This Week's Market Moves | June 8, 2020
Stocks soared at the end of the week, as the U.S. jobs report unexpectedly surprised to the upside, with 2.5 million jobs created in May. This puzzling, but encouraging, news lifted all major indices, with the S&P 500 index climbing nearly 5% this week. Here are some additional insights on the market:
The relentless stock market rally continued, with the major indices closing up another 3 to 8% this week. Nationwide protests, China’s threats to pause its farm imports, and disappointing reports on Gilead’s coronavirus drug, Remdesivir, had the potential to drive stock prices lower; however, the market largely ignored the negative headlines. Better-than-expected jobs data sent the market soaring, with the S&P 500 index rapidly marching back to its pre-pandemic level.
Sectors that lagged in the downturn have now turned into the leaders. For the second week in a row, the unloved sectors of the markets, such as banks, airlines, travel and leisure-related and energy stocks, continued to surge, while the previous leaders, such as tech stocks and health care, have lagged. All of the 11 S&P 500 sectors rose this week, with financials and energy climbing the most. Value stocks have assumed leadership over growth stocks, as the sector rotation trade continues.
Bond yields have started to sell off as the stock market rally gathers steam. The surprisingly strong jobs data sent the 10-year Treasury yield soaring to 0.89% at the end of the week, breaking out of its trading range for the first time in more than two months. At the same time, the yield curve, the difference between short-term and longer-maturity Treasuries, continues to steepen. The re-steepening of the yield curve reflects glimmers of hope on the economic front and concerns about increased issuance of longer-dated Treasuries to finance the Government’s economic-recovery measures.
Debt sales are running at a record pace this year, as companies have increasingly tapped the financial markets to ensure they have enough cash on hand to weather the economic impact of the coronavirus pandemic. The Fed’s unlimited support and stabilization of the financial markets has made it possible for companies to gain access to the debt markets, which is crucial to keeping business afloat during this challenging time. However, it is not just cash-constrained companies that are tapping the markets. Many strong companies, such as Amazon, have issued debt to take advantage of some of the lowest borrowing costs in history.
Anticipation that OPEC and allied countries will extend record production cuts through July has sent oil prices higher this week, with Brent crude futures, the global benchmark, rising above $41 per barrel for the first time since early March. Members of OPEC and their allies, including Russia and Mexico, already pledged to cut output by 9.7 million barrels a day in May and June, helping to prop up oil prices, as demand for crude begins to recover.
For much of the last decade, the U.S. dollar has strengthened relative to its major trading partners. This is not so surprising, as U.S. growth has been significantly stronger than most of the developed world. The U.S. dollar’s appeal is also boosted by its perceived safe-haven status as the world’s reserve currency. However, the recovery in risk appetite has seen the U.S. dollar give back some of its recent gains.
The labor data has been nothing short of astounding. It goes without saying that data collection efforts have been challenging in the current environment, which make the releases difficult to interpret. With that said, nearly 2 million more Americans filed for unemployment benefits this week, bringing the total job losses to a staggering 43 million since the shutdowns began. On a positive note, this is the first time that weekly jobless claims came in below 2 million since the end of March. The May unemployment data delivered another blockbuster surprise at the end of the week, reporting a 2.5 million increase in payrolls and a 13.3% unemployment rate. Markets were expecting a loss of 8 million jobs and a 19.1% unemployment rate. Adding to the confusion, continuing claims, those that are currently receiving benefits, surged this week.
The COVID-19 pandemic has wreaked havoc across a wide swath of industries, particularly travel, leisure and restaurants. The government loan programs may have provided a lifeline to many businesses, but the odds of failure are extremely high given the severity of this crisis. Most workers displaced during the pandemic expect their job losses to be temporary; however, if companies are not able to survive the state-mandated shutdowns and restrictions on reopening, many of the jobs lost may never come back. Concerns about a second wave of job losses, largely among higher-earning workers, is also starting to build.
The European Union (EU) took a big step towards fiscal integration with the announcement of a 750 billion Euro stimulus plan to help the region recover from the coronavirus pandemic this week. While it has yet to be agreed upon by the 27 EU member nations, it has eased concerns about downside risks to the European economy and improved sentiment towards the Euro. Meanwhile, the European Central Bank (ECB) doubled the size of its bond-buying program, extending the program to June 2021, and Japan and China proposed additional stimulus measures to support their economies. These stimulus packages should be supportive for global growth.
Stocks are quickly marching back to their all-time highs, as businesses begin to reopen following the coronavirus shutdowns. While there are tentative signs the worst may be behind us, we have not yet seen the full impact of the coronavirus shutdowns on the economy. Real-time growth trackers, such as the Atlanta Fed’s GDPNow, are currently forecasting a 53.8% decline in the 2nd quarter, even though the actual data will not be released until the end of July. A report from the Congressional Budget Office is also forecasting that it could take nearly a decade for the U.S. economy to recover from the pandemic.
Indices: Core Bond: Bloomberg Barclays U.S. Aggregate Index, High Yield: ICE BofA US High Yield, Large Value: Russell 1000 Value Index, Large Blend: S&P 500 Index, Large Growth: Russell 1000 Growth, Emerging Markets, MSCI EM NR USD, Foreign Equities: MSCI ACWI Ex USA NR USD, REITs: FTSE NAREIT All Equity, Small Blend: Russell 2000
Note that this article was published on June 8, 2020. Data represented is as of the publication date. The information contained herein has been obtained from sources that are believed to be reliable. However, Cammack Retirement Group does not independently verify the accuracy of this information.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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