Monthly Markets Memo - February 22, 2021
by Dan Zalipski, CFA
A majority of the S&P 500 companies have reported earnings for the last quarter of 2020. As we began 2021, analysts were expecting Q4 earnings to decline -6.8%, a year-over-year measurement. Somewhat unexpected, as of this writing, they are on track to increase 2.9%. Being a year-over-year measurement, this implies that corporate earnings, in aggregate, are above pre-pandemic levels. The recovery seems to be moving faster than anticipated.
In aggregate, corporate earnings are growing. Beneath the surface, however, there is a reshuffling. Some industries are clearly benefiting from the seismic societal shift the pandemic induced, such as healthcare and technology. Others continue to tread water hoping to make it through, such as travel and leisure. There are reasons to be optimistic about the future.
Those businesses that are awaiting reopening expect continued support from the Federal Reserve in the form of low-interest rates. The Fed has already committed to keeping rates low until we are closer to full employment, a point the Fed stated is at least a few years away. With rates low, corporate America reacted to the unprecedented situation with a surge in borrowing. Businesses issued record levels of debt at extremely low rates to support them through to the other side of the pandemic.
These businesses need the consumer to return to ultimately survive. Fortunately, the U.S. consumer is in relatively good shape. During a typical recession, U.S. consumers see their savings rates decline as household income drops while expenses remain constant. This recession is far from typical and unlike any from recent memory. Right around the time American’s were being asked to cancel vacations and shelter-in-place, direct deposits of government cash were padding bank accounts across the country, sending the personal savings rate (a measure of the percentage of disposable income consumers retain) all the way up to 25.8%, three months earlier that figure stood at 7.3%. Consumers have cash, a touch of cabin fever, and are itching to spend.
The final piece of optimism is the continued and expanding rollout of the Covid-19 vaccines. As of now, there are 2 companies approved, with at least 3 more working their way through the approval process. Logistical challenges are being addressed as supply and distribution continue to ramp up. As vaccines find their way into arms across the country, covid related restrictions should begin to loosen, with an expected pickup in economic activity to follow. A significant stumble with this distribution or any further delay in the economic recovery would damage the current outlook. Strong earnings and positive growth are welcome signs of recovery but would likely take a back seat to any additional complications that would extend the reopening timeline.
“Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared.” - Jerome Powell, Chairman of the Federal Reserve
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