by Shawn Narancich, CFA
Executive Vice President
Record Setting
While market commentators continue to debate the shape of economic recovery, a quick glance at an S&P 500 price chart confirms the V-shaped recovery investors have enjoyed since the dark days of late March. As highlighted in the table below, only 103 trading days were required for the market to not only recoup the short and steep bear market losses, but also vault the market to the new all-time highs achieved this week. Dating back to the 1950s, this marks the fastest recovery to new market highs ever witnessed following a 30 percent or greater decline for the benchmark index. Year-to-date, the S&P 500 has now returned over six percent.
Source: Strategas
We view the market’s recovery as part and parcel with the extraordinary fiscal and monetary stimulus provided by our central bank and U.S. government. As the saying goes, “markets stop panicking when central banks [and governments] start panicking.” The scope and magnitude of stimulus helped inform our decision this spring to reduce clients’ bond exposure and add to equities.
Tales of the Tape
Amid the virus-induced pullback in economic activity, record levels of stimulus have served as water wings for the U.S. economy, helping stabilize employment and finance a lack of income for those business and consumers most severely impacted. With social distancing rules in effect and large swaths of the population working from home, essential retail, e-commerce and home improvement demand are booming. These trends were on full display this week as major brick-and-mortar retailers reported their second quarter results.
Hitting the Bullseye
On the upside, what stood out to us were the record-setting earnings delivered by Target, which delivered same-store sales growth topping 24 percent, boosted not only by healthy in-store traffic gains, but even more substantially by customers ordering online for both home delivery and pick-up at the store. Sales for the retailer surged across categories and were particularly strong in electronics, a trend we expect to continue during the current back-to-school period. Simply put, new laptops and home routers are more important than new clothes this year as students and parents adjust to a remote learning environment delivering school over the internet. Target’s top and bottom line numbers surged past estimates and the stock rallied 12 percent.
Nesting
Also delivering strong numbers this week were retailers Lowe’s and Home Depot, which both reported surging sales and earnings growth boosted by consumers tackling home improvement projects. Lowe’s same-store sales increased 35 percent and Home Depot’s by 23 percent, both staggering numbers reflecting a substitution effect whereby consumers not traveling and going out as much are redirecting foregone spending to their homes. While numbers beat estimates in both cases, the stocks realized more muted gains afterward because of the strong gains they had already achieved into earnings.
Missing the Mark
Retailers leveraged to apparel spending did not fare so well. Continuing a theme of department stores losing market share to Amazon and off-price retailers like T.J. Maxx, Kohl’s reported declining sales and a second quarter loss. While the top and bottom line exceeded investor expectations, the stock fell 16 percent on management’s discouraging outlook. As we are prone to observe, brick-and-mortar retailers need to provide a compelling reason for shoppers to visit their stores. In this case, Kohl’s results point to a company that has yet to crack the code on apparel retailing.
Our Takeaways from the Week
Blue-chip stocks set new all-time highs, recovering from virus-induced lows in record-breaking time
Second quarter earnings concluded with retailers reporting disparate results highlighting the ascendancy of online shopping