The last week’s market highlights:
Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s 2020 Midyear Outlook:
- U.S. economy: Looking for a full recovery by late 2021, albeit with high unemployment.
- Global economy: More monetary and fiscal stimulus is needed to keep businesses afloat.
- Policy watch: No Fed interest rate hikes until well after the economy has healed.
- Fixed income: Lean into higher-risk assets to generate income.
- Equities: Focusing on quality across the board (and dividend payers, too).
- Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
Quote of the week:
“We become brave by doing brave acts.” – Aristotle
China returns to growth—but not without a few wobbles
During the coronavirus pandemic, some investors have been focusing less on traditional monthly economic data releases, most of which are backward-looking, in favor of higher-frequency metrics, including traffic congestion, airline bookings and restaurant reservations. These provide a more “real-time” picture of the global economy’s health.
But last week, markets anxiously awaited one backward-looking data report in particular: second-quarter GDP growth for China. And they weren’t disappointed.
After contracting 10% in the first quarter, the Chinese economy rebounded with force in the second, expanding at an 11.5% annualized rate to add the emphatic upward stroke in the “V” shape of its recovery.6 Another signal of China’s swift, sharp comeback was June’s 4.8% year-over-year gain in industrial production—a broad measure of manufacturing, mining and utilities output. This was the biggest such advance for Chinese factories since last December.7
Despite this one-two punch of positive news, we’re mindful of potential pitfalls ahead for the world’s second-largest economy. First, Chinese consumers aren’t opening their wallets. Retail sales were expected to return to positive year-over-year growth but the June data instead showed a decline of 1.8% as people continued to avoid restaurants, shops and other crowded businesses.8
Second, last week we learned that China’s exports were up only 0.5% in the past year (although even that was better than expected).9 External demand for Chinese products could remain weak, as other economies around the world are still in “catch-up” mode, experiencing the COVID-19 crisis on a two- to three-month delay. China was the first country to enter lockdown mode, in January, and the first to demonstrate clear signs of recovering. Moreover, the country has thus far avoided a major resurgence in the coronavirus, and with it, another potential round of widespread business closures. We can’t extrapolate that experience to China’s main trading partners, especially not the U.S.
Investors yearning for earnings will have to wait
Because of COVID-19, the second-quarter earnings season is widely expected to be bad—very bad. For S&P 500 companies in aggregate, consensus forecasts call for a 45% year-over-year drop in earnings. That would represent the worst quarter for index earnings since 2008.10
So far, however, some of the numbers have been good—very good. Collectively, the 17 financial firms (out of 45 companies overall) that have reported results as of July 17 have topped forecasts by an average of 25%.11 Among these are several large banks with a global presence, whose second-quarter results include record trading revenues.
But for all firms reporting through last Friday, earnings and sales have fallen 20% and 3%, respectively, versus a year ago.12 And we expect those numbers to worsen significantly as earnings season progresses. Looking ahead to the third and fourth quarters, profits should continue to decline, but at a slower rate, before turning positive in the first quarter of 2021.
Not only do investors have to grapple with the likelihood of three straight quarters of dismal earnings, in many cases they’ll also have to “fly blind” in assessing when companies might return to profitability. That’s because many firms have offered vague or even no forward guidance whatsoever—another byproduct of the coronavirus. The dearth of guidance reflects the uncertainty for corporate managements in the face of economic lockdowns that triggered widespread layoffs and hammered revenues.
In the current climate, we know that company profits are competing for investors’ attention amid many other headlines: progress (or the lack thereof) in containing the spread of COVID-19, the trajectory of the U.S. economy and the upcoming U.S. election. If better-than-expected corporate report cards are able to cut through the clutter, they could go a long way toward boosting sentiment and with it, stock prices.