Earnings announcements have taken center stage over the past few weeks as nearly a third of S&P 500 constituents have reported results. Such quarterly results have been dismal as the impact from the global pandemic has resulted in curbed retail spending and has created an overall bottleneck for global commerce. This was a largely expected outcome given the manually induced economic shutdown that commenced in early March 2020. This was a heavily discussed topic in our commentaries as we focused on the underlying backdrop of what it may mean for the economy and for the stock market. The mere fact that the slowdown was not caused by pre-existing and pertinent economic issues (similar to both of the previous economic recessions), but was rather engaged for the purpose of preserving human life, provides an objective reason to maintain an optimistic stance on the market and the economy. Our commentaries from March and April, in addition to our video releases, also focused on the notion that analyst expectations of what may occur in the near-term should not be viewed as the base case scenario. The reality that no one knows how to appropriately gauge the current backdrop is something we cautioned investors on and it is something that the current earnings season has proven to be accurate. Not to mention the fact that the pace of equity market upside defied all expectations.
Having analyzed the earnings backdrop thus far, companies have posted a nearly 15% earnings surprise above estimates. That is a tremendous figure that, once again, shows the inability for analysts to gauge earnings activity amidst a manually employed event-driven environment. We continue to believe that this will be the case moving forward due to the sustained inability to gauge labor market and consumer strength. Many market participants have attempted to downplay the health status of the labor market when in fact the data may not support their overall doubtful message. Although jobless claims remain elevated, as do continuing claims, we must understand that the make-up of the jobless claims is substantially different than most recessions in modern history. The data is skewed to segments of the economy, and their underlying wages, that have historically provided a minimal impact to total economic growth over the long-term. This is also evident in the housing market since most of the individuals that lost their jobs tend to rent rather than own. The unfortunate reality of the global pandemic is that it has affected the most vulnerable members of our society and the data continues to support that statement. As we look ahead, the likelihood of a $1 trillion stimulus package may provide a substantial boost to sentiment for those that need it and may allow for further upside to retail sales, among other discretionary categories. What we are also likely to see, however, is another spike in savings rates like what we experienced in the previous stimulus package. This supports our notion that the stimulus package was not entirely focused on those that need it the most but was rather a widespread approach. Looking ahead, it remains futile to assume that economic growth did not notably shrink last quarter. We know that to be the case based on the current earnings cycle. We are also reasonably aware that an announcement of a recession is inevitable, a topic that we have covered in the recent past. None of this changes our stance on long-term equity market participation as the ultimate driver of success, despite the potential for near-term volatility. We urge investors to remain focused on periods beyond three years and to remain objective in their decision-making process.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg.
All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites. Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.