The man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money sometimes gets rich. – Charles Henry Dow
Strong quarterly earnings from the biggest technology companies last week and dovish comments from the Federal Reserve powered the Nasdaq Composite Index to a gain of 3.7% while the S&P 500 Index rose nearly 2%. July was the fourth straight positive month for the major stock averages with the S&P 500 up 5.5% during the month. Technology bellwethers Amazon, Apple, Alphabet (Google) and Facebook have led the market higher and they left no doubt last week that their lofty stock valuations were deserved after they announced their quarterly earnings. Both Amazon and Facebook reported revenue and earnings that blew past analysts’ estimates and Alphabet also beat expectations despite reporting its first revenue decline in company history. Apple easily beat estimates on both the top and bottom lines, reported its highest revenue total ever in its fiscal third quarter and announced a 4 for 1 stock split. So far about 60% of S&P 500 companies have reported second quarter earnings results and the vast majority of them have beaten Wall Street earnings estimates. The Federal Reserve also held its two-day meeting last week to review its monetary policy and, as expected, it decided to leave interest rates unchanged at near zero. In its comments, the Fed acknowledged that the economy has improved but remains well below levels at the beginning of the year. Weaker demand and lower oil prices are keeping consumer price inflation in check and allowing interest rates to stay at historically low levels. Fed Chairman Jerome Powell said that the Fed will maintain its accommodative stimulus measures until it is confident that the economy has “weathered” the crisis. The future path of the economy will depend significantly on the course of the virus but the Fed will use all of the tools at its disposal to support the economy. The pace of the economic recovery could also depend on the timing of additional government stimulus as Congress remained deeply divided on the size and scope of the coronavirus relief bill as millions of Americans lost their unemployment benefits at the end of July.
Gross domestic product (GDP) in the second quarter fell at an annualized rate of 32.9%, marking the deepest recession in U.S. history as the economy faces a long road back after a forced shutdown due to the coronavirus pandemic. Durable goods orders in June were better than expected but uncertainty over the strength of the economic recovery due to the pandemic could negatively impact business investment. Pending home sales in June were much higher than forecast as consumers took advantage of record low interest rates. Weekly jobless claims were 1.434 million, in line with estimates, and concerns rose that temporary job losses could become permanent as businesses are forced to close due to the virus.
For the week, the Dow Jones Industrial Average fell 0.2% to close at 26,428 while the S&P 500 Index added 1.7% to close at 3,271. The Nasdaq Composite Index surged 3.7% to close at 10,745.
The July employment report is expected to show that about 2 million jobs were added and that the unemployment rate fell to 10.5% from 11.1% in June. ADP’s National Employment Report for July is also expected to show that the economy added 2.1 million private sector jobs. Both the ISM Manufacturing and Non-Manufacturing or services sector Purchasing Managers’ Indexes (PMI) for July are forecast to be solidly above 50 in expansion territory.
Among the most prominent companies scheduled to report second quarter earnings results are American International Group, Berkshire Hathaway, MetLife, Prudential, Clorox, Tyson Foods, Walt Disney, ViacomCBS, McKesson, CVS Health, Bristol-Myers Squibb, Emerson Electric, Toyota Motor, Honda Motor and Motorola Solutions.
Although investors will again focus on second quarter earnings this week, they also will be anxiously watching what transpires in Washington as Congress attempts to reach an agreement on a new fiscal stimulus package. Last week was the busiest and most important week of earnings season and the results did not disappoint as the big technology bellwethers, namely Apple, Amazon, Alphabet and Facebook, all beat expectations and contributed to the market’s strong performance. The expected earnings decline in the quarter has not been as bad as feared, thanks in large part to companies in the technology sector. The slowdown in economic momentum and the alarming increase in the number of coronavirus cases across the country adds a sense of urgency to talks in Washington to reach a deal. The economic relief package put forth by Senate Republicans last week would include direct payments to individuals of up to $1,200, more Paycheck Protection Program small business loans and set unemployment insurance at 70% of a worker’s previous wages. The bill passed by the Democratic-controlled House back in May is about $3.4 trillion while the Senate bill is less than half of that amount. Even if both sides agree to a package in the $1 to $2 trillion range, it will add significantly to an already staggering federal budget deficit, not to mention that a final coronavirus relief bill will probably be needed at year-end to support the economy until there is widespread distribution of a vaccine. Needless to say, it behooves both parties to compromise and pass a bill, especially in an election year when so much is at stake.