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Weekly Commentary For Week Ending August 28, 2020

Updated: Oct 5, 2020

S&P 500 and NASDAQ POST RECORD HIGHS WHILE THE DJIA MOVES INTO POSITIVE YTD TERRITORY

  • Investors have seen five straight weekly gains for the broad, large–cap S&P 500 and the tech–laden NASDAQ, as both moved to new highs while the concentrated – and about–to–change – DJIA moved into green territory for the year.

  • The S&P 500 jumped 3.3% while NASDAQ moved up 3.4% and the DJIA was up 2.6%, followed by the smaller–cap Russell 2000 gain of 1.7%

  • The Financial sector moved up over 4% on the week, as the Fed mentioned letting its inflation target move a bit higher than recent goals

  • Of the 11 S&P 500 sectors, only Utilities was negative as it lost less than 1%, whereas Communication Services, Information Technology and Financials were all up over 4%

  • Much of the week's news was positive, especially as there were some positive COVID-19 updates from a few pharmaceutical companies

  • Of the economic data, most notable was the one that measures consumer confidence, which indicated that consumers have been somewhat pessimistic, although it's been more “trendless”

  • The 2–year Treasury ended the week the same at 0.15% while the 10–year rose to 0.73%

  • WTI crude futures gained 1.6% to $42.97/barrel


S&P 500 and NASDAQ Hit New Highs

U.S. stocks continued to their march upwards as this week marks the 5th week in a row of positive gains, pushed mostly by more positive hopes about a COVID–19 vaccine and treatments.

But there is a tale of two markets, as the higher–valuation tech names pushed higher (Microsoft up over 6%) versus the lower–valued companies. Larger cap names continued their dominance over the smaller–caps and the growth names outdistanced their value counterparts.



Earnings Season Wraps Up

As the second quarter earnings season wraps up, research firm FactSet reported some interesting findings, including that:

  • The S&P 500 reported a decline in earnings of -31.9%

  • 53 S&P 500 companies provided EPS guidance for Q2

  • 84% of S&P 500 companies reported actual EPS above estimated EPS, which was the highest percentage since FactSet began tracking this metric in 2008

  • The Utilities sector reported the highest earnings growth of all 11 sectors in the S&P 500 at 9%

  • The term “COVID” was mentioned at least once during the earnings conference calls of 462 S&P 500 companies from June 15th through August 24th


Consumer Sentiment Remains Unchanged

Consumer sentiment remains low for the fifth consecutive month, as reported by the University of Michigan:


“Consumer sentiment has remained trendless in the same depressed range it has traveled during the past five months. The August figure posted an insignificant gain of just +0.4 Index points above the April to July average. The small August gain reflected fewer concerns about the year–ahead outlook for the economy, although those prospects still remained half as favorable as six months ago.

The pandemic has created distinctive consumer reactions to the economy. Since the April shutdown of the economy, a sizable number of consumers thought conditions could hardly get any worse. The natural response was that economic conditions would improve given the absence of any negative economic causes for the recession.

For example, while nine–in–ten consumers viewed the current state of the economy negatively in August, half of all consumers anticipated the economy would improve in the year ahead. Although half anticipates an improved economy, when asked to judge the performance of the economy, 62% judged that the overall conditions in the economy could be best described as unfavorable. Although strong gains in consumer spending from the 2nd quarter lows can be anticipated, those gains will significantly slow by year–end without some additional fiscal spending programs to diminish the hardships faced by unemployed workers, small businesses, as well as support for state and local governments.”



Manufacturing Improving

Manufacturing firms report on various aspects of their business, such as shipments, new orders, order backlogs, capacity utilization (usage of equipment), supplier lead times, number of employees, average work week, wages, inventories of finished goods, and capital expenditures.

On Tuesday, August 25th, the Richmond Fed reported that manufacturing activity in the Fifth District continued to strengthen in August as:


“The composite index rose from 10 in July to 18 in August, as all three components – shipments, new orders, and employment – increased. The index for local business conditions also rose, and many firms reported increased capital expenditures. Manufacturers were optimistic that conditions would continue to improve.


Survey results suggested many Fifth District manufacturers saw increases in employment, wages, and the average workweek in August. However, firms struggled to find workers with the necessary skills, as this index fell from 3 in July to −21 in August, its largest one–month drop on record. Survey respondents expected employment and wages to rise and continued difficulty finding skills in the coming months.”


The results from the Richmond Fed were similar to the results compiled by the Philadelphia Fed with respect to manufacturing within the Philadelphia region just the week prior.


Changes to the Dow Jones Industrial Average

General Electric was the last of the 12 originals remaining in the Dow Jones Industrial Average. Although it was removed from the Dow for 6 months in the 1890s and from 1901–1907, GE had been a continuous member of the Dow since 1907. But in June 2018, the stewards of the DJIA announced that GE would be replaced by Walgreens.

That left Exxon Mobil, a member since 1928, as the oldest member of the Dow. But on August 31, 2020, prior to the opening of trading, Exxon Mobil, Pfizer and Raytheon Technologies are out of the Dow and Salesforce, Amgen and Honeywell are in.


The move was made to “diversify the index by removing overlap between companies of similar scope and adding new types of businesses that better reflect the American economy.”


Sources

Richmondfed.org; Factset.com; umich.edu; fidelity.com; msci.com; nasdaq.com; wsj.com; morningstar.com;


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