SMALL CAPS HAVE A BIG WEEK AS NASDAQ TAKES A BREATHER AND 2Q EARNINGS SEASON KICKS OFF WITH THE BIG BANKS

Weekly Market Update — July 20, 2020

  • This week saw a reversal of roles, as NASDAQ dropped 1.1% while the other major markets turned in green numbers
  • The smaller–cap Russell 2000 jumped 3.6% on the week, followed by the 2.3% gain of the DJIA and the 1.3% increase for the S&P 500
  • The large banks kick-started the quarterly earnings season and pushed the Financials sector up 2% on the week, as most of the big banks exceeded earnings expectations
  • Three of the 11 S&P 500 sectors rose more than 5% on the week, as the Industrials, Materials and Health Care sectors outperformed significantly
  • In health care, news about progressing vaccines was encouraging, but overall there seemed to be more worry about COVID–19, specifically in California and Texas
  • U.S. Treasuries were close to being unmoved on the week, as the 2–year Treasury moved down a basis point and came to rest at 0.14% while the 10–year was unchanged at 0.63%
  • The U.S. Dollar Index declined 0.7% to 95.95
  • WTI crude futures ended the week mostly unchanged and came to rest just north of $40/barrel
  • Gold posted a weekly gain of more than $10 as it closed the week at $1,808/ounce
Weekly Market Performance

Close Week YTD
DJIA 26,672 2.3% -6.5%
S&P 500 3,225 1.2% -0.2%
NASDAQ 10,503 -1.1% 17.1%
Russell 2000 1,473 3.6% -11.7%
MSCI EAFE 1,852 2.1% -9.0%
*Bond Index 2,380.99 0.28% 7.01%
10-Year Treasury Yield 0.63% 0.00% -1.4%

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Small Caps Have Big Week as NASDAQ Retreats Slightly

Markets were mostly up again this week, as the smaller–cap indices reversed course and outpaced their larger–cap counterparts and shrunk the performance gap YTD. While NASDAQ declined on the week, it still boasts a remarkable YTD gain of over 17% and the S&P 500 is a whisper away from being in positive territory for the year. The smaller-cap Russell 2000 has a long way to go until it breaks into green territory.

Although the news cycle continues to be dominated by COVID–19 and the 2020 Presidential race, seemingly lost in all that news is that the economy is continuing to turn in positive data and the trends are making it increasingly more difficult to argue that a recovery is not underway. Whether this will be a slow, gradual recovery that takes years or a faster V–shaped recovery is anyone’s guess. But the forward-looking stock markets, and the economic data of late, seem to indicate that a recovery is indeed happening.

This past week brought data that suggested inflation was not as worrisome as the CPI increased modestly after three successive monthly declines. And when we add on current unemployment numbers, there is reason to believe that inflation is not on page one of the stock market’s worry list.

On piece of great news, taken with a grain of salt given extraordinarily high unemployment numbers, was this nugget buried in the press release from the U.S. Bureau of Labor Statistics on Friday morning:

“Nonfarm payroll employment increased in all 50 states and the District of Columbia in June 2020.”

More good news on the week included:

  • Total industrial production increased 5.4% in June
  • The Empire State Manufacturing Survey for July jumped to 17.2 from -0.2 in June
  • Import prices increased 1.4% in June, and when oil was excluded, still increased 0.3%
  • Export prices increased 1.4% in June
  • The weekly MBA Mortgage Applications Index increased 5.1%
  • Retail sales increased 7.5% in June
  • Weekly initial jobless claims decreased by 10,000 to 1.3 million
Inflation Appears Less of a Worry

The most widely followed indicator of inflation is the Consumer Price Index and it is defined as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”

On Tuesday, the U.S. Bureau of Labor Statistics released the following:

  • The Consumer Price Index for All Urban Consumers increased 0.6% in June on a seasonally adjusted basis after falling 0.1% in May
  • Over the last 12 months, the all items index increased 0.6% before seasonal adjustment
  • The gasoline index rose sharply in June after recent declines and accounted for over half of the monthly increase in the seasonally adjusted all items index
  • The energy index increased 5.1% in June as the gasoline index rose 12.3%
  • The food index also rose in June, increasing 0.6% as the index for food at home continued to rise

The fact that CPI rose in June is important because it had declined for each of the previous three months – the first three–month decline in over 60 years. Yes, June’s increase was the largest increase in almost 8 years, but that is not surprising as businesses reopened and consumers spent more money.

Retail Sales Jump Again

On Wednesday, the U.S. Census Bureau announced the following advance estimates of U.S. retail and food services sales for June 2020:

“Advance estimates of U.S. retail and food services sales for June 2020, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $524.3 billion, an increase of 7.5 percent ( 0.5 percent) from the previous month, and 1.1 percent ( 0.7 percent) above June 2019. Total sales for the April 2020 through June 2020 period were down 8.1 percent ( 0.5 percent) from the same period a year ago. The April 2020 to May 2020 percent change was revised from up 17.7 percent ( 0.5 percent) to up 18.2 percent ( 0.3 percent).

Retail trade sales were up 6.4 percent ( 0.5 percent) from May 2020, and 5.0 percent ( 0.7 percent) above last year. Nonstore retailers were up 23.5 percent ( 1.4 percent) from June 2019, while building material and garden equipment and supplies dealers were up 17.3 percent ( 2.1 percent) from last year. ”

Earnings Season Kicks Off

As of Friday, only a handful of companies had reported earnings for the second quarter and the results were somewhat mixed. Whether the results are better or worse more or less depends on your perspective and expectations.

But research firm FactSet reported that of the 9% of S&P 500 companies that have reported as of Friday, the following was observed:

  • “In terms of earnings, the percentage of companies reporting actual EPS above estimates (73%) is above the five–year average
  • In aggregate, companies are reporting earnings that are 6.3% above the estimates, which is also above the five–year average
  • In terms of sales, the percentage of companies (78%) reporting actual sales above estimates is above the five–year average
  • In aggregate, companies are reporting sales that are 3.5% above estimates, which is also above the five–year average
  • All 11 sectors are reporting (or are predicted to report) a year–over–year decline in earnings, led by the Energy, Consumer Discretionary, Industrials, and Financials sectors”
Sources

Bls.gov;Census.gov ;mba.org;newyorkfed.gov ;federalreserve.gov;factset.com ;census.gov ;fidelity.com ;msci.com;nasdaq.comwsj.commorningstar.com;

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