24 Aug Capital 19 Catch-Up

We’re Officially in a Bull Market!

Retail Stock Earnings Impress as the Fed Sounds a Warning

We’re officially in a new bull market! The S&P500, after falling 33.9% and hitting a low on the 23rd of March 2020, closed at a new all-time high of 3389.78 on Tuesday. In just 4.9 months the benchmark index has added 51.5% in what has been the quickest comeback in Wall Street history. The milestone also confirms the February 19 to March 23 bear market was the shortest of all time.

The comeback has been nothing short of astonishing, and like the vast majority of market rallies, it has been a lopsided one with defined winners and losers. Since February 19, when the S&P500 last hit all-time highs, only 38% of S&P500 components are positive. That means that it has been a minority of stocks that have been doing most of the heavy lifting.

Technology has been the clear leader of the latest bull run. The tech-laden Nasdaq has been at all-time highs for months now, and its biggest components have been having stellar 2020 performances on the back of the pandemic shutdowns. Microsoft (MSFT) and Netflix (NFLX) are up over 50% so far in 2020. Amazon (AMZN) has taken full advantage of the surge to online buying and is up a whopping 79% for the year to date. While Facebook (FB) is up 27% and Alphabet (GOOGL) the home of Google is up a healthy 16%.

Apple (AAPL) for its part rose 8.25% this week and is now up more than 60% for the year. On Wednesday it became the first publicly-traded company to exceed a valuation of more than $2 trillion. If it seems like it was only a few years ago that we were debating who would be the first company to crack the $1 trillion mark, that’s because it was. Apple has doubled its valuation in just on two years. Shareholder friendly dividends and stock buybacks have kept them a Wall Street favourite for many years now and with a new cycle of 5G hardware set to be released the party could well continue. $3 trillion anyone?

The losers of the new bull market have been those that have suffered and continue to suffer by the pandemic shutdowns. The airlines have been unable to get their aircraft back into the skies with only a small number of domestic flights taking off worldwide, and the chances of global travel happening anytime soon are minimal without a coronavirus vaccine. United Airlines (UAL) is still down 63% year to date, American Airlines (AAL) is down 58%, while Southwest (LUV) has fallen

Because of this, the travel industry as a whole has been unable to get back on its feet. Think travel agents, cruise lines, car rental companies, hotels, tour companies. It’s been an unmitigated disaster. It’s also been a terrible time for the restaurant industry, especially those without home delivery options, and for the hospitality sector with pubs and clubs either shut down entirely or having to operate with limited patronage.

So for those with portfolios laden with technology you would have been loving the 2020 stock market so far. For those in hospitality, retail and travel stocks, the ride hasn’t been as kind. If like many, you hold a broad cross-section of the S&P500 it’s likely that you are back to where you were in February. Personally, I think that is a brilliant outcome considering how 2020 has fared. Now if we can just eradicate this bloody virus and start travelling interstate again I’ll call it a success.

The retail sector was in the earnings headlights this week and there was plenty to smile about for some of the major players. Target (TGT) was the standout as it increased digital sales by 197% and lifted overall profits by more than 80%. It’s e-commerce curbside pickup service saw a 700% increase in usage and its share price jumped 12% on the news. Other success stories included farming equipment seller John Deere who rose 4.4% on Friday after beating expectations, while shoe retailer Foot Locker did the same and rose 1.4%.

Walmart (WMT) also easily beat estimates as it increased revenue by 5.6% year on year to $137.7 billion. Earnings per share were $1.56 when analysts were expecting $1.24, as e-commerce sales increased by 97%. Walmart was initially up 6% after the earnings release but finished slightly lower as investors showed concern that comparable-store sales growth dropped from previous months double-digit highs.

Home improvement retailer Home Depot (HD) saw sales increase by 23% in the second quarter as those stuck at home focussed on completing odd jobs around the house. Profit was up 25% to $4.33 billion, while digital sales doubled, and average purchases rose by 10.1%. Expenses were also up, however, with Home Depot spending $480 million in extra wages to entice employees into work during shutdowns. Despite the earnings beat, shares were down slightly as a cautious rest of year guidance spooked investors.

Home Depot competitor Lowes (LOW) also announced earnings that smashed expectations, but also finished lower for the day as they declined to give any guidance for Q3 and Q4. Profits were up 68.7% to $2.83 billion, while revenue increased by 30% to $27.3 billion as analysts expected $24.27 billion. Website sales were up a hefty 135%, while the company also said they spent an extra $460 million on employee wages and improving health and safety around its stores. The company pulled its 2020 guidance back in May and stated there were too many unpredictable factors to reimplement a new target.

A similar sentiment came out of the Federal Reserve minutes that were released on Wednesday. As the FOMC kept interest rates on hold for another month they stated “The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

The Federal Reserve will hold its annual monetary policy symposium this week as it attempts to wrap its head around implementing stimulus plans during a global pandemic. This yearly funfest is usually held in Jackson Hole Wyoming with central bank members, academics and economists flying in from around the globe to play golf, drink whiskey, and talk monetary theory. This year, however, it will be held virtually with attendees having to log in online to participate in the festivities. A sign of the times.

Earnings this week will continue to have a retail bent as Dick’s Sporting Goods (DKS), Best Buy (BBY), Dollar General (DG), Gap (GPS), and PVH Corp (PVH) all release their numbers. We’ll also see results from Hewlett Packard (HPE), Autodesk (ADSK) VMware (VWM), Dell Technologies (DELL), and Campbell Soup (CPB). Chinese electric vehicle maker XPEV will hold its IPO this week, while gunmaker Smith and Wesson (SWBI) will split into two, with its firearms business keeping the SWBI code and its outdoor accessories business becoming American Outdoor Brands under the ticker AOUT. If you hold SWBI you will receive 1 share of AOUT for every 4 shares of SWBI.

Have a great week.