Monday Morning QB - Market Observations:
- Vaccine Hopes Announced by Several Companies Continue to Lift Markets
- Economic Reports Look Good Despite the Rise in COVID-19 Cases…Can the Trend Continue?
- “Reopening” Momentum May Be in Serious Jeopardy in Certain States
- U.S. Deficit Reaches $3 Trillion as Virus Costs Increase with the Number of Infections
- Nasdaq 100 Index Makes Another New High
- First Week of Earnings Season Shows Mixed Results
- Congressional Gamesmanship Continues Around Second Stimulus Bill to Replace the Expiring CARES Act
Monday Morning QB - Market Performance:
The virus concerns, combined with positive economic news, helped to create a weeklong market tug of war which ended in mixed results for the major indexes.
The Dow Jones Industrial Average rose nearly 600 points to finish the week at 26,672, a gain of 2.3%. The technology-heavy NASDAQ Composite retreated -1.1% following back-to-back weekly gains of more than 4%.
By market cap, the large-cap S&P 500 added 1.2%, while the mid-cap S&P 400 and small-cap Russell 2000 each gained 3.6%.
The Current State of the Tug of War
As all our portfolios have appreciated, the stock market enjoyed a resurgence in May and June as many states began to reopen. The job market started its rebound quicker and healthier than expected. Government stimulus checks found their way into the economy. The combination of the two has kept our economy from falling into the abyss.
The stock market expected the abyss in March and quickly shifted gears when the abyss was avoided. Ah, but can it last? The choppy stock market in July is the result of our current tug of war.
The virus is spreading, threatening some states to shut down after reopening temporarily. At the same time, positive news around potential vaccines has buoyed the market against further declines. Vaccine potential, so far, has created a stock market “hall pass” for the current environment, allowing investors to look down the road six months or so and see a vastly different economic reality.
However, if shutdowns reoccur, that will slow the rate of job creation as well as send consumers back to online shopping only.
Big Ticket Items Show the Reality between the Haves and the Have Nots
The type of job you have can go a long way to describe the effect of the virus on your household.
Many of the lower-wage jobs are in the service sectors of our economy. In a typical recession, these jobs are the first to go - low wage, low skilled jobs.
Covid-19 has directly affected this part of our economy; for example, restaurants, travel, leisure, and hospitality have been hard hit with many establishments under this category still closed or at best, limited. In states where the reopening is under siege, these jobs will be the first to go if another shutdown is required.
For the workers in this sector of our economy, the additional unemployment benefits, which are set to expire, were used to stay above water financially. But what is next?
On the other side of the economic pillow, low-interest rates are luring the people with job security into the housing and auto industry. If you have a job and your portfolio has endured the March collapse, you probably feel surprisingly good about where you are economically right now.
Mortgage rates hit the lowest level on record last week when the 30-year fixed mortgage rate dipped below 3.0%. Low rates have moved buyers and builders to push up timetables on new construction.
Auto dealers are almost back on track as well. An inventory glut created from the beginning of the pandemic combined with low-interest rates has left car dealers in the mood to make a deal or allow you to have the car of your choice free of interest over the next 60 to 72 months.
Sales of durable goods, more expensive products that are expected to last more than three years, have been a bright spot in this crazy recessionary environment. In a typical recession, durable goods are the first area to bleed and the last area to recover.
But our current state of affairs is anything but typical!
This economic disparity is helping to temporarily widen the income inequality gap, fueling some of the tensions across our country. Obviously, there is more going on than just an income divide.
However, the current observations between the haves and have nots is not helping the problem.
Vaccine Announcements Create Hope as the Number of Infected Continues to Rise
Last week came with its fair share of hope around the availability of a vaccine before the end of the year. Abbott Labs, Johnson & Johnson, and Moderna all made headlines with better than expected results in each of their respective areas of expertise.
Abbott Labs – Abbott provides testing for Covid-19. Their testing methods are both lab-based as well as on-site, including a lab-based antibody test to see if a person was previously infected with the virus. The revenue from testing fueled the company’s earnings beat.
With testing demand continuing to rise, the CEO Robert Ford thinks the capacity the company is building around testing will be in high demand for years.
He believes even with a vaccine available, patients will want to know if they have the flu or Covid-19. I cannot say I disagree. In a future flu season, if showing symptoms, I will want to know exactly what my body is dealing with and the right treatment to get me back up and running as soon as possible.
Johnson & Johnson – J&J expects to start the first human studies of its Covid-19 vaccine ASAP. If the initial trial is successful, the company hopes to begin a more exhaustive trial in September.
Should the drug study show that the drug protects people from Covid-19, J&J believes the drug could be available in early 2021 with up to one billion doses.
Moderna – Moderna had already begun human trials with its vaccine. The excitement last week came from a report published in the New England Journal of Medicine that stated all the participants showed the desired immune response from the vaccine.
The next step in the process is a larger human trial, with around 30,000 adults participating. This trial is expected to start at the end of this month. The study will last years but the hope is to show preliminary positive results quickly into the process.
The stock market typically has reacted favorably to vaccine news. Currently, more than 160 coronavirus vaccines are somewhere in the developmental process, with more than 20 already at the human clinical trial stage world-wide.
The stock market should benefit from a continual shot in the arm.
While We Wait…
There is a definite consensus on the best way to proceed while Covid-19 continues unabated by a vaccine:
- Boost testing capacity
- Trace and Isolate virus carriers
- Continue to social distance and wear a mask
- If you are part of the compromised group, continue to shelter in pace
My wish for the bureaucrats?
Stop playing politics with which businesses can open and which ones cannot. Open everything up and follow the simple rules above. When the spikes occur (and they will), isolate the targeted areas, and let everyone else go about their business.
This approach is what other countries have done where the disease is less politicized. The stock market will respond in kind -- at least until we get closer to the election!