In this week’s update, CIO Tom Weary, CFA®️, discusses the stock market’s strong November numbers despite expectations for volatility. He also goes over the latest in the COVID-19 pandemic, its impact on the economy and job market, and shares earnings from RFA Portfolio holding The J.M. Smucker Company.
Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. Well, it’s great to be back after a brief Thanksgiving break as we head into the final month of what has proven to be a truly momentous year complete with a global pandemic and recession, record numbers of hurricanes and wildfires, a hotly contested Presidential election during widespread social unrest and street protests, all accompanied by a sickening plunge in stock prices followed by a startling recovery back to new records recently. It’s enough to make your head spin. Let’s start by looking closer at the stock market before catching up on the latest coronavirus news and other reports on the economy.
We started the week by wrapping up one of the strongest months ever in the stock market with the Dow Jones Industrial Average gaining nearly 12% in November, its best month since January of 1987, while small cap stocks as measured by the Russell 2000 roared over 18% for their strongest monthly performance on record. This is not the outcome that investors were expecting. You will recall that last summer I showed charts of the VIX futures markets, or the bets that traders were making about future market volatility, with a big spike around the November elections. Well, as this chart shows, that feared burst of market volatility never really materialized. Three things happened which kept volatility lower than expected. First, while the election did not go entirely smoothly neither were there tremendous fireworks, nor was there a long period of uncertainty. The election came and went without the world ending. Second, during November surprisingly successful results from three different coronavirus vaccine trials were announced, raising hopes that there is a light at the end of the pandemic tunnel. And third, as this next chart illustrates, analysts’ estimates for fourth quarter earnings growth, while still showing a decline from last year given the pandemic, have been steadily improving over the past several months. Investors are increasingly hopeful that we can return to a semblance of normal once we get the pandemic under control.
While the news on the vaccine front is encouraging for the future, the current reality of the pandemic is increasingly bleak. As this first chart shows, the number of daily COVID-19 cases has exploded exponentially in the past two months to over 200,000, and we have yet to see the impact from recent Thanksgiving travel and family gatherings. This in turn is leading to record numbers of hospitalizations now surpassing 100,000 nationwide. There is a real threat of the healthcare system becoming overwhelmed in many parts of the country, forcing local governments to re-institute lockdowns and stay-at-home orders. And with a predictable lag, we are also seeing an ominous rise in the number of deaths, now approaching 3,000 per day. Even without the implementation of renewed lockdowns, the rise in coronavirus cases has led to a reduction in mobility and activity, as illustrated in this next chart. People just don’t feel safe being out and about. And they also don’t feel safe returning to the office, as this next chart shows, with the number workers returning to the office declining recently after having slowly recovered a bit over the summer months. There is a lot of urban office space that is still empty and may remain so even after the pandemic passes as many companies have adjusted to working from home. The post-pandemic world will look very different from 2019.
We had a number of important data points on the economy this week. The ISM Manufacturing Purchasing Managers Index came in at 57.5, below expectation and down from the prior month, perhaps reflecting the recent rise in COVID cases, but still in expansion mode. This growth in manufacturing is supported by an increase in private investment as measured by Capital Goods Orders Nondefense ex Aircraft, which you can see came in slightly ahead of estimates last month. This next chart comparing the current recovery in Capital Goods Orders to the prior recovery after the Global Financial Crisis highlights how sharp both the pandemic plunge and recovery have been. The ISM Services PMI for November came in at 55.9, which while down slightly was still above 50 and thus also continues to be in expansion mode. On Wednesday, payroll processor ADP reported a surprisingly low increase in private employment of only 307,000, the smallest increase in four months, versus expectations for 440,000. That was followed on Friday by a very disappointing jobs report when the Labor Department reported an increase in Nonfarm Payrolls of only 245,000, the smallest increase in 6 months. The November Unemployment rate dropped slightly to 6.7%, but only because 400,000 discouraged workers stopped looking and dropped out of the labor force. This weak jobs report puts more pressure on Congress to agree on another aid package, for as you can see in this final chart millions of jobless Americans are going to run out of unemployment benefits on the day after Christmas, and politicians rarely enjoy playing the part of Ebenezer Scrooge.
Last Tuesday morning, J.M. Smucker reported quarterly earnings of $2.39 per share, 16 cents a share above estimates. Revenue beat forecasts as well. The producer of Smucker’s Jam, Jif peanut butter, Folgers coffee and other brands also raised its full-year earnings forecast. As been the case since earlier this year, Smucker benefited from more cooking by consumers forced to spend time at home due to the pandemic, so I encourage you to have a cup of coffee with your next peanut butter and jelly sandwich.
So, what does it all mean? While the current reality of the pandemic is very grim and likely to worsen in the near future, the success of three new vaccines is allowing investors to look towards the light at the end of the long, dark pandemic tunnel, shifting more towards plays on the recovery and taking stocks to new highs. Undoubtedly, there will be setbacks now and then, but we now have something tangible to back up our hopes. In the meantime, Congress is going to have to act pretty quickly to help many Americans get through a difficult winter. We will stay on top of things for you as events unfold. So, please relax, have a great weekend and join us again next week for the RFA Weekly Market Update.
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