ND&S Weekly Commentary 7.13.20 – Let The Earnings Season Begin

July 13, 2020

Last week stocks finished modestly higher with a resurgence of COVID-19 cases causing uncertainties and market volatility. The pandemic is spreading in several US states at record levels and its effects will continue to be the primary driver of the financial markets for the rest of the year. There are some bright spots from improving economic data, historically low interest rates and tremendous financial liquidity. However, the uncertainties over the rise of COVID cases, the political outcome of the US elections and an expected very weak earnings season have investors on edge.

The Dow Jones Industrials gained 1.0%, the S&P500 rose 1.8% and the tech heavy Nasdaq climbed 4.0%. Foreign markets also increased with developed markets as measured by the MSCI EAFE index up 0.3% and emerging markets gaining 4.7% with China’s markets leading the way.

Investors are preparing for a terrible earnings season next week. According to FactSet, estimated earnings for the S&P 500 for the second quarter will plummet 45% from the same period last year and revenues will be down by 10%. The major banks will report this week and all eyes will be on net interest margins, loan loss reserves and guidance. The S&P 500 is only down 0.4% this year and is selling at over 22 times forward twelve month earnings estimates which is expensive. The market could be in for some choppy times ahead.

The 10-year US Treasury note traded down to a yield of 0.57% but finished the week at 0.65% which indicates that rates should remain near zero for quite some time. If the Covid-19 cases continue to surge, the confidence of investors will suffer, increasing the demand for safe assets. The price of gold is already up nearly 20% for the year and gold mining shares are soaring.

The Institute for Supply Management’s (ISM) Non-Manufacturing Index which tracks the service sector of the economy rebounded into expansionary territory in June at 57.1, handily beating estimates of a reading of 50.0. Employment figures continue to improve as 4.8 million jobs were added in June. New drug treatments by Gilead Sciences showed good results and Pfizer and BioNtech expressed optimism that their mRNA vaccine candidate could be ready for approval by the end of the year.

All eyes will be on second quarter earnings announcements this week. Economic data to be reported are inflation on Tuesday, retail sales on Thursday and housing starts on Friday. With so many uncertainties and headwinds, we strongly encourage investors to not chase momentum stocks or higher yielding assets, and stay close to their long-term asset allocation.

“Together we can face any challenges as deep as the ocean and as high as the sky.” — Sonia Gandhi