This week, CIO Tom Weary, CFA®️, goes over the latest pandemic numbers and discusses several positive reports on the economy, including July’s jobs report. He then covers the latest on the bond market before sharing recent earnings from RFA holdings Sony, Prudential Financial, Simon Property Group, and FLEETCOR.


Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  This week we heard from a few more of our companies as earnings season begins to wind down and the summer doldrums set in.  Investors fretted about the possible implications of a fourth surge in the COVID pandemic driven by the highly contagious Delta variant, seeking clues in the latest economic data, so let’s begin by starting there.

A combination of falling vaccination rates and the spread of the highly contagious Delta variant has led to a recent surge in new daily cases, as we can see in this first chart.  While nowhere near the level seen at the height of the pandemic in January, we have surpassed the level of the second wave last summer with many areas such as Florida and Missouri running out of hospital beds.  Masking mandates, even for the vaccinated, have returned in some areas such as Los Angeles, and yet it does not appear at this point that lockdowns are going to return.  We seem to be stumbling down the path to an open economy, but there continue to be bumps in the road.  The pandemic continues to be an important part of the narrative.

We had several positive reports on the economy this week.  The ISM reported the Manufacturing PMI for July coming in at 59.5, which was a strong number even if down sharply and below expectations, keeping in mind that any reading above 50 indicates expansion.  The lower figure appears to be caused by shortages of labor and materials, not a lack of demand.  Businesses expand demand to continue and are investing accordingly.  This next chart of Capital Goods New Orders Nondefense ex Aircraft, the best proxy of business investment, shows capital expenditures soaring to new highs.  That will help productivity down the road.  And on the Services side, the ISM reported the July PMI to be a very strong 64.1, well above expectations.  The economy is booming.

On the labor market front, on Wednesday payroll processor ADP reported a disappointing increase in Total Nonfarm Private Payrolls of only 330,000, well below the 690,000 expected.  And on Friday, the government reported a surprisingly strong increase in July Nonfarm Payrolls of 943,000 versus the 845,000 expected and an Unemployment Rate of 5.4% versus economists’ estimates of 5.7%.  A strong labor market bodes well for the consumer, and with consumption driving 70% of the economy things are looking good for a sustained period of economic growth, and yet bond investors appear to be seeing a different picture.

Fixed income investors appear more focused on the U.S. having hit its peak growth rate, with interest rates falling since the end of March, with the yield on the benchmark 10-year U.S. Treasury bond falling below 1.2% recently, as we see in this next chart.  And if we factor out the recent surge in inflation, we can see in this next chart that real interest rates, or after inflation, as measured by Treasury Inflation Protected Securities, are hitting historic lows, deep into negative territory.  This is called financial repression and drives investors out of the bond market to seek some kind of real return in other markets.  If there is any kind of non-transitory inflation, fixed income investors don’t seem to sense it.

Simon Property Group saw sales at its shopping malls and outlet centers bounce back to pre-pandemic levels in its latest fiscal quarter, as Americans shopped for clothes, shoes and other items. The largest U.S. mall owner is hoping the improved results encourage retailers to sign new leases and help it fill space vacated during the pandemic.  Simon reported earnings of $3.24 which beat by a whopping 86 cents on revenues of $1.25 billion which grew 18% from a year ago and beat by $120 million.  The company boosted their earnings guidance for the year as they saw substantial improvement in cash flow during the quarter.  They also hiked their dividend for the second time in a row, with the stock now yielding 4.75%.  That’s a great way to reward shareholders.

Prudential Financial reported second quarter earnings of $3.79 which trounced consensus estimates by 70 cents due to higher net investment spread results in most of its businesses and higher net fee income in retirement and individual annuities businesses.  Assets under management grew 4% in the quarter to $1.7 trillion at June 30.  Current quarter results reflect higher net investment spread results, business growth, and lower expenses, partially offset by lower earnings from joint venture investments and less favorable underwriting results.  The Rock appears as solid as ever.

Sony topped profit expectations thanks to demand for its latest next-generation game console and raised guidance despite an anticipated demand slowdown in gaming.  Total revenues grew 15% and topped consensus by about 4% while operating profit also topped expectations.  In its earnings call, Sony’s Chief Financial Officer said the PlayStation 5 Standard Edition isn’t losing money anymore. The view in May was that the console would reach break-even in June, and he said “it’s been progressing according to the plan. Overall, hardware profitability and peripherals hardware profitability, including peripherals, as we have been saying, is proceeding smoothly.”  Meanwhile, the lower-priced PS5 digital edition will have its loss offset by other hardware sales, including peripherals and the last-generation PS4.  That looks like solid progress in a world struggling with a major semiconductor chip shortage.

We had a strong debut quarterly report from another one of our recent additions to the Core Portfolio.  FleetCor Technologies, a leader in fuel cards and payment systems for commercial customers, reported earnings of $3.15 which beat estimates by 21 cents on revenue of $670 million which grew 27% from a year ago.  And they are looking to the future, with CEO Ron Clarke discussing on the conference call his thoughts on innovative ways to monetize the transition to electric vehicles down the road.  That’s what we like to see in our companies, making money now and thinking how to manage the challenges and opportunities of the future.

So, what does it all mean?  Unfortunately, the pandemic is still with us, although its impact appears to be fading, at least in the minds of investors.  Let’s not drop our guard entirely just yet.  The economy continues to recover and may be at its peak rate of growth right now.  By late next year this boom will be a fading memory with economists projecting GDP growth to return by then to its healthy tortoise pace around 2%.  Bond investors seem to be sensing that scenario already as interest rates have fallen back to historic lows rather than rising as one might expect given the current economic strength.  We’ll stay on top of the latest developments on your behalf.  So, please, sit back, relax and join us again next week for the RFA Weekly Market Update.

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