Monthly economic e-news – July 2020
14 July 2020
By Craig Turnbull
Chief Investment Officer
Big tech companies driving the US share market
Since late March, despite widespread infections of the COVID-19 virus across the globe, many of the world’s major share markets, including the ASX 200 here in Australia, have been climbing back from the lows of mid-March.
However, in the US, the share market has surged back led by big technology with the US technology index, the NASDAQ 100, reaching a new record high in early June.
Source: Yahoo Finance
Which companies are driving up the NASDAQ?
While the COVID-19 restrictions have had an adverse impact on many sectors across the global economy, the restrictions have been positive for a number of technology companies.
Amazon is one US company that’s benefited from social restrictions and more people working from home. Shares in the e-commerce company are up around 80% since mid-March on the back of a strong surge in online shopping and increasing demand for their cloud computing services.
Despite a sharp fall in iPhone sales, Apple shares have rallied more than 60% over the same period due to strong increase in global revenue from entertainment and software services over recent months.
The explosion in virtual meetings around the world has helped to almost quadruple the share price of US communications company, Zoom Video, up from US$68 to US$253 in the first six months of 2020.
The share prices of other big US tech companies such as Microsoft, Netflix and Alphabet, the parent company of Google, have also experienced strong rallies over recent months. The question now is whether these share prices can be sustained if there is not a strong recovery across the broader US economy.
What is the current state of the US economy?
Despite the recent rise of China, the US economy remains the largest economy in the world with a gross domestic product of around US$20 trillion, and that means that what happens in the US has a huge influence on global confidence.
The US leading economic index, the Coincident Index, is a composite of a wide range of indicators such as business confidence, production and corporate earnings, that aims to summarise the current economic conditions in a single statistic.
This index fell by more than 13% in April but in May this figure bounced back by more than 5% after some restrictions were eased in New York and across the US.
The US unemployment rate has also improved, down from a high of 14.7% in April to 11.1% in June. This figure still equates to more than 17 million Americans currently without a job.
However, the recent surge in COVID-19 infections across California, Florida and Texas has resulted in the re-imposition of social restrictions. These three highly populated states account for roughly a third of the US economy so any extended shutdown may put the broader US recovery at risk.
In May, the US Government implemented an historical US$3 trillion stimulus package but even more assistance may be needed if the economic recovery starts to splutter.
This will be a crucial decision with the 59th presidential election just months away.
What does this mean for super returns?
Many super fund investment options have an exposure to international shares and their holdings of US technology companies, such as Alphabet, Apple and Amazon, has helped to drive good returns over recent years.
The strong performance of these shares over the last few months has also helped to minimise some of the losses for members in these investment options.
However, it’s clear from the rising COVID-19 infection rates in the US, and to some extent here in Australia, that the pandemic is far from over and any economic recovery will remain fragile in the short to medium term.
Markets at a glance
for the month ending 30 June 2020
Australian shares1 up by 2.61%
Australian Government Bonds yield2 down to 0.870%
Australian dollar up to US$0.6863
Cash rate3 steady to 0.25%
International shares4 up by 2.42%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)