In this week’s update, CIO Tom Weary, CFA®️, discusses the upcoming election and how it may impact the stock market. He also gives an update on the coronavirus pandemic as COVID-19 vaccine trials stall and the virus picks up steam heading into flu season. Additionally, he reports on earnings from RFA holdings JPMorgan Chase, Bank of America, First Republic Bank, and Johnson & Johnson.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  This week we kicked off the third quarter earnings reporting season with blockbuster results from big banks and major healthcare companies.  This week also saw Apple introduce the iPhone 12 and Amazon host its 48-hour Amazon Prime Day.  But first, let’s start by taking a look at a couple of topics which are looming large over the financial markets – the elections and COVID-19.

The best thing that I can say about the upcoming elections is that they will be over soon.  There has been a fair amount of fear circulating in the market that volatility will skyrocket around the elections, a fear which is reflected in the futures market for the VIX or Volatility Index, also known as Wall Street’s Fear Index, which you can see here peaking around the election.  But you can also see that the level of fear has dropped dramatically in the past week.  As former Vice President Joe Biden has pulled further ahead in the polls, fears of a contested election have waned, and stocks have rallied.  Nobody wants the uncertainty of an extended period without a clear winner in the Presidential race and the possibility of turmoil in the streets.  Wall Street is now beginning to embrace a bullish narrative of a Biden victory and Blue Wave flipping the Senate to the Democrats’ advantage leading to greater fiscal stimulus next year.  A Biden agenda most likely will mean higher taxes on corporations and individuals earning over $400,000 with increased spending on healthcare, infrastructure and education.  In reality, the impact to the federal deficit over the next decade isn’t that different between the Biden agenda and the Trump agenda.  As this next chart shows, the stock market has done pretty well under both parties.  So, no matter whom you are backing, the economy and the stock market will probably be fine.  Don’t panic if your candidate loses.  Panic is rarely a great strategy.

Unlike the elections, the pandemic isn’t going to be over anytime soon, unfortunately.  As this first chart shows, daily reported Covid-19 cases are on the rise again, which is worrisome as we head into colder weather and flu season in the Northern hemisphere.  And we are not alone as cases are on the rise globally.  This next chart shows that Europe, where case counts had been quite low in recent months, has recently witnessed a huge surge in infection rates, even passing the rising rate here in the U.S.  Along with rising new cases and infection rates, there have been several other worrisome developments.  First, vaccine trials have hit bumps in the road, with Johnson & Johnson pausing their trial after the unexplained illness of a participant.  Eli Lilly followed the next day in pausing their trial due to safety concerns.  Even though a large number of major companies are working around the clock, a safe and effective vaccine might not be just around the corner.  And when an effective vaccine is widely available, it isn’t clear that the public will line up to be injected, with interest levels in getting the vaccine at all time lows.  We can’t reach herd immunity even with an effective vaccine if not enough people get vaccinated.  And finally, the U.S. recorded it first case of Covid reinfection with a Nevada man coming down with a different strain of the coronavirus.  I am not an immunologist, but it seems to me that a rapidly mutating virus has to present a major challenge in creating an effective vaccine.  This pandemic may be with us for some time to come.

On Tuesday morning, J.P. Morgan Chase kicked off reporting season with results that beat on both the top and bottom lines, with revenues of $29.2 billion beating by $960 million and earnings of $2.92 per share beating by 73 cents.  Earnings were more than double that in the second quarter as the company took a far lower provision for future credit losses than expected, demonstrating the bank’s confidence in the economy.  CEO Jamie Dimon described his outlook for economic growth to be a long grind rather than a pandemic spiral.  But he did confess to a wide margin of uncertainty, stating that their loan loss reserves of $34 billion could be either $10 billion too high if the economy continues to recover or $20 billion too low if we suffer a double-dip recession.  The bank’s results were also boosted by a 30% increase in trading revenues in the investment bank.  On Wednesday, Bank of America reported results that missed on the top line and only squeaked by estimates on the bottom line.  Revenues came in at $20.5 billion, missing estimates by $580 million, and profits were down 16% to $4.9 billion or 51 cents per share versus estimates of 49 cents.  BofA also boosted loan loss reserves less than expected but unlike J.P. Morgan did not see a big gain from trading at Merrill Lynch, its investment banking unit.  We also heard from First Republic Bank, which handily beat estimates on both the top and bottom lines, and from U.S. Bancorp, which also beat estimates even as net interest income dropped thanks to strong growth in its fee-based businesses.  Overall, these were pretty strong reports from our bank holdings.

Healthcare giant Johnson & Johnson, a holding in both Core and Defensive portfolios, reported results that beat estimates on both the top and bottom lines while also raising their guidance for full-year earnings.  Revenues of $21.1 billion topped estimates by $930 million while earnings of $2.20 per share beat by 22 cents.  The company did announce a pause in their vaccine trial involving 60,000 participants due to an unexplained illness, demonstrating the difficulty of developing a new vaccine.  United Healthcare, the nation’s largest health insurer, also announced results this week which beat on the top and bottom lines, and they too raised their outlook for the year as medical trends returned to normal after a huge disruption caused by the pandemic.  The leading companies are finding ways to navigate this very challenging environment.

So, what does it all mean?  The approaching elections are creating a fair amount of anxiety, but investors are beginning to look beyond them.  Unfortunately, that is not the case with the pandemic, which appears to be picking up strength as we head into the winter months and flu season.  Investors are counting on more fiscal support for the economy and no threat of further lockdowns, so the coronavirus headlines continue to drive market volatility.  Companies have started reporting earnings for a very difficult period, but so far your companies appear to have risen to the challenge.  So, please relax, have a great weekend and join us again next week for the RFA Weekly Market Update.

Other Previous Videos

  • October 9, 2020

    In this update, CIO Tom Weary, CFA®️, discusses the political headlines that caused major volatility in the stock market this week. He also goes over updates on the job market and economic growth.

    Watch video   Read Transcript

  • October 2, 2020

    This week, CIO Tom Weary, CFA®️, discusses the stock market’s strong ending to the third quarter, with the S&P 500 up more than 5% for the year. He also gives updates on the labor market and consumer behavior and shares earnings from RFA Defensive Portfolio holding Conagra Brands as well as Core Portfolio holdings PepsiCo and Constellation Brands.

    Watch video   Read Transcript

  • September 25, 2020

    This week, CIO Tom Weary, CFA®️, discusses continued struggles for the economy amid another rise in COVID-19 cases and goes over the latest figures in jobless claims and the housing market. He also reports earnings from RFA Core and Defensive Portfolio holding Nike Inc., which came in far above expectations, as well as RFA Core Portfolio holding Accenture.

    Watch video   Read Transcript

×
Live Chat