In today’s Steady Investor, we look at key factors that we believe are currently impacting the market and what could be next for the markets such as:
US GDP Declines -4.8% in Q1, Market Rallies – On Wednesday, the Bureau of Economic Analysis (BEA) reported that the US economy shrank at an annual -4.8% pace in Q1, marking the sharpest rate of decline since 2008. This is the BEA’s first Q1 GDP estimate (there are usually four), so we might reasonably expect that the final numbers for Q1 are slightly better or worse than -4.8%. Even still, the S&P 500 rallied +2.66% on the same day, which the financial media mainly attributed to a promising Covid-19 treatment being developed by Gilead Sciences. For those perplexed by how the stock market could rally over +2% on a day when GDP figures were so dismal, you need only remember that the stock market does not move on backward-looking data. We would argue that when the S&P 500 plummeted -34% from February highs, the equity markets were pricing-in the bruising GDP figures we’re only learning today. The stock market is forward-looking, not backward-looking. As for the hit to economic growth in the US, the contraction was largely expected, and we should also expect further declines in Q2. Personal consumption of services contributed to 47% of GDP in 2019, and with the services segment of the economy virtually shut down with social-distancing, it follows that services consumption fell -10.2% annualized in Q1. 1 It is likely to fall further in Q2, but that may not matter for the stock market, which appears to be pricing-in the recovery that could hit in Q3 and Q4.
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How Can You Navigate the Current Market?
With declining GDP and a recession fueled by social distancing, the current market has many investors concerned for their financial future. But there are some silver linings in the midst of this crisis that are important for investors to keep in mind.
In our just-released Market Strategy report, we look at what the new normal means for the economy and what silver linings could positively impact the economy in the future.
If you have $500,000 or more to invest and want to learn more about these insights, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released May 2020 Market Strategy Report2
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The US Consumer Appears Ready to ‘Get Back Out There’ – A closely watched gauge of US consumer confidence reported what everyone already knew: consumer confidence plummeted in April. It was a month beset by social-distancing, stay-at-home orders, and job losses, with US consumers often limiting purchases to essential goods. But there was a silver lining in the data suggesting that US consumers might not be as down-and-out as many believe, given a measure of consumer expectations for the next six months improved. What’s more, the absolute level of the Conference Board Consumer Confidence sentiment index posted a reading that is barely below its 20-year moving average, suggesting that this pandemic may have ultimately just pulled consumers ‘back to earth.’3
The Fed to Intervene More in Muni Markets – The Federal Reserve is extending its liquidity to state and local governments, expanding a program to purchase municipal debt with maturities of up to three years. Many states have been burdened with unemployment benefits and rising health care costs, putting pressure on yields in many muni markets. The Fed’s actions may help neutralize this pressure, by committing $500 billion to the lending facility with the US Treasury kicking in $35 billion to cover losses.4
US Corporate Earnings Roundup – Corporate earnings are starting to trickle in. While many companies are reporting shrinking profits or losses, the issue is less about what happened in the January-through-March period and more about evolving expectations for the current and coming quarters, which continue to be set lower as a result of the pandemic. For the 193 S&P 500 members that have reported Q1 results, total earnings or aggregate net income is down -17.1% on +0.6% higher revenues, with 64.8% beating EPS estimates and 60.6% beating revenue estimates. For the tech sector, we now have Q1 results from 35.3% of the sector’s market capitalization in the S&P 500 index. Total Q1 earnings for these Tech companies are down
-1.6% from the same period last year on +2.7% higher revenues, with 74.1% beating EPS estimates and 70.4% beating revenue estimates – not so bad. Another positive area is Consumer Staples, where total Q1 earnings to-date are up +8.4% on +4.7% higher revenues, with 75.0% beating EPS estimates and 50% beating revenue estimates. On the downside, the financial sector posted higher than expected credit costs, which have weighed heavily on profitability, dragging down the overall Q1 earnings growth pace for the S&P 500 index. For the Finance sector, we now have Q1 results from 57.0% of the sector’s total market capitalization in the S&P 500 index. Total earnings for these financial companies are down -44.6% from the same period last year on +1.6% higher revenues, with only 46.8% of the sector companies beating EPS estimates and 63.8% beating revenue estimates. Excluding the Finance sector drag, Q1 earnings growth for the remaining S&P 500 companies that have reported results would be down -4.4% (vs. -17.1% including the reported Finance results). For Q1 as a whole, total S&P 500 earnings or aggregate net income is now expected to decline -15.5% from the same period last year on +1.5% higher revenues. Excluding the Finance sector drag, Q1 earnings for the rest of the index would be down -11.4%.5
What to Make of Unprecedented Times? Investors and businesses are navigating unprecedented times. As we wait for the virus to pass and the economy to recover, many investors may be wondering what they can do now as we wait. In the meantime, I recommend that investors remain calm, focus on the long term and not let emotions take control of their investments. To help you focus on the fundamentals instead of the fearsome headlines, I am offering all readers our Just-Released May 2020 Market Strategy Report.6
In this report, we examine ten trends that are forming in the “socially-distanced” economy, which provides context for the unique set of challenges that corporations across the world are facing. We also take a look at some of the silver linings in this crisis, which are often underappreciated in a sea of bad news and weak data.
If you have $500,000 or more to invest and want to learn more about these insights, click on the link below to get your free report today!
Disclosure