U.S. equities broadly edged higher last week as investors digested the initial round of second quarter corporate earnings announcements. Meanwhile, the anticipation towards the next round of fiscal stimulus is building as is the focus on vaccine development news amid a backdrop of a continued rise in coronavirus cases and reimplementation of social distancing restrictions in some states. For the week, the S&P 500 and Dow Jones rose 1.3% and 2.3%, respectively, while the Nasdaq Composite took a pause from its recent streak of market-leading gains as the index slid down -1.1%.
The first week of earnings results came in line with to slightly better than expectations with 75% of reporters in the S&P 500 beating earnings forecasts to date, though this off a very low bar. Banks and financial service companies, who led the way reporting last week, have so far reported a -58% drop in earnings in the second quarter compared to a year ago as they have set aside substantial reserves to cover anticipated losses as consumers and businesses start to default on their loans. The four largest U.S. banks, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo, collectively put aside $33 billion alone in the second quarter.
This last week presented mixed perspectives on the health of the U.S. consumer. Retail sales growth for the month of June was stellar, while the initial reading of consumer confidence for the month of July was anything but. The monthly retail sales report showed spending growing 7.5% over May’s levels and almost returning to pre-crisis levels, far sooner than anticipated. Meanwhile, the Consumer Sentiment Survey from the University of Michigan dropped notably to 73.2 from 78.1 in June, as the recent surge in coronavirus cases and resulting social distancing restrictions reversed much of the emerging confidence around reopenings. The end result suggests that the breakneck pace of the economic rebound in May and June has been at least temporarily slowed in July. The continued resilience of the U.S. consumer will depend on an improving job market and further federal aid to bridge the gap from lost wages as there are still 17.3 million Americans filing for unemployment insurance.
On the topic of further stimulus, U.S. Congress is currently working toward a fifth coronavirus relief package, though the size and scope of the deal remains under debate. House Democrats have already passed a proposal surpassing $3 trillion in aid while Republicans are targeting closer to $1 trillion in spending. The sense of urgency on the next round of federal aid is high given the quickly approaching fiscal cliff on July 31st at which time the initial round of enhanced unemployment benefits will expire. Market participants broadly anticipate that they will be renewed, at least in some capacity. Of course, if they are not, there will be market repercussions. Government aid provided well over a quarter of all personal income in April and May as wages and salary income for the country dropped more than 10% from February’s highs.
In the week ahead, second quarter earnings reports will continue in earnest with almost a fifth of companies from the S&P 500 set to report. Additionally, executives from pharmaceutical giants Merck, Moderna, Pfizer, AstraZeneca, and Johnson & Johnson will testify before Congress on their progress in developing a Covid-19 vaccine.
First Merchants Private Wealth Advisors is planning a Live Client Event in August that will provide an update on the economy and markets, as well as other timely topics. Please be on the lookout for details coming in later announcements.
