The virus is spreading. The economy is down. But the market’s still whistling a happy tune.
(St, Louis Post Dispatch)
July 27,2020 (Dave Nicklaus)
Right now, those profits are shrinking rapidly. About a quarter of the companies in the Standard & Poor’s 500 index have reported second-quarter earnings, and FactSet projects that the final tally will show a 42% decline. That would be the worst showing since the financial crisis of late 2008.
Even so, amid signs that the coronavirus pandemic in the U.S. is getting worse instead of better, the stock market is radiating optimism. The S&P 500 is up more than 4% this month and now shows a slight gain for the year.
If someone had told you on Jan. 1 that a pandemic would kill 144,000 Americans, force businesses to close and push unemployment to an 80-year high, what kind of year would you have predicted for the stock market? Minus 25%? Minus 50%?
A positive return for 2020 feels wildly out of tune with headlines showing rising infections, millions of unemployed workers and plummeting profits. Yet the stock market, in its wisdom, views all of that as old news.
“People were expecting a rotten quarter,” Ken Crawford, senior portfolio manager at Argent Capital Management, says of the recent earnings reports. “It’s not good, but it’s not a surprise.”
Scott Wren, senior global market strategist at Wells Fargo Investment Institute, says investors are thinking more about what companies can earn in 2021 and 2022 than how they performed in the recent past.
“The market has clearly looked past this near-term bump,” Wren said.
The gloomy second-quarter reports have contained hints of good news. Coca-Cola, for instance, posted its worst revenue decline in 30 years, but it said sales picked up as countries eased their shutdown rules.
Other companies also indicated that the pandemic’s worst effects are behind them. “Moving upward from a minus-40% quarter is maybe not that difficult, but the market is seeing that momentum is moving in a direction that it likes,” Crawford said.
Investors have other reasons to be optimistic. Congress is talking about at least $1 trillion in additional stimulus spending, and the Federal Reserve remains committed to its near-zero interest rates and emergency loan programs.
“The response from policymakers mitigated a lot of the damage that the pandemic did,” said Richard Ryffel, a veteran banker who just joined First Bank as director of wealth management. “Those measures have been responsible for maintaining the level of consumer spending.”
And don’t forget that some businesses actually benefit from the pandemic. As people do more online shopping and watch more streaming videos, a handful of technology companies like Amazon and Netflix have accounted for a big share of the market’s gains.
Of course, plenty of risks exist. Negotiations on the stimulus package could break down. Rising infection numbers could force a new round of business closings and layoffs. A decisive Democratic election win could create worries about higher business taxes.
There’s also a chance that good news from a vaccine company will spark another market rally. Don’t be surprised if the next few months see a lot of volatility, with big up and down days as investors try to figure out how long the pandemic and recession are going to last.
Saying that the future is uncertain, though, isn’t the same as saying there’s no basis for the market’s optimism. “We have seen historical instances where markets outrun both the economy and earnings,” Ryffel said. “This is not all that unusual.”