The second quarter earnings during the pandemic
Since the 24th of July, 26% of the S&P 500 companies have already announced their Q2 results (second quarter). 81% have had a positive earnings surprise while 71% have had a positive revenue surprise.
However, this cannot really be considered “surprising” as this was based on the expectation that there was going to be a 44% decline in earnings for companies. So, even though there was a positive earnings surprise, in actuality, we had experienced a largest decline since Q4 (4th quarter) of 2008.
4th quarter in 2008 vs 2nd quarter in 2020
Source: Yahoo! Finance
During Q4 in 2008, there was an announcement of there being a 69.1% drop in earnings. The stock market was directly correlated to this decline, with the stock market itself similarly experiencing a decline of 60-70%.
However, when we compare this dip to the previous decline in 2008, we can observe that there is an abnormality. Earnings have declined by around 44% and the expectation for future earnings has also seen a reduction. However, the stock market has maintained its position; hardly moving down at all. In fact, if you look at the tech companies, their stock prices have all increased since the start of the year.
As the pandemic continues, the Federal Reserves (FED) will continue to insure the economy through Quantitative Easing (QE)[1]. The 2nd wave is coming[2] and this might shake the economy even further. However, a 3rd wave might not come if the FED continues to support the economy and US earnings do not decline significantly.
US and China trade war update
The tit-for-tat tensions between US and China have been rising as evidence by the Houston and ChengDu consulate closedown incidents. This rivalry is not likely to stop as US is adamant about stopping China from rising. If US were to lose their world leadership in terms of being the world reserve currency, it is likely that they will go into bankruptcy very quickly given how much debt they currently possess.
Since both countries have directly opposing wants, it is likely that this tension will continue and will affect the economy. This tension will be more clearly seen in the Technology sector, with this sector being the most important as the country with the most Tech supremacy will be the country who becomes the world leader. China is currently being supplied semi-conductor chips by the US but will have to improve their technological capabilities if they want to overtake US in this area. Meanwhile, they will also have to work against the US restricting their current supply of semi-conductor chips.
This tension could develop into either a threat or an opportunity for the common investor.
This tension could become a threat as China is now trying to produce their own semi-conductor chips; however, it is not easy. Hence, they still largely depend on the US for these chips. The combination of a restriction in the supply chain and a frozen supply chain because of the Covid-19 pandemic means that China had to reduce their production and consumption. Hence, if the pandemic continues and they are unable to produce their own semi-conductor chips, they might not be a particularly good country to invest into.
On the flipside, the tension could also become an opportunity for investment if the stock market corrects[3] sufficiently. The reduction in stock prices could give you the opportunity to invest into undervalued stocks in China. However, at this moment, there has not yet been enough correction.
US and their economic situation
The $600 per week unemployment benefit that US has been providing to its citizens ended on 31 July. The Republicans and Democrats are currently debating what to do moving on.
Republicans want to reduce it down to $200 per week because the high unemployment benefit might disincentivise the people to return to work. However, Democrats have argued that there are currently no jobs for people at this moment. Hence, if people are not given the support, they may go bankrupt and this will cause a chain of devastating events.
Europe and their economic situation
Europe is handling the Covid-19 pandemic well. Germany has always been very careful about over-spending since their situation in WW2. Germany has also always been hard working and do not spend money that they do not have. As such, Europe has always found it very hard to get a stimulus plan based on borrowing from external countries because Germany has always objected to it. However, during this pandemic, Germany has been supportive of the joint borrowing of $750 billion for their stimulus plan to help Europe’s growth from 2020 to 2023.
This joint borrowing will help Europe keep interest rates low as a collective. This will ultimately support their economic growth instead of increasing their debts as they have handled this Covid-19 situation well and have waited for the curve to be broken. As such, there will not be much of a resurgence when they reopen their economy.
If you observe the value of the Euro, you will realise that the Euro has been one of the strongest currencies in the last month. This reflects a certain optimism by investors in the Euro-zone and could possibly have an impact on your near to mid-term investment decisions as Europe comes onto the radar again.
[1] Quantitative Easing is the introduction of new money into the money supply, typically through printing money and buying bonds, by the central bank. In this article, we will focus on the Quantitative Easing conducted by the FED.
[2] To learn more about the second wave, read: Covid-19: Is it all clear ahead now?
[3] Stock market correction: A decline of 10% or greater in the financial markets, whereby this could adjust overvalued stock prices in the long term and provide opportunities for people to buy more stock.
If you have any questions about your personal investment portfolio or want to learn how to better reap the opportunity you are now having, feel free to reach me via heb@thegreyrhino.sg or 8221 1200.
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