This week, CIO Tom Weary, CFA®️, starts off by reporting several major pandemic milestones. He then shares signs of continuing recovery in the economy and key takeaways from this week’s Federal Reserve meeting before discussing strong earnings from RFA Defensive Portfolio holding Oracle Corporation.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update. There was a closely watched Fed meeting this week and one of our companies reported earnings, but first let’s note a couple of important milestones in the pandemic that occurred this week.

This week we marked several major milestones regarding the coronavirus pandemic. On the positive side, earlier this week California and New York, once epicenters of the pandemic, both moved to fully open their economies, lifting most if not all restrictions. These are major steps in the economic recovery, so let’s hope that there aren’t any major outbreaks as a result that would force us to take a step back, as we are seeing in Great Britain where they just had to impose a four-week delay in reducing restrictions. Fingers crossed! On a more somber note, the U.S. official COVID-19 death toll passed 600,000 this week, the highest of any country in the world, not a distinction that we should seek. The global death official toll is approaching 4 million, but the real number is most likely three times that according to research by The Economist magazine. And that number will likely move much higher given that the rest of the world hasn’t made nearly the progress that we have here in the U.S. in terms of vaccination. As you can see in this chart of new cases in the U.S., the vaccination program appears to have brought the spread of COVID under control with nearly 2/3 of adults vaccinated, although officials are concerned about pockets of unvaccinated Americans, especially in the Southeast. We can breathe a little easier now, but we can’t drop our guard entirely just yet.

The U.S. economy continues to show signs of recovering from the pandemic plunge. While Retail Sales for May came in slightly below expectations, as you can see by this first chart, they are still well above trendline as Americans spend some of the they accumulated during the lockdown. May’s report did reveal a shift from spending on tangible goods to services such as dining and travel as consumers venture out of their cocoons with pandemic restrictions lifting. Turning to manufacturing, we can see in this next chart that production is returning to its pre-pandemic level. This is echoed in Capacity Utilization, as we see in this final chart. While the May figure surprised to the upside, it was likely held back by the inability of manufacturers to hire all the production workers they needed. We’ll keep an eye on how this develops over the coming months, but things are looking better in both consumption and production here in the U.S.

The Fed held a regularly scheduled meeting on Tuesday and Wednesday. While holding short term rates steady near zero for now, Fed officials signaled rates will rise sooner and faster than previously expected. That’s the main takeaway from the latest policy statement and updated summary of economy projections released on Wednesday. Seven officials now expect to lift interest rates next year, up from four officials in March. More important: All but five members think rates will need to increase in 2023. In March, only 7 thought so, with 11 members expecting to keep rates pinned at zero. Markets have been expecting no change in rates before 2024. In its statement, the Federal Open Market Committee, the Fed’s monetary policy arm, reiterated that it would continue buying at least $120 billion a month in Treasuries and mortgage-backed securities. Indicators of economic activity and employment have strengthened, with sectors most adversely affected by the pandemic still weak but improving. The Fed repeated that the path of the economy will depend significantly on the course of the virus. In other words, things are getting better but we aren’t out of the woods yet.

After the close on Tuesday, Oracle, a holding in the Defensive Portfolio, reported strong fiscal fourth quarter results which beat expectations on both the top and bottom lines. Revenue rose 7.5% to $11.2 billion, the strongest growth since 2012, leading to earnings of $1.54 versus $1.20 a year ago and $1.31 expected. However, the stock sold off on the news. Why? Because expectations had been very high. As we can see in this first chart, Oracle had been one of the strongest performers in technology this year with the stock price up 30% before this report. So, Oracle was punished for reporting good but not surprisingly good results. And the company committed the further sin of giving disappointing guidance, saying they expect fiscal first quarter earnings in the range of 94 cents to 98 cents versus the Street’s estimate of $1.03. Oracle is pivoting from subscription-based database software sales to a cloud-computing business model, a shift which is working but which is expensive. As we can see in this next chart, Oracle plans on ramping up capital expenditures to $4 billion this year. They have a long way to go to catch up with market leaders Amazon Web Services and Microsoft’s Azure. As we saw last quarter, even Google is struggling to keep up in the cloud-computing arms race.

So, what does it all mean? It feels as if we are starting to put the pandemic in the rearview mirror here in the U.S., but that isn’t true in the rest of the world where vaccination rates are still very low. And we have pockets of vulnerability here in the U.S. too, so we can’t drop our guard just yet. The Fed upgraded their economic outlook this week which sounded a bit more hawkish to some. Now the market is projecting that the Fed may raise rates a couple of times in late 2023 rather than waiting until 2024 to lift them from zero. Really?!! That’s still over two years from now. A lot can happen between now and then. 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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