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Investment Strategy
by Larry Adam
Chief Investment Officer, Private Client Group

Weekly Headings

July 31, 2020

Key Takeaways

• Further fed action should help ‘heat up’ the recovery
• Unemployed individuals may be left ‘in hot water’
• Tech earnings ‘hot streak’ exceeds market expectations

This past May was the warmest May on record globally, and it should have served as a signal that these summer months would be a true scorcher. Climate forecasters are expecting above average temperatures to continue through September across almost the entire US, putting 2020 on pace to become the warmest year on record. Unfortunately, this warmer than usual weather is coinciding with a time when most of our activities are being hosted outdoors but these restrictions have been critical in mitigating case surges and helping our nation emerge from the ongoing health crisis. But we aren’t the only ones trying to handle the heat! Between the biggest week of earnings, the Fed meeting, and key economic data, there were plenty of headlines ‘hot off the press’ for the financial markets to handle this week, and as we look ahead, some of these same developments, as well as a few others still have the potential to ‘turn up the heat’ on market volatility.

• The Fed’s Commentary Is Never Full Of Hot Air | The COVID-19 outbreak reaffirmed our belief that when the Federal Reserve promises to “act as necessary,” the commitment is often fulfilled. The financial markets were awaiting Chair Powell’s commentary on the status of the economic recovery, hoping that his insights would provide clarity regarding the magnitude and timeframe of the robust rebound. While unable to give reassurance surrounding the timing of the recovery, as the economy is still very much dependent upon the path of the virus, Chair Powell was able to confirm that the Fed will utilize its “full range of tools” in order to support the economy. In an effort to not over promise and under deliver, the Fed highlighted the importance of fiscal stimulus too, as monetary measures are not able to bolster the economy on a standalone basis. In the weeks ahead, we fully expect the Fed to further utilize its existing facilities and hope its stimulus sentiments encourage Congress to compromise.
• Jobs Report Hot On The Trail Of GDP Data | As anticipated, the 2Q20 gross domestic product (GDP) decline of -32.9% was the worst quarter on record, with personal consumption falling 34.6% as the prolonged shutdowns required non-essential businesses to shut their doors for the majority of the quarter. But as staggering as this decline may be, it is important to realize that consensus estimates expected this to occur and since it is a backward looking number, it is more prudent to focus on real-time economic activity metrics along with more timely economic data points such as both ISM indices and the July jobs report next week. Ultimately, the strength of the economy and its recovery will be reliant on an improving, more stabilized labor market.
• Congress Must Strike While The Iron Is Hot | Households, businesses, state and local governments, and now the Federal Reserve are all calling on Congress to compromise and pass a phase 4 fiscal stimulus package. With the additional $600 per week unemployment benefit set to expire today and with the PPP loan deadline just over one week away, beneficiaries of the highly needed fiscal aid could be left ‘in hot water.’ While we remain hopeful for a final hour bill to address the immediate fiscal cliff concerns, disagreements on issues such as the size and duration of the unemployment benefit, limited liability provisions for corporations, and direct versus targeted aid for state and local governments will likely delay the passing of the next phase until early August. As acknowledged by the Fed in this week’s meeting, key elements of the next bill (e.g., a second round of stimulus checks) would provide a critical boost to consumer spending to ‘extend the bridge’ to more normal economic times.
• Big-Tech Names In The Earnings’ Hot Seat | Earnings expectations were ‘boiling’ given the impressive performance of the tech-related companies. For example, year-to-date, Technology, is the top-performing sector—outpacing the S&P 500 by ~17%! But this week, the earnings results by the big four (Alphabet, Amazon, Apple, and Google) ‘dialed up the heat.’ From double-digit revenue growth to positive forward guidance, the collective reports far exceeded market expectations. As a result, the sector is now experiencing the largest magnitude of earnings beats, 94.1% versus its previous 20-quarter average of 83.6%. Through the remainder of earnings season and in the months ahead, this sector should remain resilient in the face of the COVID-19 pandemic.
• Hot Spots Still Trying To Control The Spread | The case surges and positivity rate spikes seen across certain regions are now unfortunately translating to a rise in death counts too, with some states such as California and Florida reporting new daily records. To make matters worse, Dr. Fauci expressed that new areas of concern were starting to emerge too, particularly within the Midwest (e.g., Ohio, Indiana). While most ‘hot spot’ areas have readily reinstated restrictions in order to combat the virus, we’re now experiencing states that have seemingly successfully defended against COVID-19 take additional measures in order to ensure their trends do not reverse. From travel guidelines to mask mandates, government officials are pressing their communities to realize that the sooner the virus is truly contained the sooner the economy can sustainably rebound.

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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.