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.


Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  We wrapped up the third quarter on Wednesday, got an update on the all-important labor market, and even had a few of our companies report earnings this week.  But before we dig into those headlines, I’d like to let you know that on Monday afternoon we will be launching our new, updated Reilly Financial Advisors website.  I encourage everyone to check it out as it has an abundance of new features and content.  Let’s start off by taking a quick look at how the stock market performed in the third quarter.

During the third quarter, the S&P 500 Index exhibited a “two steps forward, one step back” pattern, with stocks moving sharply higher in July and August before pulling back in September.  Even with the pullback in September, the S&P 500 returned nearly 9% in the quarter and is up over 5% for the year, which is pretty remarkable given everything going on at the moment.  This table shows that performance has been driven by Information Technology and Consumer Discretionary stocks.  The Megacap Tech Titans continue to drive market performance, interspersed with brief rebounds in Value stocks.  Signs of life in Value stocks do point to an economic recovery next year, and investors feel pressure to participate.  This next chart shows how institutional investors piled up more that $3 trillion in money market funds during the first quarter downturn, and that cash is generating a negative return after inflation.  That’s a lot of dry powder that will eventually find its way back into the stock market.

This week the Commerce Department reported that Consumer Spending rose a healthy 1% in August, which is good news since Consumption is two-thirds of the economy.  However, the same report showed that Personal Income dropped 2.7% in August, driven entirely by the expiration of supplemental unemployment benefits.  Consumers love to spend, but they must be both willing and able to continue spend to keep the economy going.  Consumers are feeling better, as indicated by the Conference Board Index of Consumer Confidence which was reported this week as spiking well above expectations.  The survey also showed that people feel that job prospects are slightly better.  This was supported by Wednesday’s report on September private payrolls from ADP showing an increase of 749,000, 100,000 above estimates.  On Thursday the Labor Department reported last week’s Initial Jobless Claims dropping 36,000 to 837,000, holding steady for the fifth straight week in the 800,000 to 900,000 range.  Continuing Claims for the prior week dropped 980,000 to 11.8 million, continuing the gradual downward trend.    And on Friday, the Labor Department reported a disappointing increase in Nonfarm payrolls of only 661,000 and a drop in the Unemployment Rate to 7.9%, driven mostly by discouraged workers giving up looking.  While the labor market appears to be strengthening gradually, recent headlines have been more worrisome.  As government aid for the airlines ended this week, American and United announced layoffs of 32,000 and 28,000, respectively, with the future for that industry looking uncertain. And in other areas, Marathon Petroleum announced a layoff of 12% of their workforce while insurer Allstate will cut 8% of their staff.  We’re aren’t out of the woods yet on the jobs front.

On Thursday, Core Portfolio holding PepsiCo reported earnings of $1.66, 17 cents ahead of expectations on revenues of $18.1 billion, an increase of 5% and over $800 million above estimates.  We are all eating more Frito-Lay snacks and drinking Pepsi at home even as restaurants and sports venues remain closed.  This was PepsiCo’s biggest beat on the top and bottom lines in five years.  Packaged food giant Conagra, a holding in the Defensive Portfolio, reported earnings of 70 cents, 13 cents above estimates as revenues increased 15%, well above expectations.  The company also raised their dividend from 21 cents to 27.5 cents per share, an increase of over 30%.  And Constellation Brands reported earnings of $2.76, beating estimates by 25 cents, as sales also topped targets by $80 million, as beer volume was down only 0.9% versus consensus expectations for a 3.2% drop.  In this environment, where bars are struggling to survive, that performance is considered a victory.

So, what does it all mean?  The stock market racked up a very strong third quarter, even in the face of growing uncertainty surrounding the spread of COVID-19 and the coming elections.  Now those two concerns have merged as the President has just tested positive for the coronavirus introducing more uncertainty into an already volatile election season with one month to go.  Consumers continue to spend, but their ability to continue to do so depends upon further progress in the labor market and additional government relief packages, both of which seem uncertain at this point.  Nevertheless, your companies continue to report financial results which pleasantly surprise Wall Street analysts.  So, please relax and have a great weekend and join us again next week for the RFA Weekly Market Update, and don’t forget to check out our new website on Monday afternoon.

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