Heading into second quarter earnings season, most analysts anticipated that with the forced COVID-19 shutdown, earnings and sales for companies in the S&P 500 were going to fall off a cliff. These analysts were so pessimistic about second-quarter earnings that the forecast called for an anticipated decline of greater than 40%.
Instead, we witnessed the biggest collective sales and earnings surprise for the S&P in decades. In fact, if you include all the S&P 500 companies, the average earnings surprise was 23% better than expected. These consistently positive results helped to smooth out a normal bumpy time for the market.
History shows that summer, especially August, tends to be a tough month for stocks. However, this August, the S&P is up 7% and at an all-time high. The Nasdaq has increased by 8.8% in August, and it too is at an all-time high. The Dow Industrials, on the other hand, have not reached new heights, but they are still up 8.4% in August.
Since the March 23 market lows, when the S&P 500 lost over 35% of its value from peak to valley, the market rallied more than 50% to create the shortest bear market in history. Most bear markets take at least 18-24 months to fully recover. This bear market took just five months to erase.
The great news is the market is starting to heat up, heading into the fall presidential election. This is to be expected, however, as the stock market typically rises in August of presidential election years. Of course, both sides of the aisle are trying to win votes by selling their hopeful visions for the future. With both the Democrat and Republican conventions now completed, investors appear to feel more optimistic about the future, keeping the positive streak alive.
With policy solutions being debated by both parties, the economy has taken center stage. This focus is creating more upbeat sentiment and a better mood for investors heading into a historically strong seasonal period for stocks. The fourth quarter (October to December) tends to be the most favorable time of year for stocks, as investor mood tends to be cheerful during the Thanksgiving and Christmas holiday season.
Before we get there, we still have September and October to contend with. Trading volumes typically pick up in September, after Labor Day, when traders are all back from summer vacation, and the odds favor more gains ahead for September.
With the COVID bear market now in the rearview mirror, many of the market’s fears have subsided. The U.S. economy was much more resilient than most predicted. Businesses were forced to reinvent themselves and grew stronger and more productive in the process. The remote workplace, technology, and new opportunities have helped most of corporate America not only survive the lockdowns, but come out better on the other side.
The great economic rebound is already in progress and quickly gaining steam. With interest rates near 0% and COVID-19 fears largely under control, economy activity has been very robust, setting the stage for a true “V-shaped” economic recovery. The Federal Reserve (the Fed) is now forecasting third-quarter GDP growth could come in at a nearly 26% annualized rate, sure to be one of the best quarters ever recorded!
Now one of the biggest positive developments has been the work-from-home phenomenon. With the shutdowns forcing most workers to work from home, U.S. productivity actually advanced at a greater than 7% annualized rate in the second quarter, despite the forced economic shutdown.
This advance clearly shows Americans found a way to be much more effective working from home.
Ultra-low interest rates are also playing their part in stimulating economic growth. Housing starts surged nearly 23%, building permits increased by more than 18%, and existing home sales grew nearly 25% in July. The real estate market is surely seeing the positive effects of record low mortgage rates.
The Fed has committed to keeping interest rates low through 2022 and ready to step in for more stimulus if needed, which should continue to help boost economic activity. This outlook combined with positive developments on the COVID-19 front are helping to boost optimism.
Despite all of this, the truth remains that things aren’t back to normal just yet. The economy, particularly for small business, is still vulnerable and has its set of challenges ahead. The economy is not back at full strength, and there are a host of threats that could creep back in. With children returning to school and the cold & flu season soon upon us, there is legitimate reason to be concerned.
This concern should be prayerful in nature, and we hope that proper perspective comes when reviewing the Lord’s promises, like Jeremiah 29:11.
“For I know the plans I have for you,” declares the Lord, “plans to prosper you and not to harm you, plans to give you hope and a future.”
Come economic feast or famine, take comfort knowing God is fully in control, no matter what happens. As your trusted advisors, we will remain vigilant, and take a more defensive approach to this market, especially when it comes to adding new companies to our portfolios. We are focusing on companies that we believe can continue to thrive in a challenging environment. We feel your portfolios are well-positioned for whatever the future holds.
Sources: Yahoo Finance, Reuters.com, and JP Morgan Market Insights
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