 am. Though there has been significant topline improvement in this data, we are still talking about massive numbers. Econoday consensus is calling for a reading of 2,000,000 for July, versus June’s 4,800,000. The official unemployment rate is expected to drop to 10.5% from 11.1%. Private payrolls are expected to register a gain of 2,175,000 while manufacturing jobs (+306,000) add meaningful underpinning to the top line data. However, the fact that we are not seeing any headway gained in the weekly jobless claims data is worrisome. It is also, potentially, a sign that we have hit a plateau in employment gains.

Flickr photo: by Douglemoine

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