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.

Transcript

Hi, I’m Tom Weary here at Reilly Financial Advisors with your Weekly Market Update.  This week Nike, a holding in both Core and Defensive Portfolios, reported stellar results, and we’ll get to that in a moment.  But first, let’s begin by taking a quick look at the latest data on the economy.

Making progress in re-opening the economy and getting more Americans back to work depends upon making progress in containing the spread of the coronavirus, and on that front the recent news has not been encouraging.  As this first chart indicates, daily new reported cases of Covid-19 started ticking back up again after falling steadily over the past couple of months from the horrible peaks we hit in July.  It isn’t clear whether this increase was a blip driven by increased socializing over Labor Day weekend or more broadly by students, especially college students, heading back to school after the relative isolation of summer vacation.  But it does mean that cases are heading higher just as cooler fall weather is driving more people inside and flu season is approaching.  Already, some attempts to bring employees back to the office and students back to the campus have failed.  This is having an impact on the economic recovery.  This next chart of the New York Fed’s Weekly Economic Index shows how the recovery seems to have stalled in recent weeks.  We risk plateauing at what the Economist magazine has dubbed “the 90% economy”, where some industries such as travel, hospitality and retail remain severely depressed unless we get the virus under control.  This can be seen in this week’s PMI reports, with IHS Markit’s Composite Purchasing Managers Index in September cooling slightly to 54.4 from 54.6 in August, keeping in mind that any reading above 50 indicates expansion.  However, we see the impact of the pandemic by breaking this reading down to its components, with the Services PMI falling from 55 in August to 54.6, whereas the Manufacturing PMI actually rose from 53.1 in August to 53.5 in September.  Manufacturing has been impacted less by the pandemic, but it represents a much smaller segment of the U.S. economy than Services do.  Turning to the housing market, August Existing Home Sales rose for the third consecutive month, up 2.4% from July’s blistering 24.7% increase and up 10.5% from last year.  Prices have risen as supply remains at historically low levels, which is understandable given sellers’ reluctance to show their homes during a pandemic, while interest rates remain at historically low levels as well.  This is most pronounced in the luxury home market as wealthier buyers flee metropolitan areas in search of more space for working from home and distance learning for the kids.  On Thursday, the Commerce Department reported that sales of new single-family homes rose 4.8% in August to surpass 1 million annualized rate for the first time in 14 years, And finally, turning to the labor market, on Thursday the Labor Department reported that Initial Jobless Claims unexpectedly rose 4,000 last week to 870,000 while Continuing Claims for the prior week fell 167,000 to 12.6 million, the lowest level since mid-April.  The jobless claims data paint a picture of a labor market recovery that’s struggling to maintain momentum.

After the close on Tuesday, Nike reported results that crushed expectations, with revenues roughly flat versus estimates of a 14.4% drop while earnings of 95 cents per share were more than double expectations.  Gross margins expanded to 44.8% from 42.9% as operating costs dropped 11% due to spending less on marketing and athlete endorsements.  Sales were strong globally as retail locations re-opened, but the real eye-popper was an 82% increase in direct online sales as Nike continues to adapt to the challenges presented by the pandemic.  One analyst noted Nike’s “digital prowess, best-in-class customer engagement, and unrivaled product innovation continue to accelerate.”  While another stated that “the first-quarter results demonstrated that Nike’s brand momentum remains robust and its strong execution will allow it to emerge from the pandemic an even-stronger player.”  That’s what great companies do – they transform themselves in the face of threats and thrive.  The stock jumped 10% on the news, sending the share price to an all-time record high.  On a disappointing note, IT consulting firm Accenture, a Core Portfolio holding, reported quarterly profit of $1.70 per share on Thursday, falling 3 cents a share short of Wall Street forecasts. Revenue also came in slightly shy of estimates and the company gave a weaker-than-expected current-quarter revenue forecast, as clients spend less due to the Covid-19 pandemic.  The stock price fell despite news that the company is raising its dividend and expanding its stock buyback program, signaling their confidence in a stronger future.

So, what does it all mean?  The pace of the economic recovery appears to have stalled out recently.  Industries where people can work from home or manufacture items at a safe distance from co-workers have largely recovered, but service industries requiring closer human interaction are struggling to find ways to operate safely.  Recovery in these industries are dependent upon success against the spread of COVID-19, and the news on that front is discouraging as confirmed cases are rising globally just as we head into autumn in the Northern hemisphere.  Investors are looking to Washington for both more fiscal support and a more coherent national pandemic response strategy, neither of which seem to be on the horizon at the moment.  Some companies, such as Nike, are navigating this new reality successfully, and we will continue to hunt for those great companies to put in your portfolio.  So, please relax and have a great weekend and join us again next week for the RFA Weekly Market Update.

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