This week, CIO Tom Weary, CFA®️, discusses the ongoing presidential election and the stock market’s reaction to a likely divided government. He also goes over the latest on the pandemic, gives updates on the goods and services industries, discusses RFA’s latest Core Portfolio trade, and shares earnings from several companies, including PayPal, Mondelez International, and Prudential Financial.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  It was another busy week with long-awaited elections finally taking place, new coronavirus milestones, some important economic news, more earnings reports and even a trade in technology names in the Core Portfolio.  So, without further ado let’s jump right into the headlines from a very eventful week.

Well, the much-anticipated elections took place on Tuesday and we still don’t have a completely clear outcome.  However, at this point in time it appears that the result is yet more gridlock rather than the Blue Wave that some polls had been suggesting.  The stock market celebrated with the largest post-Election Day rally in 120 years, ostensibly because divided government implies that not much will change dramatically.  While we are still likely to see more fiscal stimulus it probably won’t be as much as it might have been under single-party rule, either Democratic or Republican.  That also implies that deficits won’t be as large and neither will government borrowing, which was reflected by an immediate rally in bond prices and hence a drop in long-term interest rates.  The megacap Tech Titans rallied sharply whereas financial stocks and Value stocks in general faded with lower rates and reduced hopes for an economic recovery boosted by a massive stimulus program.  The situation is fluid so we will keep an eye on it for you.

We are hitting new pandemic records with daily cases surging past 100,000 here in the U.S., as you can see in this first chart.  As you can see by the chart, each succeeding wave of the pandemic is larger than the previous one.  Hospitalizations lag confirmed COVID cases, but you can see in this second chart that they are building a third wave as well.  The good news is that doctors are getting better at treating COVID, so confirmed cases are leading to fewer and briefer hospitalizations, and subsequent fewer deaths as well, as we can see in this next chart, although they still number around 1,000 every day.  The notable change is where those cases are occurring.  As you can see in this map, the highest rates of coronavirus infection recently have been in the most rural parts of the Upper Midwest where hospitals can be few and far between.  There is a real risk of overwhelming the healthcare system in that part of the country.  The situation is worse in Europe where cases of COVID-19 are skyrocketing, as can be seen in this next chart.  Many of the countries there have re-imposed strict curfews and lockdowns.  And the impact of the pandemic to corporate earnings is even greater in Europe than here in the U.S., as can be seen in this final chart.  We can’t manage a durable economic recovery until we get a better handle on the pandemic.

Recent data on the economy paint a divergent picture between goods and services.  The ISM Manufacturing Purchasing Managers Index continued its strong rebound, hitting 59.3 versus expectations of 56.0, nearly back to the recent high in 2018, as you can see in this first chart.  And that reading was way above expectations, as you can see in this second chart.  Remember that any reading above 50 implies expansion, so the manufacturing sector is rebounding very strongly from the pandemic plunge.  This appears to be happening globally, as can be seen in this next chart.  The same cannot be said about the much larger Services sector of the economy.  The ISM Services PMI came in at 56.6 in October, which was the slowest rate in 5 months, down from 57.8 in September.  This divergence can be seen in Consumer Discretionary spending in this next chart, where a 21 percentage point gap has opened up between the growth in sales of durable goods and services, which makes sense during a pandemic when you can buy a car or dishwasher easily but not get a haircut, eat in a restaurant or fly on a plane.  Another example is the divergence between online sales growth and the struggles of brick-and-mortar stores, as depicted in this last chart.  Once again, a large part of the economy cannot fully function normally until we get a better handle on the pandemic.  Lockdown or no lockdown, many consumers won’t feel comfortable receiving in-person services until the pandemic has passed.

This week we heard from Paypal, which reported revenues increasing 25% to $5.5 billion as earnings came in at $1.07 versus 76 cents last year and estimates for 94 cents, but investors were initially disappointed to see that the rate of growth in fourth quarter earnings is expected to slow.  We also heard from semiconductor maker Skyworks Solutions, which reported revenues of $957 million, an increase of 16% and $116 million above estimates.  Earnings came in at $1.85, beating estimates by 33 cents.  While the company raised their outlook, investors remain a bit nervous that 51% of sales come from a single customer, even if that customer is Apple.  In Consumer Staples, we heard from Ahold, owner of several supermarket chains, reporting revenues up 7% on comp stores sales growth of 10.5% thanks to demand driven by pandemic-related pantry stocking.  The company raised their outlook for earnings growth to the high 20% range on continued demand.  As we eat more Oreo cookies during the pandemic, snack-maker Mondelez beat on both the top and bottom lines and projected future earnings growth of at least 5% on a constant currency basis.  And food distributor Sysco Corporation reported earnings of 34 cents per share, beating estimates by 7 cents, even as sales plunged 23% to $11.8 billion missing estimates by $280 million due largely to reduced business at restaurants, the company’s largest customer segment.  And finally, in the financial sector, Prudential Financial, the original Rock, reported profits of $1.5 billion, an increase of 5%, as assets under management rose 8 ½ % to $1.7 trillion.  The Pru also announced the sale of overseas subsidiaries Prudential of Taiwan and Prudential Korea as they shift their earnings mix to higher growth markets.

This week, in the Core Portfolio we sold our position in Cisco Systems to make room for Lumentum, a midcap growth company in the Communications Equipment industry specializing in laser technology.  They make lasers that go into smartphones enabling facial recognition and into automobiles enabling advanced navigation such as self-driving cars.  Monday night Lumentum reported fiscal first quarter results which beat on the top and bottom lines, exceeding expectations by over 20%, and raised their outlook.  Cisco Systems is a large cap value company also in the Communications Equipment industry specializing in switches and routers with a growing presence in software and services, but the stock has been a bit of a laggard recently.  We are maintaining the position in the Defensive Portfolio given that Cisco has a forward P/E of 13, dividend yield of 4%, a low beta, with long-term growth around 7%.  We’ll keep looking for great new opportunities for your portfolio.

So, what does it all mean?  The elections have taken place but the dust hasn’t settled yet.  Investors appear to have embraced a narrative of continued gridlock.  While your companies are finding ways to post impressive earnings, for the economy to return to its full potential we must get the pandemic under control.  Otherwise, too many industries based upon in-person services will be left behind as manufacturing and high-tech companies move ahead. We will continue to hunt for great companies to add to your portfolio, as we did this week.  So, please relax, have a great weekend and join us again next week for the RFA Weekly Market Update.

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