The Pulse – What’s Happening in the Economy and the Capital Markets: 10/12/20 – 10/16/20


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The Pulse – What’s Happening in the Economy and the Capital Markets: 10/12/20 – 10/16/20

Executive Summary

Earnings season started with generally positive reports. Banks reported better loan performance than expected yet remain very cautious on the economy overall. Month to date, smaller capitalization companies remain the outperformers, a sign of optimism from investors that the economic rebound is sustainable. Company management teams do not appear to share the same level of confidence in the economy.

Economic data from the week presented more mixed signals. Improvements in travel and related industries continue while we are starting to see cracks in the manufacturing/industrial rebound that we believe are a result of restocking supply chains impacted by shutdowns earlier this year.

The Markets

Month to date, the Russell 2000 – which reflects the smaller and mid-sized publicly-traded U.S. companies – has been a significant outperformer. Historically small and mid-sized companies are more domestically oriented, so their outperformance is a sign that economic recovery is sustainable and that the U.S. is likely to have another stimulus package, notably including an infrastructure bill.

This week kicked off 3rd quarter earnings season with approximately 15% of the S&P 500 reporting – approximately 50% of those companies reported increasing earnings guidance compared to 20% reducing it, a sign of cost controls implemented earlier this year.

Large, money center banks reported better than expected earnings considering their stronger than expected loan performance. However, shares did not rally as banks remain conservative about the economy. JP Morgan Chase noted that it expects it to take about another year to work through the worst losses of its loan book, and thus does not feel confident that the bank will be out of the woods until the second half of 2021.

Cash is increasing on the balance sheets of S&P 500 companies alongside increasing earnings guidance and analyst estimates. This infers that companies are focusing on maintaining liquidity given the uncertain economy. The resumption of buybacks and prior dividend levels have not been announced and according to Bloomberg, this is the most cash hoarding since at least 2013.

The Economic News

Mobility data from the Dallas Federal Reserve highlights a reduction in consumer activity in the last ten days, which makes levels similar to those in early July and range bound.

Dallas Fed Mobility & Engagement Index

High Frequency Data

Recent High Frequency data shows improvement in travel-related segments such as air travel and hotel utilization, though activity remains well below pre-COVID-19 levels.

A big positive and surprise of the week were the declining Continuing Jobless Claims, now down 21% from a month ago. This may reflect the exhaustion of benefits.

*Two additional notes:

  • Initial Claims remain high, and
  • Pandemic Unemployment Assistance (PUA) claims have also declined in recent weeks.

Several important economic data points from the week include:

Retail sales were the shining star and much better than expected, excluding automotive and gas sales which were +1.5% versus expectations of +0.5% and 0.7% in August.

Small Business Optimism was also stronger than expected with the index at 104 versus expectations of 101 and 100 in August.

CPI (Consumer Price Index – a sign of inflation for consumers) is in line with expectations at +1.7% year over year and August excluding the impact of food and energy.

PPI (Producer Price Index – a sign of inflation for businesses) is up +0.7% year over year, above expectations of 0.5% and above August’s 0.3% excluding the impact of food, energy and trade.

*The increase of 0.4% from month to month is a sign of inflation worth continued monitoring.

Focus of the Week – Industrial Goods & Manufacturing

This week’s economic data shows the pace of recovery starting to cool for the industrial goods and manufacturing industries, surprising economists with metrics below expectations. Companies benefitted from catch-up production related to restocking supply chains after the shutdown.

  • In September, manufacturing production declined for the first time in five months by 0.3% below the expected +0.6% and August’s 1.0%, mostly due to weaker automotive production which declined 4.0%.
  • Industrial goods production declined 0.6% below the expected +0.5% and +0.4% in August.
  • Capacity Utilization is at 71.5% below the expected 71.8% and in line with August’s levels.

A Few Stories that Caught My Eye


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