by Timothy D. Carkin, CAIA, CMT
Senior Vice President
“The path of the economy will depend significantly on the course of the virus.” Chairman Jerome Powell reiterated this point emphatically in his comments following the two-day meeting of the Federal Open Market Committee (FOMC). To most people this may seem like stating the obvious, but sometimes it bears repeating, especially considering the data released this week.
This week, the biggest headline was an estimated 32.9 percent drop in quarterly GDP, the largest on record by a wide margin. This followed a 5 percent drop for the first quarter when the economy dipped into recession, ending the longest economic expansion in United Stated history. The “Great Lockdown” caused a 34.6 percent drop in consumer consumption, with the biggest declines coming from the healthcare, recreational and restaurant sectors.[1] One promising byproduct of these events is the personal savings rate which went to 25.7 percent, implying that some of the drop may be due to deferred spending.[1] The GDP number was not unexpected as lockdowns shuttered a large portion of the economy for much of the second quarter. However, recently we have seen economic activity pick up significantly as restrictions have been lifted.
More timely data, like initial jobless claims may be more insightful in revealing the path of the economy than GDP. This week, 1.4 million people filed unemployment benefits claims for the first time, increasing the total unemployed to 17 million. This is the second week of increases that ended the downtrend that started in May. Two weeks cannot be considered a reversal, but there is worry it correlates with a recent spike in COVID-19 cases.
With this backdrop and to no one’s surprise, the Federal Reserve held interest rates steady near zero and committed to maintaining its bond purchase program. In the comments after the meeting, Chairman Powell acknowledged the pickup in economic activity but cautioned that more recent data is concerning. While it’s the Feds job to be measured and cautious in their comments, the monetary policies they have implemented should set the stage for a path to economic recovery, provided the virus doesn’t take us off course.
What “downturn?”
This week, Facebook, Apple, Amazon and Google reported earnings as their CEOs appeared before Congress. Despite a worldwide collapse in economic activity, Amazon.com was the clear winner, showing revenue up 26 percent from a year earlier, and Apple and Facebook both beat revenue estimates. However, Google was the outlier, reporting its first revenue decline in company history. Technology companies have been the driving force behind the rebound in equity prices since March, comprising nearly 40 percent of the S&P, the Technology sector is a larger portion of the market than in the dot-com bubble era. Outside the technology space, by contrast, the only other sector to have such a commanding weight in the market was Energy in the 1980s when it was north of 20 percent; now has dwindled to just 3 percent… a weighting that is less than several individual technology companies today. [2]
The change in sector weights is a reflection of the changing economy and why it may be difficult to understand why the market appears so healthy. The rally in the market has been centered around tech companies making their combined weight larger. On the other hand, industries that have been hurt by the lockdowns have become relatively smaller. As the bigger companies have become larger, their gains have outweighed the shrinking companies’ losses. We know this trend cannot persist indefinitely and we remain vigilant in looking for a catalyst for a rotation away from growth sectors and towards cyclical value.
Week in Review and Our Takeaways:
U.S. Treasury yields are near record lows after the Fed noted challenges may be ahead
Stocks were nearly flat on the week despite beats from three of the largest companies
Sources:
U.S. Bureau of Economic Analysis
FactSet