The Pulse – What’s happening in the Economy and the Capital Markets: 10/19 – 10/23

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The Pulse – What’s happening in the Economy and the Capital Markets: 10/19 – 10/23

Executive Summary

According to several data points, the economy shows continued signs of recovery at a slowing pace. The exception to the trend is residential housing where September reports were strong and leading indicators are positive.

The markets are still reflecting the potential fiscal stimulus package. Investors see this as a “when,” not “if,” and the interest rate on the ten-year U.S. Treasury bond jumped this week in anticipation of growth and a stronger 2021. Meanwhile, economists’ estimates for Q4 GDP continue to decline as the High Frequency Data reinforces the slowed pace of recovery.

Q3 earnings for publicly traded companies are exceeding expectations. However, stock prices of many of the original COVID-19 beneficiaries dropped as they have been unable to meet the elevated expectations, despite the improvements in their overall business.

The Markets

The volatility of the stimulus negotiations played out in the markets. As previously discussed, investors, economists and Fed officials have all strongly expressed a need for further stimulus to sustain the economic rebound. As of late Friday, talks appear to have stalled.

We are roughly a third of the way into Q3 earnings season and company profitability is outperforming analysts’ expectations. 84% of companies exceeded expectations with average earnings 18% above expectations (compared to the long-term average of 3.5%).

Companies that immediately benefitted from COVID-19 are now struggling to meet investor expectations, while those initially negatively affected are now performing stronger.

  • Netflix (NFLX) declined 8% due to their subscriber growth forecast falling short at 2.2 million.
  • Kimberly-Clark (KMB) declined 11% with Q3 earnings below forecast, despite raising 2020 EPS guidance.
  • Citrix Systems (CTXS), declined 11% despite the work from home infrastructure provider’s earnings exceeding expectations.

The bigger news this week was the increase in the interest rate on the ten-year U.S. government bond which serves as a benchmark for many valuation models in the markets. Since the end of September, the interest rate (aka “yield”) is up by 30%. This reflects a combination of increased optimism around 2021 economic growth and the inflationary impact of future stimulus.

U.S. GOVERNMENT 10 YEAR BOND YIELD

The Economic News

We are expecting the first release of Q3 U.S. GDP data to be a record high in the +25-30% range. As a reminder, the reported U.S. GDP annualizes the change from the prior quarter. This report implies that we have not yet recovered from the Q1 and Q2 decline.

Looking forward, the expectations for Q4 GDP have been steadily declining since the summer. Expectations for Q4 GDP growth were as high as 9% and are now below 4%, implying that recovery will be flatter for longer, as opposed to the expected “V shape” recovery, reiterating the need for more stimulus.

ECONOMISTS ESTIMATES FOR Q4 2020 GDP – DECLINING SINCE SUMMER


LEADING ECONOMIC INDICATORS

This week, the Leading Economic Indicators through the month of September were released showing a continuation of the trends previously discussed – continued economic growth at a slowing pace. In September, the index fell below 1 for the first time since April.

The Federal Reserve’s Beige Book of Economic Activity highlighted that improvements continue across all districts with the pace of growth characterized as slight to modest.

  • Manufacturing activity generally increased at a moderate pace.
  • Residential housing markets show a steady demand for new and existing homes with activity constrained by low inventories.
  • Banking showed an increased demand for mortgages as the key driver of overall loan demand.
  • Commercial real estate conditions continued to deteriorate in many districts, excluding the warehouse and industrial space where construction and leasing activity remained steady.

High Frequency Data

High Frequency Data echoes signs of economic recovery as month over month improvements exist across almost all the data that we follow. Weekly data numbers are not as strong as the monthly improvements, highlighting the slowed pace of improvement. Weekly Retail Sales are the exception as weekly data is higher than the monthly data.

Focus of the Week – Residential Housing

Monthly residential housing statistics remained exceedingly healthy, especially year over year.

  • The National Association of Home Builders index was 85 which is above expectations and September a four-decade record.
  • Housing started very strong above September’s level, though slightly below expectation, having increased 11% year over year and 2% month over month
  • Building permits, a leading indicator for residential housing, were better than expected and better than September, increasing 8% year over year and 5% month over month.
  • Existing Home Sales were very strong, above expectations and September numbers, increasing 21% year over year and 9% month over month.

Stories that Caught My Eye

  • “Shipageddon” –Trucking and shipping containers experience capacity shortage. (link)
  • Paypal users will now be able to use cryptocurrencies. (link)
  • Aggressive Oil & Gas M&A is reducing capacity and could lead to inflation once demand returns. (link)
  • Sales of $1M+ homes have more than doubled. (link)

Disclosures

Investment advisory services are offered by Aprio Wealth Management, LLC, a Securities and Exchange Commission Registered Investment Advisor.  Opinions expressed are as of the current date (October 26, 2020) and subject to change without notice. Aprio Wealth Management, LLC shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, the information, data, analyses or opinions contained herein or their use, which do not constitute investment advice, are provided as of the date written, are provided solely for informational purposes and therefore are not an offer to buy or sell a security. This commentary is for informational purposes only and has not been tailored to suit any individual. References to specific securities or investment options should not be considered an offer to purchase or sell that specific investment.

This commentary contains certain forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

No graph, chart, or formula in this presentation can be used in and of itself to determine which securities to buy or sell, when to buy or sell securities, whether to invest using this investment strategy, or whether to engage Aprio Wealth Management, LLC’s investment advisory services.

Investments in securities are subject to investment risk, including possible loss of principal. Prices of securities may fluctuate from time to time and may even become valueless. Any securities mentioned in this commentary are not FDIC-insured, may lose value, and are not guaranteed by a bank or other financial institution. Before making any investment decision, investors should read and consider all the relevant investment product information. Investors should seriously consider if the investment is suitable for them by referencing their own financial position, investment objectives, and risk profile before making any investment decision. There can be no assurance that any financial strategy will be successful.

Securities offered through Purshe Kaplan Sterling Investments. Member FINRA/SIPC. Investment Advisory Services offered through Aprio Wealth Management, LLC, a registered investment advisor. Aprio Wealth Management, LLC and the Aprio Group of Companies are not affiliated with Purshe Kaplan Sterling Investments.

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