In this update, CIO Tom Weary, CFA®️, discusses this week’s drop in the stock market during a surge in COVID-19 cases and fears of more lockdowns in the United States. He goes over the latest in consumer confidence, third quarter GDP growth, and the labor market. He also shares earnings reports from tech giants Microsoft, Amazon, Apple, Alphabet, and Facebook as well as RFA portfolio holdings NXP Semiconductors, Visa, and more.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  The impact of the novel coronavirus continues to be felt far and wide as well as close to home, keeping RFA employees out of the office for a second week as we quarantine ourselves.  Fortunately, we appear not to have had any community spread as all other tested employees reported negative results.  But the pandemic did have a major impact on the stock market this week, so we’ll start there before turning to the economy and a slew of earnings reports from Technology companies.  We won’t have time to cover any other sectors this week.

The stock market pulled back this week, with the S&P 500 Index falling over 3% on Wednesday alone before bouncing back on Thursday, leading to the biggest weekly drop since March, as you can see in this first chart.  And even though the election is only a few days away, the leading suspects for the pullback are the rise in new coronavirus cases to record levels, as you can see in this second chart, and the lack of any progress in talks surrounding further fiscal stimulus.  Investors fear that the rise in coronavirus cases will lead to another round of lockdowns here in the U.S. as happened this week in France and Germany, which would be a major setback in efforts to re-open the economy.  This disappointing rapid rise in COVID cases may also be behind the disappointing drop in Consumer Confidence, shown in this next chart.  With the consumer driving 70% of the economy, any drop in confidence could lead to weakening in spending.  That’s not what we need at this point in the recovery.

This week we got our first reading on third quarter GDP growth which, as expected, registered a blistering annualized growth rate of 33.1%, as seen in this first chart.  Unfortunately, as depicted in this second chart, even that startling growth rate doesn’t get us back to the pre-pandemic trendline given how severe the drop in the first half of the year was.  It will take years for the U.S. economy to return to where it would have been without the pandemic.  But there are steps that can be taken to accelerate that recovery.  This next chart depicts the impact of various possible policy changes under a potential Biden Administration compared to continuation of current policy.  The biggest impact would come from the increased government spending laid out in the Democratic platform, but there would also be increased growth coming from reducing trade tariffs and lifting current restrictions on immigration.  Immigration is important to the labor force given that the prime employment age population, those between ages 25 and 54, hasn’t really increased since 2007 after decades of rapid growth, as you can see in this next chart, and GDP growth is simply growth in the labor force times the increase in productivity, which is hard to come by.  We did get some good news on the labor market front, with Initial Jobless Claims for last week coming in at 751,000, a 7-month low, but still at historically high levels, above anything seen before the pandemic.  And as this next chart shows, the number of Americans on any type of unemployment assistance program is still well above 20 million, a staggeringly high figure.  As for the productivity part of the equation, that is driven by business investment, and we had encouraging news there with Capital Goods Orders Nondefense ex Aircraft, a proxy for business investment, surprising to the upside with 1% monthly growth, as you can see in this chart, and reaching a historically high level, as seen in this last chart.  Economic growth is going to need all the help that it can get as we attempt to get back on track after the devastation wrought by the pandemic.

We heard from all five of the megacap tech titans this week.  Microsoft reported results still aided by pandemic-related tailwinds with earnings of $1.82 beating estimates by 28 cents on revenues of $37.2 billion which increased 12% and beat by $1.4 billion.  The pandemic not only helped sales in gaming and personal computing but also drove sales of Azure, their cloud-computing solution, up 48% from last year.  Amazon blew away analysts’ estimates with sales of $96 billion and profits of $6.3 billion.  That’s $12.37 per share, which is nearly triple last year and 67% higher than expected.  Amazon has already earned more in 9 months this year than in all of 2019.  And they still have Amazon Prime Day and the holidays in the fourth quarter.  Apple beat on both the top and bottom lines with sales of $64.7 billion beating by $1.4 billion and earnings of 73 cents per share beating by 3 cents.  Although revenues in the Services division and sales of Mac computers hit all-time records, investors were disappointed by relatively weak iPhone sales.  Google’s parent company Alphabet crushed estimates with sales of $46.2 billion growing 14% and beating by $3.3 billion with earnings of $16.40 beating by $5.19 as their operating margin expanded to 24% versus the expected 19.8%.  Facebook also benefited from increased advertising spending as revenues grew 22% to $21.5 billion and earnings of $2.71 beat estimates by 80 cents.  Defensive portfolio holding NXP Semiconductors beat earnings estimates and raised their fourth quarter sales outlook due to the recovery they see in automotive and mobile end markets.  Akamai Technologies beat on both the top and bottom lines with revenues up 12% as cloud security software sales rose 23%.  We also heard from both of our credit card companies, Mastercard, a holding in the Core Portfolio, and Visa, a Defensive Portfolio holding.  Visa beat on the top and bottom lines whereas Mastercard missed estimates for both revenues and earnings, although their CEO did state that they were seeing encouraging progress in the trajectory of domestic spending, while travel-related spending remains a challenge.  Let’s hope that translates to better results for Mastercard going forward.

So, what does it all mean?  Although the economy rebounded incredibly strongly in the third quarter, it still wasn’t enough to get us back to the pre-pandemic trendline and over 20 million Americans are still on some kind of unemployment assistance.  Many of those will not be able to return to work until we get the pandemic under control, and we are currently losing that battle with record high new cases here in the U.S. and lockdowns returning in Europe.  Although the election will be behind us soon, the same cannot be said about the pandemic.  We will stay on top of the latest COVID-related developments as well as the results from your companies, only a few of which we had time to review today.  So, please relax, have a great weekend and join us again next week for the RFA Weekly Market Update.

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