There is a lot to report from the past few days. Some backward looking, some forward. Some good, some bad. We have a historic GDP report, Fed comments, Big-Tech quarterly earnings and another shoddy unemployment claims report. A lot to chew on, as usual. Let’s start with the old news.
GDP, on an annualized basis, came at a whopping negative 32.9%. This equates to a 9.5% drop from Q2 of 2019. Typically, when the report beats estimates by nearly 2%, it would be a huge positive. These are not typical times. Nearly a quarter of the drop was from a consumer spending collapse which was only worse during the World Wars. About the only positive was Government spending. GDP reports are a rearview indicator. Other than history lessons, they have minimal bearing on the investment market today. Case in point, the S&P 500 was up 20% during the second quarter and another 5% in July.
Much of the recent dollar weakness and low interest rates today are tied to the Federal Reserve’s actions. They held their meeting on Wednesday and kept Fed funds in their 0% – 0.25% target range. Prepared statements were quite dovish. Planned purchases of Treasuries and MBS securities will continue for the foreseeable future. As virus cases keep surging, they intimated the punch bowl will not be pulled too early. Quite the opposite in fact, as inflation is allowed to run above 2% for an extended period, if we can even get there. Market odds continue to price in negative rates by this time next year. Simply put, free money is here for a while.
What does this mean for the market? Well, savers continue to be punished. Bank accounts will earn next to nothing for quite some time. P/E’s stay elevated. Predictable growth stories keep leading. Investors are forced up the risk spectrum. Bubbles are created when cheap money goes to bad projects. Companies that normally go bankrupt can stay afloat longer than they should. As noted, some good, some bad.
Weekly unemployment claims are one of the more important leading indicators. Yesterday’s report did not help the bull’s case. Claims rose for the 2nd week in a row after declining for 15 straight weeks. This is the 19th straight week which totaled more than a million. Reclosings and a realization that less employees are needed in the new world are to blame. A lot of small businesses came back to a rough market and closed up shops. The next stimulus package is critical to help those in need.
Lastly, but certainly not least, some of the biggest companies in the world reported over the past few days. Most came in with solid beats and even growth on the top line in a dismal economy. As you may be aware, companies guide analysts to a low ball revenue and earnings per share number so they can beat by a small amount to “impress” the market. Briefly (these are not buy or sell recommendations):
• Amazon#: Earnings were almost six times what they projected. Revenues rose 40% from last year. They have hired over 175,000 people since March to help with demand. Clearly the stay at home trend helped them out tremendously. 20 years ago, internet sales were 3% of total retail sales. It slowly ramped to 13% in February. Covid accelerated this to 19% today. The stock price is reflecting the new reality.
• PayPal#: Another huge beneficiary. They signed up more customers this past quarter than all of 2016. E-commerce payment volumes are reaching levels they didn’t expect until 2025. Contactless payments and less use of physical cash are here to stay. A clear winner with a 77% year-to-date gain to prove it.
• Facebook#: Remember all of those companies “cancelling” advertisements on Facebook’s platforms? That didn’t hurt them at all. The company smashed estimates and even saw revenues rise over 10%. Shelter in place helped keep people glued to their Facebook and Instagram feeds as a way to stay connected to loved (and hated) ones. If you want to reach a potential customer, there are not many ways better than Facebook.
• Google#: The other main way to reach today’s customers via advertising also bested estimates by a wide margin. However, revenues did fall, albeit only by 1.7%. It remains a two-person race to capture traditional advertising spend between these conglomerates.
• Apple#: Another stellar report with an 11% rise in revenues and an easy bottom line beat. They saw double digit growth in iPads, Macs and wearables. I guess everyone needs to access their Instagram while sitting on the couch, exercising AND in their home offices! They are splitting their stock again, 4 for 1. This does nothing for the value of the company but some feel a lower price attracts a broader base of investors.
• Qualcomm#: The largest 5G chip supplier did not want to miss this party. They announced a license agreement with the last main global cell phone maker. Demand for 5G phones is ramping up. There is a long runway for new use cases in this exciting market as well.
Big Tech just got bigger as gains from these market leaders post-earnings were solid, totaling nearly $300B in increased valuations on top of the $5 trillion they were already worth. We’ll see if they can hold them into the close today. On average, they are already up 40% this year. In a world where rates are zero, predictable growth stories continue to win. As Covid is causing a lot of that growth to be pulled forward, this is not an overly bizarre move. Gains from here could be tougher to come by, but the new digital economy is one with massive change, much of which is technology driven.
This has been a very atypical recession. There were no excesses that needed to be corrected like the housing or technology bubbles. Past recessions always produced new leaders. This one was self-induced. Forcing businesses to close brought forward years of online, cloud and digital growth.
Pair that with Fed comments of an elongated easing period, low interest rates forcing savers into stocks and a continuation of Covid concerns, it would not be crazy to think leaders keep leading. Until these factors change, it may be best to let the winners run. The caveat stands though. Stick to your discipline. Don’t get over exposed to equities after the pop. Don’t let one or two stocks dominate your portfolio. There will be another opportunity to buy world class leaders at decent prices.
Harry Potter would like to wish J.K. Rowling a happy 55th birthday, while Mavericks fans are wishing Mark Cuban a happy 62nd.
James Vogt, 610-260-2214