S&P 500 closes at record high on strong economic data, earnings

It’s best to divide your money among three or four types of stock funds (growth, value, emerging growth, etc.) so you’ll always have some money invested in the most profitable sector of the market. – Peter Lynch

After hitting an all-time high on February 19th and then plunging over 30% to an intraday low below 2,300 on March 23rd, the S&P 500 Index closed at a new record high on Tuesday and ended the week with a modest gain. The Nasdaq Composite Index rose nearly 3% on continued strength in the technology sector, particularly shares of Apple which closed with a $2 trillion market cap, while the Dow Jones Industrial Average was flat. Quarterly earnings continue to surprise to the upside and last week was no exception as Walmart, Target, Home Depot and Lowe’s reported strong earnings results as did John Deere, which beat analysts’ estimates on both the top and bottom lines. Economic data was also better than expected last week as preliminary manufacturing and services sector data were at their best levels in months and housing data was strong. However, minutes from the most recent Federal Open Market Committee (FOMC) meeting in July revealed concern that the ongoing coronavirus pandemic could weigh heavily on economic activity in the near term. The virus is likely to continue to negatively affect employment, especially without much-needed help from Congress, which went into recess without reaching a deal on an economic relief package. All of the Fed members were in agreement that the federal funds rate would remain near zero until they were confident that the economy had weathered the storm and on pace to achieve its maximum employment and price stability goals. They also expressed worries over the soaring levels of government debt, which now stands at $26.6 trillion. On a positive note, the U.S. and China agreed to go back to the negotiating table to review progress of the “phase one” trade deal since it was signed in January. Tensions between the two countries have risen during this time over the origin of the coronavirus, national security concerns with a Chinese technology firm and Hong Kong’s autonomy. Lingering concerns about the stalemate in Washington over a coronavirus economic relief package and what comes out of the annual Federal Reserve symposium held in Jackson Hole will likely be the primary focus this week.

Last Week

As mentioned above, housing data was particularly strong last week as the National Association of Home Builders/Wells Fargo Housing Market Index showed that home-builder confidence was much better than expected, hitting its highest level on record. Housing starts in July were also much higher than forecast and existing home sales rose nearly 25% from their level in June as buyers took advantage of historically low interest rates. Weekly jobless claims, however, totaled 1.106 million, higher than estimates. Elevated jobless claims raise concerns about whether or not housing demand will be sustainable as prices rise and limit the supply of existing homes for sale.

For the week, the Dow Jones Industrial Average was flat and closed at 27,930 while the S&P 500 Index rose 0.7% to close at 3,397. The Nasdaq Composite Index jumped 2.6% to close at 11,311.

This Week

Durable goods orders for July are expected to rise nearly 5% while July new homes sales are forecast to be about even with the numbers reported in June. The second estimate of second quarter gross domestic product (GDP) is expected to be the same, showing a decline of 9.5% in the quarter. Both the final August consumer confidence and University of Michigan consumer sentiment indexes are expected to be slightly higher. Finally, the ISM Chicago Purchasing Manager’s Index (PMI) for August is forecast to be above 50, a reading that denotes expansion.
The most notable companies scheduled to report quarterly earnings this week include Best Buy, Nordstrom, Dick’s Sporting Goods, Gap, Ulta Beauty, Dollar General, Dollar Tree, Medtronic, Hewlett Packard Enterprise, Dell Technologies and HP Inc.

Portfolio Strategy

Although the S&P 500 Index hit a new all-time high this past week and erased all of the losses from the sell-off due to the coronavirus pandemic, a closer look beneath the surface shows that the majority of stocks in the benchmark are nowhere near their prior highs. In fact, between February 19th, the date of the prior high, and August 18th, the date of the new high, over 60% of the stocks in the index posted losses while less than 40% showed gains. The performance of the S&P 500 has varied widely by sector, with the clear winner being the technology sector with a year-to-date gain of about 30%. Within this sector, it’s been the strong performance of six stocks (Facebook, Apple, Amazon, Alphabet, Netflix and Microsoft) that have done most of the heavy lifting this year. The other sectors with the biggest positive gains have been consumer discretionary (+26%), communication services (+11%) and health care (+8%). The majority of sectors within the benchmark, though, have seen declines on a year-to-date basis. The biggest loser has been the energy sector with a loss of 39%. Other sectors with negative returns include financials (-21%), real estate (-11%), utilities (-8%) and industrials (-6%). About one quarter of the stocks in the S&P 500 Index have lost 25% or more since the high on February 19th, primarily those in the energy and travel and tourism industries that have been hit particularly hard by the coronavirus pandemic. In many ways, it’s been the tale of two markets, with growth-oriented sectors leading the way and value-oriented sectors lagging as the economy struggles to recover from the pandemic.