Monthly Markets Memo - November 24, 2020
by Dan Zalipski, CFA
We are nearly through the 3rd quarter earnings season and it has been a record quarter in more ways than one. Companies are easily beating analyst estimates. Both the number of companies reporting upside beats and the degree they are exceeding their estimates are near-record amounts.
Unfortunately, the year-over-year decline in earnings growth is also a near-record, only to be outdone by the previous two quarters. If anything, this serves to illustrate the difficulty involved in forecasting these results during such volatile and unprecedented times.
With the election mostly behind us and welcomed news on vaccines beginning to trickle out from the pharmaceutical companies, investors are beginning to see a potential path to the end of the pandemic. The economic gut-punch that companies experienced as the Coronavirus Pandemic began to set-in during early 2020 is beginning to fade from the earnings reports. Factset’s earnings forecast projects positive earnings growth returning in the first quarter of 2021.
The Fed has declared continued support for the markets as the recovery continues, signaling that it will keep rates low through 2023. They continue to maintain multiple programs aimed at providing support and liquidity within the markets. While the Fed seems to be doing everything they can to promote strong, functional markets, they also seem to recognize their limits. Federal Reserve Chair Jerome Powell has repeatedly cited the need for Congress to pass additional stimulus to provide support for the areas of the market the Fed is unable to reach.
The election results could complicate any further stimulus needs. With the most likely outcome being that Republicans retain control of the Senate, the passage of another large multi-trillion dollar stimulus, such as the CARES act, is unlikely due to continuing partisan gridlock. Negotiators have recently resumed talks. Both sides recognize the need for additional stimulus, unfortunately, that seems to be where their common ground ends. Democrats want a big stimulus package and Republicans want a smaller, more targeted stimulus. The likelihood of this getting worked out during the lame-duck session is low.
Recent economic reports have been upbeat, providing cover for Congress to continue to fight over stimulus details. The most recent jobs report, for example, saw the unemployment rate drop to 6.9%. There are concerns heading into the winter months. The Coronavirus is resurging, with most states struggling with the uncontrolled spread. Europe has begun to institute lockdown measures to stop the spread. States within the U.S. have begun to issue stay-at-home advisories but are unlikely to institute a true lockdown order on the same level as what we saw in the spring.
This may be a long, rough winter, but things are looking brighter in 2021. A stimulus package will likely be passed, barring increased economic pain does not force their hands during the lame-duck session. Earnings growth is expected to return in the first quarter, an important mile-marker for the economy and investors alike. Finally, we continue to track and monitor numerous companies developing Coronavirus vaccines. Moderna CEO Stéphane Bancel predicted, “...that by Memorial Day, in the US, anybody who wants a vaccine will get a safe and efficacious vaccine."
"Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses." -Federal Reserve chair Jerome Powell
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