We may be past the fourth of July, but this week was full of fireworks.
Summer analogies aside, this week was one of the most packed stretches of market moving data this year. Between economic data, earnings results, a rapidly evolving pandemic, and a fiscal stimulus fight, there were enough headlines to keep us off the beach and glued to our desks. The drama was in full force, but shiny results from tech stocks at the end of the week were a nice bright spot.
Here’s what went down.
The Biggest Earnings Day Ever
It was the busiest week in S&P 500 second-quarter earnings season with about 180 S&P 500 companies stepping up to the plate. Coincidentally, several of the market’s superstars — Facebook, Apple, Amazon and Alphabet (Google) — reported on Thursday, July 30, on what some called “the biggest earnings day ever.” In July, we wrote about tech stocks’ relatively high bar for the quarter. But boy, did they deliver. All four companies beat analysts’ estimates for both sales and earnings. Results included double digit sales growth at Amazon, Apple, and Facebook, and EPS that far exceeded expectations for all four companies.
The takeaway: Results show that market leadership from the big tech companies can remain intact. Last quarter was a rough one — Wall Street now estimates S&P 500 profits fell 41.9% year over year. Tech earnings on the other hand look relatively strong with an estimated decline of 3.9%. In addition, tech is one of the few sectors expected to report positive growth rates by the fourth quarter.
A Historic GDP Number
We officially closed the book on the second quarter with the release of the Thursday, July 30 gross domestic product (GDP) report, which is a broad measure of U.S. economic activity. GDP fell 32.9% in the second quarter (on an annualized basis), the worst drop in recent memory.
Luckily, that’s all behind us, and we’re one month into a new chapter. The economy is bouncing back, and economists expect GDP to rebound 18% this quarter. But the momentum of this recovery may be stalling, according to recent data.
Continuing claims (or the number of people who have filed for unemployment benefits for at least two weeks), rose for the first time since May. And Americans began feeling less optimistic about the future as coronavirus cases rose in July. A July 28 (Tuesday) Conference Board report showed consumer confidence slid, and consumers’ economic expectations faded.
The takeaway: Look forward, not back. We’re in a recovery, albeit a slowing one. Consumers, by far the biggest contributors to growth, are getting a little worried.
A Committed Fed
The Federal Reserve has been known to surprise investors, but its message has been remarkably consistent lately. On Wednesday, July 29, Fed policymakers chose to keep rates low and bond purchases historically high, and Fed Chair Jerome Powell repeated that policy will stay this way for a while. Powell warned of the severity of this particular downturn and how dependent the economy is on the pandemic’s path. Then, he followed up with a promise that the Fed will do whatever it takes.
The takeaway: No big surprises here. The Fed is still all in on supporting this recovery for a while, and that’s great news for stocks.
The Fiscal Cliff
Negotiations over the next government aid package kicked off on Monday, July 27 with Republicans’ $1 trillion plan. That plan included a reduction in extra unemployment benefits to $200 per week versus the $600 that has been in place these last few months (the “enhanced” unemployment benefits). It also includes a second round of $1,200 in stimulus checks for qualified individuals and families.
The plan falls short of the $3 trillion plan passed by House Democrats in May, which is likely to make it more difficult for the two sides to come to an agreement quickly. The big worry is that Congress won’t reach a decision before enhanced benefits expire today (Friday, July 31), which would lead to a record number of unemployed Americans facing higher bills and no help at all.
The takeaway: The near-term uncertainty about the next stimulus package could add volatility to the markets, but it is widely expected that the two sides will eventually come to a resolution and pass a stimulus bill. That said, the clock is ticking.
Read more of our thoughts on the fiscal cliff here.
Gold’s Record High
Of course, it wouldn’t be a wild week without a little market action. Gold prices soared to record highs on Monday, eclipsing their European Debt Crisis peak (in 2011).
Gold has a few different uses in an investor’s toolbox. Some use gold as protection against inflation, or against currency swings (especially a falling dollar). Others see it as a safe haven in times of uncertainty. These days it may be a little of the former and latter, especially with the U.S. dollar dropping like a stone. Gold could also shine a little brighter in investors’ eyes because of the uneasy environment and increased government debt levels.
The takeaway: Gold’s rally is the latest in a long list of unusual market moves that make us nervous. Despite that, stocks sensitive to gold prices, like the materials sector and gold miners, have benefitted from the recent move and could continue to benefit from additional upside in the yellow metal.
We’re in the thick of summer, but headlines show no signs of taking a rest. Next week, we’ll see another 130 S&P 500 companies report earnings, a highly anticipated July jobs report, and data on global manufacturing activity. And don’t forget about the fiscal aid fight. The market is likely to remain reactionary to news headlines, particularly given the seasonally low market volume. That means volatility could be here to stay for a while.
The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She frequently shares her knowledge as a guest on national news outlets such as CNBC, CNN, Fox Business News, and Bloomberg News. She also serves on the board of Better Investing, a non-profit organization focused on investment education.