This week, CIO Tom Weary, CFA®️, gives encouraging updates on the pandemic and the economy. He also discusses AMC Entertainment and other “meme stocks” before sharing earnings from RFA Defensive Portfolio holding The J.M. Smucker Company.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  I hope that you had a relaxing long holiday weekend.  The broader stock market was relatively subdued this week as we begin to settle into the summer doldrums.  We heard from one our companies this week, but first let’s get quick updates on the pandemic, the economy and the stock market.

The state of the pandemic continues to be the dominant driver of the economy, and on that front the news is generally positive, at least here in the United States.  As you can see in this first chart, the number of daily reported COVID cases is falling rapidly, with the two-week trend down 46%.  We are well down from the January highs of around 250,000 daily cases to under 17,000 currently.  This is putting much less pressure on the healthcare system.  As we see in the second chart, new hospital admissions are steadily declining, down roughly 14% in the last week and 83% off the January highs.  The national vaccination program is having a real impact, but as we can see in this next chart the rate of vaccinations is also dropping dramatically, now running at about a third of the peak rate in April.  Creative ideas to get the unvaccinated to step up have moved on from lotteries to free beer and daycare.  That may tell you something about whom public officials are targeting at this point as they make a final push to get everyone vaccinated.  The American public is tired of the pandemic and wants to return to normal life.  As we see in this next chart, the number of seated diners as measured by Open Table has already returned to its pre-pandemic level.  We will not be denied our restaurant meals.  And as this last chart indicates, air travel has returned to 75% of its normal level and is rising rapidly.  I guess that we have collectively decided that the pandemic is over.  At least we are behaving that way.

The American consumer, and therefore the American economy, is amazingly resilient.  As this first chart shows, consumption took a big blow from the pandemic but has now rebounded strongly back to its pre-pandemic trendline.  This in turn is catapulting total real GDP, given that consumption is 68% of GDP.  As this next chart indicates, by the end of 2022 real GDP is forecasted to return to and exceed its pre-pandemic trendline.  Businesses are joining consumers in the spending splurge.  As we see in this next chart, Capital Goods New Orders Nondefense ex Aircraft, which is the best measure of private investment by corporations, surprised economists in April by rising 2.3%.  When we look at the level of Private Investment in this next chart, rather than the monthly change, we can easily see that the amount is in record high territory.  We also had a reading on the ISM Manufacturing PMI which came in above forecast at 61.2, as we see in this next chart.  And we can understand the high level of corporate investment when we dig further into the numbers and see the problem with bottlenecks in supply chains that I mentioned last week.  The next chart shows the backlog of orders facing manufacturers, forcing them to scramble to ramp up production.  And their customers are desperate.  As we see in this next chart, inventories have plummeted as businesses were caught flat-footed with consumers returning to buy goods before production cranked up.  Restarting an economy is no easy task.  And on the Services side, the ISM reported that the May PMI rose from 62.7 in April to 64 in May, which marked its highest level in its 24-year history.  And Services are only set to accelerate as pandemic restrictions are loosened.

All this economic activity is leading a rebound in hiring.  On Thursday, payroll processor ADP reported an increase in Total Nonfarm Private Employment of 978,000, well above expectations for 650,000.  Businesses are reporting difficulty finding enough applicants for the positions they want to fill.  And in Friday’s official employment report from the Commerce Department, jobs growth last month was about double the pace of April’s advance. The U.S. economy added 559,000 nonfarm payrolls in May, compared to estimates of 671,000. April’s jobs tally was revised up by 12,000 to 278,000. The nation’s unemployment rate slipped to 5.8% in May compared to estimates for a 5.9% rate.  Economists feel that this understates the true unemployment rate by 2 to 3 percent given the number of people who have dropped out of the labor force due to the pandemic.  As we can see in this last chart, there are still 15 million Americans receiving some form of unemployment assistance, so we still have a long way to go for a full recovery in the labor market.

While the broader stock market was relatively quiet this holiday-shortened week, there were some fireworks in the more speculative corners with the return of gamification in the so-called meme stocks.  Most notably, AMC Entertainment nearly doubled in value on Wednesday, as we see in this first chart.  And the CEO threw fuel on the fire by offering free popcorn and private screenings to shareholders, 80% of whom are retail investors at this point.  A few moviegoers trickling back into theatres does not justify a valuation of over $30 billion.  The fervor spread to the stocks of other heavily shorted struggling companies such as Blackberry and Bed, Bath & Beyond as the Retails Bros rampaged.  This is not investing and is not going to end well for those involved, but at least it seems limited to small corners of the market at this point.

J.M. Smucker, a holding in the Defensive Portfolio, beat estimates by 22 cents a share, with quarterly profit of $1.89 per share.  Revenue came in slightly above forecasts. Sales fell compared with a year earlier, however, when homebound consumers stocked up as the pandemic took hold.  Smucker did issue an upbeat full-year earnings forecast above analysts’ estimates but does see revenue falling 2 to 3% in the next year as consumers venture out and eat at home less.

So, what does it all mean?  The American consumer appears determined to shrug off the shackles of the pandemic.  Consumption has returned to its pre-pandemic trend line and real GDP also will before too long.  Most companies are benefitting from the reopening, but some that saw an uptick in business due to the pandemic, such as Abbott Labs which warned this week that earnings will be weaker than expected due to a sharp drop in COVID testing, are naturally seeing some softening in business.  It’s a dynamic world with lots of moving parts, but we enjoy following the action on your behalf.  So, please, sit back, relax, and join us again next week

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