China and Valuations Overshadow Data and Earnings
July 24, 2020
High-flying tech and momentum stocks fell for the second consecutive week as investors booked profits and continued rotating into value stocks. Markets still remain bullish that the economic rebound will continue but the combination of stubborn COVID trends, rising tension with Beijing and certain sectors just being over extended, gave investors reason to pause. Strong housing market data and a crop of strong Q2 earnings reports failed to lift investor sentiment after late week negative market moving headlines. Initial jobless claims rose for the first time in 15 weeks, correlating with the surge in COVID-19 that has forced several states to roll back their openings. As if the market did not have enough on its plate, the U.S. and China escalated their tit for tat with each forcing the other to close their embassy in Chengdu and Houston, respectively. All in all, it was a pretty neutral week with the good offsetting the bad with the Dow ending down -0.76% for the week – its first loss in the last four.
Home Sales are Hot, Hot, Hot
In case you hadn’t noticed while working from home since Spring, suburbia has been noisy with the sound of moving trucks. June was the same as more and more Americans are leaving cities and moving to the suburbs to escape COVID. Existing home sales rose a record-shattering 20.7% in June. That was their highest monthly gain since realtors began tracking data in 1968. Inventory tightened with the supply of homes on the market falling -18.2% annually to 1.57 million. The current supply of homes is extremely tight, representing a four-month supply. By comparison, six to seven months is considered to be a healthy balance between supply and demand. The tight supply pushed home prices up 3.50% year-over-year to $295,300.
Although the rumble of moving trucks headed to existing homes may fade away as summer winds down, it will be replaced by the sound of hammers and nails as builders continue the rush to meet the demand for new homes. New home sales surged in June to their strongest rate in 13 years. New home sales hit 776,000, up 13.80% on a month-to-month basis. Sales rose in all four regions, with the Northeast leading the pack, up a whopping 89.70% on pent up demand. The median price of new homes rose 5.60% year-over-year to $329,200. That is the highest price on record. Similar to existing home sales, the pickings were slim with only 307,000 new homes on the market. That equates to a 4.7-month supply. Despite the high prices, tight inventory, and tough jobs market, the high demand for homes could continue at least through the end of summer on pent-up demand as homebuyers were sidelined by stay-at-home orders earlier this year.
Initial Claims Rise
For the first time in 15 weeks, initial jobless claims rose on a week-to-week basis. According to the Labor Department, 1.42 million individuals filed for first-time unemployment benefits. That’s up from 1.31 million who filed the previous week. The rise in claims is a result of state officials rolling back openings to combat the surge in COVID-19 cases, prompting businesses, particularly service-oriented businesses, to lay staff off once again. The persistently high level of initial claims has investors concerned the July jobs report could show little progress or even a decline in payrolls. That would not bode well for the recovery, placing even more importance on Congress passing a second round of stimulus to individuals.
Strong housing data and companies signaling the worst is behind them on corporate earnings calls came up short in being able to offset late week headlines on the health front and geopolitical news. With earnings season in full swing, investors are getting better visibility into how adaptive companies and consumers have been during the pandemic. The trend is familiar. Stay at home stocks have held up well, but even companies in sensitive industries have managed to adapt better than initially expected. We saw strong results from Pool Corp as more consumers were opting for their very own backyard pool over the public pool. Cars continued to fly off the lot with strong results from Tesla showing commuters increasingly opting for private transport over public transport. Cigarette makers also got a lift in sales as travel restrictions began easing across the world, helping lift duty free sales. Although companies remain hesitant to give guidance due to the uncertain COVID outlook, it is encouraging that consumers remain confident to continue to spend despite the uncertainty. The next big question is what the Back to School season will look like. With schools delaying openings, retailers are going to miss out on an important sales drive period, but those sales may now shift to technology purchases as more and more districts will offer hybrid or online only options. In the end, it is possible that the total spend may be the same or higher than a normal year, but the benefit of those sales is unlikely to accrue to those firms who need it most.
The Week Ahead
Traders will pour over the first estimate of Q2 GDP. Economists are forecasting a -33% decline in economic output as much of the nation was under stay-at-home orders in April. Investors will also tune in to the Federal Reserve’s FOMC press conference for clues to additional monetary stimulus measures to help boost economic growth.
Quarterly Statements Now Online
Quarterly client performance statements are now available online at www.probityadvisors.com by clicking on the “Client Login” link on the upper right side of the page. Clients now have safe and secure access to the last three quarterly performance reports all in one place for each of their accounts. Probity is providing this service in response to client requests and concerns about data privacy, mail fraud, and identity theft, as well as concerns about mail handling due to the current pandemic. An email notification was sent to clients yesterday to alert them of the Q2 2020 statements being posted to our encrypted client portal.
In addition to accessing electronic statements, the portal allows clients to do the following:
- View total portfolio value
- View account performance over the previous month as well as quarter to date and year to date
- View transaction history by account
- Sort transactions by date and type
- View short- and long-term realized gains and losses
- View individual account holdings
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Our team regularly reviews and optimizes the portfolios we manage based on economic conditions, our analysis, and research, as well as clients’ changing life circumstances and financial goals. The online account information available on our website is updated daily to provide the most current view, and our team of advisors is available to answer any questions.
If you are a current client and did not receive yesterday’s email notification, or if you wish to continue receiving paper statements, please let your advisor know.