This week, CIO Tom Weary, CFA®️, gives an update on recent events at RFA as well as the state of the economy amid election buzz and a rising number of COVID-19 cases. He also goes over an array of earnings reports from companies in healthcare, consumer staples, and technology, including RFA portfolio holdings Procter & Gamble, The Coca-Cola Company, and Verizon Communications.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  As you can see, I am back to reporting from home as this week we had our first reported case of an RFA employee with a positive coronavirus test.  Out of an abundance of caution, all San Diego-based employees were immediately sent home for 14 days while the offices are fully sanitized and affected employees are tested.  And if that weren’t enough excitement, we also had a veritable tsunami of earnings reports this week with about 20% of the S&P 500 companies reporting.  We can’t get to all of our companies that reported but we will hit some highlights.  But first let’s check in on the state of the economy.

The Federal government ended their fiscal year on September 30th, and as you can imagine it wasn’t pretty.  As this first chart shows, the federal deficit surpassed $3 trillion in the past 12 months, far exceeding any previous fiscal year.  And we are not alone.  As you can see in this next chart going back 140 years, government debt as a percent of GDP in both advanced and emerging market economies is at the highest level ever, even higher than during World War II.  And the financial picture is unlikely to improve anytime soon.  Wall Street is beginning to factor in a Democratic Blue Wave with higher fiscal stimulus, but that means different things to different investors.  While stock investors are pleased with the idea of greater government spending and the impact on earnings growth, bond investors are beginning to worry more about the impact on government borrowing levels.  As you can see in this next chart of the yield on the U.S. Government 30-year bond, rates at the long end of the curve have been rising substantially since August.  But with the Fed holding short-term rates at zero, you can see in this next chart that this is causing the yield curve to steepen.  A steepening yield curve is usually interpreted as a signal of accelerating economic growth, but that may be a false signal this time.  The last reading on Industrial Production showed a decline of 0.6% and Capacity Utilization came in below expectations at 71.5%, so manufacturing activity looks like it rolled over recently.  The fear is that this is related to the recent surge in coronavirus cases.  We can’t make further progress on the economic recovery without getting the pandemic under control.  And let’s hope that we don’t follow the path Europe, the Middle East and Africa are on where the number of coronavirus cases have exploded exponentially.  Winter is coming and we are not winning the war against the virus yet.  It could be rough going for a while.

On the earnings front, let’s start with areas that have generally benefited from the pandemic: Healthcare and Consumer Staples.  Abbott Laboratories beat estimates on both the top and bottom lines while raising their guidance.  Revenues rose 10% to $8.9 billion, beating by $370 million, Net Income rose 29% to $1.2 billion, while earnings per share hit 98 cents, 7 cents above estimates.  Results were driven by a surge in demand for COVID-19 tests as sales in the Diagnostics division rose 38%.  Thermo Fisher Scientific reported a blowout third quarter driven by COVID-19 testing demand with earnings of $5.63 beating estimates by $1.33.  Revenues rose 36% to $8.5 billion while the Operating Margin rose to 33% versus estimates of 26%.  Consumer products giant Procter & Gamble, a holding in the Defensive Portfolio, reported earnings of $1.63 beating estimates by 20 cents as revenues rose 8.5% to $19.3 billion, beating expectations by $930 million.  Sales in the healthcare division rose 12% while those in homecare and cleaning rose 30% driven by pandemic-related hygiene demand.  The company noted that a large portion of family budgets not spent on travel, leisure and hospitality helped drive their biggest global sales increase in 15 years.  P&G returned $4 billion to shareholders in the quarter split evenly between dividends and share repurchases.  And Coca-Cola, another Defensive Portfolio holding, surprised with earnings of 55 cents per share, beating estimates by 9 cents.  Sales dropped by 8% but still beat expectations by $330 million.  Solid results overall.

Turning next to Technology and Telecom, after the close on Thursday we heard from semiconductor giant Intel, a holding in the Defensive Portfolio, reporting expected earnings of $1.11 versus $1.35 last year as revenue fell to $18.3 billion from $19.2 billion.  Investors were not pleased by a 7% decline in data center sales and punished the stock.  Semiconductor equipment maker Lam Research reported fiscal first quarter earnings of $5.67, beating estimates by 48 cents as revenues rose 47% to $3.2 billion, which beat estimates by $70 million.  The company hiked their earnings guidance, but a soft margin forecast weighed on the stock price.  Amphenol, a maker of electronic connectors, reported earnings of $1.09, beating estimates by 21 cents, on revenues of $2.3 billion which increased by 11% and were $280 million above expectations.  The company attributed record sales and earnings to robust growth in mobile devices, information technology, data communications and industrial markets.  Citing sequential sales growth of 17%, Amphenol raised their earnings outlook and hiked their dividend 16%.  Verizon, a holding in both Core and Defensive Portfolios, reported earnings of $1.25, which squeaked by estimates by 3 cents as revenues of $31.5 billion fell 4% and missed estimates by $100 million.  Analysts were pleased to see relatively strong growth in the number of broadband customers and wireless subscribers.  And cell tower REIT Crown Castle reported earnings of $1.56, beating estimates by 12 cents, an increase of 8%, on revenues of $1.5 billion, which only increased 0.7% and missed estimates by $20 million.  The company did increase their quarterly dividend 11%, signifying confidence in the future.

So, what does it all mean?  The stock market continues to churn on the latest headlines regarding the stimulus talks and presidential polls.  Meanwhile, fixed income investors have begun to factor in greater government spending, and therefore borrowing, sending long-term interest rates higher even as the economy shows signs of softening with coronavirus cases rising globally.  Fortunately, both Institutional and Retail still have plenty of dry powder in the form of money market funds that are still bulging after the first quarter sell-off, as you can see in this final chart.  And your companies are finding ways to make money even in this challenging environment.  I couldn’t even get to all of the reports this week.  However, we are staying on top of all the developments.  So, please relax, have a great weekend and join us again next week for the RFA Weekly Market Update.

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