In the last Weekly Market Update of 2020, CIO Tom Weary, CFA®️, discusses the arrival of a second FDA-approved COVID-19 vaccine, from Moderna, which brings more hope amid growing cases and hospitalizations. He also goes over the unexpected drop in November retail sales, shares news from the Fed’s final meeting of the year, and reports on earnings from RFA portfolio holdings Oracle Corporation, Broadcom Inc., and Accenture.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.   The stock market hit new record highs this week as a huge Nor’Easter dumped a foot of snow on New York, lawmakers in Washington scrambled to agree upon a $900 billion pandemic aid package before leaving town for the holidays, and the FDA met to give the go-ahead for emergency use of a second coronavirus vaccine.  Since the pandemic is driving the dynamics of the economy, let’s start there before turning to the latest economic data, news from the Fed, and even earnings reports from several of your companies as 2020 winds down.

While the arrival of a second vaccine from Moderna brings great hopes for the future, we are still in the midst of a very dark pandemic winter.  As this first chart shows, we have not yet brought the number of new daily COVID cases under control, now averaging well over 200,000 after rising exponentially since September.  This has led in turn to a swelling in the number of hospitalizations, which have surged well past 100,000 here in the U.S., pressuring healthcare systems across the country and leading to further lockdowns.  As this map shows, a number of areas of the country are running critically short of ICU beds with occupancy rates already at 100% or above.  Tragically, this is leading to new record daily death totals, surpassing 3,000 in recent days.  While the advent of a second vaccine brings hope, as this next chart illustrates it will be mid-year next year before we are able to manufacture and distribute enough vaccine to immunize 60% of the U.S. population, thereby hopefully reaching so-called herd immunity, at which point perhaps we can gradually return to some semblance of normalcy.  And as this last chart shows, the widespread delivery of a coronavirus vaccine by the third quarter of 2021 could return U.S. GDP back to its pre-pandemic level by year-end, but still well below its prior trend line.  It will take some time to recover what the pandemic has taken away, but we may now soon be on our way.

One data point that perhaps is driving lawmakers to reach a deal quickly on pandemic relief aid was this week’s unexpectedly sharp drop in November Retail Sales, which were down 1.1% versus expectations for down 0.3%, as shoppers pulled in their horns in the face of rising COVID cases.  With current aid programs expiring the day after Christmas things could get very ugly very quickly.  This next chart compares the current downturn and recovery in Retail Sales to the one during the Global Financial Crisis, showing how short and sharp both are this time around, yet it does appear that the recovery may rolling over.  Things look better over on the industrial side of the economy where Manufacturing Production rose a surprising 0.8% last month, which was double expectations.  And this last chart shows that Capacity Utilization continues to improve but remains well below its pre-pandemic level.  The virus is still in the driver’s seat for now.

The Fed wrapped up their final meeting of the year on Wednesday, publishing their famous dot chart showing the expectations of each Fed member for short term interest rates in the future.  You can see that they expect the Fed Funds Rate to remain near zero through 2023.  “The outlook for the economy remains extraordinarily uncertain,” Fed Reserve Chairman Jerome Powell said during his press conference after the Fed kept the federal funds rate near zero. Still, he assured investors that the central bank has the flexibility to provide more accommodation and remains open to increasing the amount of asset purchases or buying securities with longer-term maturities in the future. The Fed expects the economy should perform strongly in the second half of 2021 due to the vaccines being distributed now. For the time being, he sees more fiscal support is needed. The market responded to Powell’s reassurances with the S&P 500 reaching session highs on Wednesday.

Catching up on our earnings reports, last week a couple of technology companies in the Defensive Portfolio chimed in.  Oracle came in 6 cents above consensus, with quarterly profit of $1.06.  The business software giant’s revenue matched expectations.  The jump in working from home helped fuel demand for its cloud-related offerings.  Broadcom reported quarterly earnings of $6.35 per share, 10 cents above estimates, and raised their dividend.  The chip maker’s revenue came in slightly above consensus as well.  Broadcom also issued a cautious outlook, which was not what investors wanted to hear.   On Thursday Core Portfolio holding Accenture, the huge IT consulting firm, reported earnings per share of $2.32 for its fiscal first quarter compared to the consensus estimate of $2.05, and its stock price surged.  Revenue beat as well and Accenture raised its full-year forecast, with demand for digital and cloud services remaining strong as U.S. employees continue working from home.  And after the close on Friday, Nike, a holding in both Core and Defensive Portfolios, will report earnings with analysts looking to see if it can maintain its tremendous momentum of surging online sales.  We’ll keep looking for more companies like Nike which are turning the pandemic from a hurdle into a stepping-stone to the next level.

So, what does it all mean?  The pandemic rages across the country, seemingly out of control, but the initial use of the first vaccine from Pfizer and the emergence of a second from Moderna gives hope that someday soon we will bring it under control and eventually eliminate it.  The U.S. economy is showing signs of weakness in the face of rising COVID cases, but lawmakers are scrambling to provide another relief package and the Fed stands ready to do more heavy lifting if necessary.  In the meantime, your companies continue to navigate these dangerous shoals successfully and report strong results.  Things should get quiet for the holiday season, so I will give you a break from the deluge of data for the rest of 2020.  So, please relax and have a happy holiday season, whether you celebrate Christmas, Hannukah, Kwanzaa, Saturnalia or even Festivus.  Join us again in three weeks when we usher in 2021 with the next edition of the RFA Weekly Market Update.

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