Stock markets stumbled last week as investor sentiment was weighed down by a resurgence in trade tensions between the U.S. and China and concerns that the economic recovery may be more drawn out than expected following cautious commentary from Federal Reserve Chairman Jerome Powell among others. For the week, the S&P 500 fell by -2.2%, while the Dow and Nasdaq Composite posted losses of -2.7% and -1.2%. However, equities have staged a sharp rally in this week’s early trading, recouping last week’s losses, as almost half of states begin the process of reopening businesses this week and several vaccine trials have noted promising developments. Further adding to the rally, during a “60 Minutes” interview on CBS News on Sunday, Jerome Powell stressed that the Federal Reserve has not exhausted its options to stimulate the economy and pressed for further fiscal stimulus from Congress.
As expected, economic data last week continued to paint a dim picture including another 3 million job losses and a record -16.4% monthly drop in U.S. retail sales in April. The drop in retail sales indicates a big dent in second quarter economic growth, as consumer spending accounts for about 70% of U.S. GDP. Several large U.S. retailers are set to provide first quarter earnings results this week that will provide more perspective on the trends of consumer demand. However, there are increasing expectations for improvement in U.S. economic data following April’s numbers as efforts to reopen the economy have gathered steam in May. The weekly report of continuing jobless claims, which hit 22.8 million last week, will provide an important indication of how quickly the job market can recover as businesses begin to reopen. Continuing claims have started to plateau but are still expected to increase this week with the consensus forecast at around 24.8 million citizens receiving unemployment benefits.
In addition to the direct economic damage from social distancing measures, the coronavirus pandemic has threatened to further stoke trade tensions between the economic powerhouses of the U.S. and China as investigations into the origination of the virus and a race for resources in seeking a cure have added to already strained relations. Last week, the Trump administration moved to block shipments of semiconductor chips to Chinese telecom giant, Huawei. The risk of retaliation bears watching given that many U.S. technology companies, which have been a significant source of support to U.S. stock returns in recent years, have notable exposure to China, both on the supply and demand side.
In China, consumer spending remains slow to return as Chinese retail sales fell -7.5% in April, despite the fact that the Chinese economy began the reopening process before most other regions back in early March. The slow return of consumer demand in China has important implications for the U.S. as its economy reboots. The return to work is an important piece of the puzzle in improving the income and ability of the consumer to spend, but lingering concerns on public health and safety may continue to suppress the desire to spend until there is a commercially available vaccine. On that front, drugmaker Moderna has announced positive results in its first human clinical trial of its experimental vaccine, which has bolstered confidence that this virus can be tackled with a vaccine and that progress is being made toward that end. However, medical officials have warned that the widespread availability of a vaccine may still be a year or more away.
In the week ahead, in addition to retailer earnings announcements and reopening efforts, market participants will be listening closely as Jerome Powell and Treasury Secretary Steve Mnuchin testify before the Senate Banking Committee on the health of the U.S. financial system.
