S&P 500 is Positive YTD During a Very Busy Earnings Season and the Worst GDP Decline in History
• The markets were mixed this week, as the smaller-cap names underperformed relative to the larger-cap tech names
• NASDAQ was bolstered by the large tech names and jumped 3.7% on the week, followed by the 1.7% gain for the large-cap S&P 500
• The mega-cap and very concentrated DJIA, on the other hand, lost 0.2% and the smaller-cap Russell 2000 inched up 0.9%
• It was the busiest week of the earnings season and most of the attention was centered on Facebook, Apple, Amazon and Google (Alphabet), as all of them reported earnings beyond consensus expectations after testifying in Washington
• Of the 11 S&P 500 sectors, the Information Technology sector led the way with a gain of 5%, followed by Real Estate sector’s gain of just over 4%
• Energy had a tough week, dropping 4.3% on the week
• The big economic news this week was that the Commerce Department reported that second quarter GDP dropped almost 33%, the worst quarterly decline in history and on the heels of the first quarter’s decline of 5%
• The U.S. Dollar Index dropped to a 2-year low
• Gold futures rose to new highs at $1986.20/oz
• WTI crude fell 95 cents and ended just more than $40/barrel
Tech-Names Push Markets Higher
Except for the DJIA, the major U.S. market indices ended the week higher, as investors dealt with a ton of earnings reports and news that GDP in the second quarter suffered the largest loss in history.
Whereas last week saw the value and small-cap names outperform, this week saw just the opposite as the growth names and large-caps finished the week higher. There was some worry from Wall Street as the CEOs of the large technology names were grilled by Washington lawmakers, but all that was put aside when earnings were reported the next day, especially from Amazon, Facebook, Google (Alphabet) and Apple.
The Energy sector was hammered, as some big names reported very steep second quarter losses – think Chevron and ExxonMobil. The Energy sector wasn’t helped by the falling price of oil, although most would agree that the sector’s performance had less to do with oil and more to do with big quarterly losses being reported.
It was a very busy earnings week with 189 reporting results. And while earnings were expectedly not great, FactSet reported that more companies than usual were actually beating estimates.
The week brought a lot of economic data and the one gaining the most attention was the staggering GDP decline for the second quarter. While the media focused mostly on this number, lost in that was the fact that housing continues to shine as a bright spot. And further, this week pushed the S&P 500 into positive YTD territory, a position not seen in quite some time.
Worst Decline in GDP in History
On Thursday, July 30th, the Commerce Department reported that GDP decreased at an annual rate of 32.9% in the second quarter of 2020. It was the worst quarterly decline in history. That almost 33% decline is on the heels of the 5% decline in the first quarter. From the Commerce Department directly:
“The decrease in real GDP reflected decreases in personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending that were partly offset by an increase in federal government spending. Imports, which are a subtraction in the calculation of GDP, decreased.”
Further, the Commerce Department reported that:
• Current-dollar GDP decreased 34.3 percent, or $2.15 trillion, in the second quarter to a level of $19.41 trillion
• Excluding food and energy prices, the PCE price index decreased 1.1 percent
• Current-dollar personal income increased $1.39 trillion in the second quarter
• Disposable personal income increased $1.53 trillion, or 42.1 percent, in the second quarter
• Real disposable personal income increased 44.9 percent
• The personal saving rate – personal saving as a percentage of disposable personal income – was 25.7 percent in the second quarter, compared with 9.5 percent in the first quarter
Jobless Claims Jump for 2nd Week in a Row
Last week, investors were lamenting the fact that the 15- week streak of declining jobless claims came to an end. This week brought a new streak as it is the second week of increasing claims. On Friday, the Department of Labor released the following:
• In the week ending July 25, the advance figure for seasonally adjusted initial claims was 1,434,000, an increase of 12,000 from the previous week's revised level
• The 4-week moving average was 1,368,500, an increase of 6,500 from the previous week's revised average
• The advance seasonally adjusted insured unemployment rate was 11.6 percent for the week ending July 18, an increase of 0.5 percentage point from the previous week's unrevised rate
• The 4-week moving average was 17,058,250, a decrease of 435,500 from the previous week's revised average.
Pending Home Sales Index Leaps in June
According to the National Association of Realtors, pending home sales jumped 16.6% in June to beat expectations. The 116.1 index level is now about 5 points above its pre-COVID level. And shockingly, yea-rover-year the index is up 6.3%.
From the NAR:
• The month of June saw each of the four regional indices rise on a month-over-month basis, marking two consecutive months of such gains.
• The Northeast PHSI grew 54.4% to 95.4 in June, but was still down 0.9% from a year ago.
• In the Midwest, the index rose 12.2% to 110.9 last month, up 5.1% from June 2019.
• Pending home sales in the South increased 11.9% to an index of 140.3 in June, up 10.3% from June 2019.
• The index in the West jumped 11.7% in June to 99.6, up 4.7% from a year ago.
Warren Buffett Spends $10 Billion
In just the first three weeks of July, Warren spent over $10 billion of Berkshire’s cash stockpile.
During the first week of July, Berkshire Hathaway announced that it had acquired natural gas transmission pipelines and storage assets from Dominion Energy for about $9.7 billion. Then during the last week of July, it was revealed through a Securities and Exchange Commission filing that Buffett bought an additional 33.9 million shares of Bank of America at a total cost of just over $813 million. That means that Warren’s company now owns about 988 million shares, which is over 11% of all of Bank of America’s outstanding shares and makes Bank of America Warren’s second largest holding behind Apple.
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Sources: bea.gov; dol.gov; nar.realtor; fidelity.com; msci.com; nasdaq.com; wsj.com; morningstar.com