In this week’s update, CIO Tom Weary, CFA®️, discusses vaccine progress amid the continued fight against coronavirus and how the recent surge in COVID-19 cases has affected the market. He also shares newly reported earnings from RFA holdings Target, TJX Companies, Ross Stores, and The Home Depot. 

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  The week began again with more exciting news in the fight against the novel coronavirus sending stocks to new highs.  But a surge in new COVID-19 cases and evidence of softening in the economy gave investors pause.  We also heard from several retailers as earnings season draws to a close.  Let’s start by looking closer at the latest coronavirus news.

 

On Monday Moderna announced that their coronavirus vaccine proved to be 94.5% effective in Phase 3 clinical trials, following Pfizer’s announcement last Monday, which they subsequently updated to show 95% efficacy once all the final data arrived.  Investors cheered the news of a second highly effective vaccine by driving the stock market to new highs with the Dow Jones Industrial Average nearly hitting the 30,000 milestone before pulling back.  With the vaccines raising hopes of re-opening the economy, investors continued a violent rotation to more economically sensitive sectors as can be seen in this chart, reversing the trend up until Pfizer’s announcement.  And then the reality of the pandemic hit home, as daily COVID cases surged to new highs passing 180,000 on Thursday, as you can see in this next chart.  This is nearly triple the rate of the prior peak in July.  And we haven’t even reached the holiday season yet with its potential for significant viral spread as families gather to celebrate.  This is leading to a rapid increase in hospitalizations, which now surpass 80,000 Americans, as can be seen in this chart.  And sadly, this is also leading to another grim milestone as we hit 250,000 deaths this week, a number which will only grow, as we can see in this chart.  With the infection rate soaring out of control in rural America, as this map illustrates, there is a real threat of smaller hospitals becoming overwhelmed in coming weeks.  The holiday season could turn out to be rather grim for the heartland.

 

The surge in COVID-19 cases is having a visible impact upon the global economy as many countries are forced to retrench and hunker down again.  Here in the U.S., Industrial Production increased 1.1% in October, but it is still 5.6% below the level in February, so while manufacturing activity continues to improve, it hasn’t fully healed.  That is evident in this next chart which shows that Capacity Utilization at 71.7% is still well below where it was before the pandemic.  October Retail Sales increased 0.2%, which was the sixth straight month as you can see in this chart but were well below forecast and demonstrated rather weak growth.  Consumers may be feeling worse about both the surge in COVID cases and the employment outlook.  On Thursday, last week’s Initial Jobless Claims rose sharply for the first time in 5 weeks to 742,000 which while down sharply from the peak in March is still roughly three times the pre-pandemic norm of roughly 200,000 and higher than any previous recession.  As this next chart shows, over 20 million Americans are claiming some form of unemployment benefit, a truly staggering figure.  While the number of those claiming regular Unemployment Insurance is dropping as their state benefits run out the difference is being made up from special pandemic programs.  As this last chart shows, the number of people exhausting their regular jobless benefits is exploding while pandemic related programs are set to expire at year-end unless Congress acts quickly.  Things could get very ugly very quickly in the new year.

 

We heard from several of our retailers this week, none more resounding so than Target, a holding in both Core and Defensive Portfolios, with revenue of $22.6 billion up 21% from last year and beating estimates by $1.9 billion.  Same store sales also rose 21%, the second straight quarter over 20%, and online sales exploded 155% over last year.  Target is crushing specialty stores as shoppers seek to limit the number retailers they visit, and the company is having great success with people ordering online and then picking up at the store, saving them delivery costs.  This was reflected in earnings of $2.79 per share which beat analysts’ estimates by a whopping $1.18.  We heard from two off-price retailers, TJX in the Core Portfolio and Ross Stores in the Defensive Portfolio.  TJX, the parent of TJ Maxx and HomeGoods, reported sales of $10.1 billion which were down 3.2% from last year but $730 million above expectations as same store sales dropped only 5% versus expectations for an 11% decline thanks to strength in the HomeGoods division where same store sales rose 15%.  Earnings per share of 71 cents blew past analysts’ estimates by 31 cents.  Ross Stores reported earnings of $1.02 blowing away estimates for 61 cents.  Revenues also topped expectations as same store sales declined only 3% versus expectations for a decline of over 12%.  And Defensive Portfolio holding Home Depot reported revenue of $33.5 billion up 23% from last year and well above expectations for $31.8 billion as same store sales increased 25% in the U.S.  Earnings of $3.18 beat estimates by 15 cents even as the company invested in their workforce by giving workers a permanent raise costing the firm $1 billion.  Investors’ biggest concern appeared to be whether Home Depot can continue their successful ways.  Let’s hope so.

 

So, what does it all mean?  As I have often said, economic progress depends upon making progress against the pandemic.  The light at the end of the tunnel brightened a bit with the announcement of a second successful vaccine this week, but the reality is that it will take many months to manufacture and distribute enough vaccine before the economy can return to normal and the immediate future is looking pretty grim as COVID cases explode threatening to overwhelm fragile healthcare systems this winter.  And the economy may very well stall without further help from Congress which appears unable to act.  Next Thursday is Thanksgiving, and all of us here at RFA wish you and yours a safe and happy holiday.  Our office will be closed next Friday as we recover from eating way too much turkey, so you’ll hear from me next in December as this momentous year winds down.  So, please relax, have a great weekend and join us again in two weeks for the RFA Weekly Market Update.

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