U.S. equities climbed higher this past week as a stronger than anticipated jobs report and second quarter corporate earnings beats outweighed concerns of Congressional gridlock in extending fiscal stimulus provisions. For the week, the S&P 500 and Nasdaq each gained 2.5% while the Dow Jones surged 3.8%. Meanwhile, the bond market response to the solid employment report was muted with the 10-year Treasury yield holding steady around 0.56%, despite an increase in inflation expectations with the 10-year expected inflation rate sitting at 1.61%. Rising inflation expectations and low nominal bond yields have driven more money into perceived inflation hedges like gold, which rose 3.0% on the week.
The second quarter corporate earnings season is nearly in the books with 90% of the S&P 500 constituents having reported results to date. Overall, the S&P 500 index is on track for a -34% drop in earnings for the quarter compared to the second
quarter of 2019. Though that doesn’t seem like much to cheer about, it did handily beat consensus analyst expectations for a -44% drop in earnings as 82% of companies surprised to the upside on reported earnings per share. However, earnings
will eventually have to do more than just being less bad than expected to justify elevated valuations as the S&P 500 sits just off its all-time high that it notched back in February.
Last week’s employment report also added to market optimism that the recovery is continuing, albeit at a more moderate pace, as the U.S. added back almost 1.8 million jobs in the month of July and the unemployment rate dropped to 10.3% from 11.1%
in June and the April peak of 14.7%. However, the number of unemployed Americans is still over 10 million higher than it was pre-crisis, which may force more Americans to dip further into savings following the expiration of enhanced unemployment benefits
at the end of last month.
To that end, Congress remains at an impasse on the size and scope of the fifth coronavirus relief bill after negotiations collapsed last week. President Trump meanwhile announced four executive actions this past weekend to work around the standstill,
including a $400 weekly enhanced jobless benefit, with 75% coming from the federal government and state governments on the hook for the other quarter, as well as student loan relief, efforts against evictions and a payroll tax holiday. However, the
executive actions may face several logistical challenges, including the difficulty for states to chip in for enhanced unemployment after the pandemic has stretched their budgets and concerns that employers won’t pass along the payroll tax cut
to employees given that they could be liable to pay the deferred taxes in 2021. The ability of the economy to sustain its recovery path and for the job market to improve in the coming months will likely be a key determining factor in the coming election.
With less than 100 days remaining until the U.S. presidential election, market participants are increasingly turning their attention to the potential political outcomes and resulting policy impacts on the economy and financial markets. Joe Biden, who
currently has an edge in the polls, is expected to announce his running mate for vice president in the coming days. From a field of about a dozen likely choices, Senator Kamala Harris is the current favorite, followed by the former national security
adviser Susan Rice. Additionally, investors will also be focused on several important economic updates on the health of the U.S. consumer in the week ahead including the July retail sales report and August consumer sentiment.
Thank you to everyone who was able to join the First Merchants Perspective from Private Wealth Online Event last Tuesday. We hope you found value in hearing about the shifting market and economic landscape. If you were unable to attend the event,
you can catch a replay here.
