U.S. equities closed out the month of May with another strong weekly performance as optimism around the progress of reopening the economy continued to dominate investor focus, despite concerns from the lingering impacts of the pandemic and a recent escalation in international trade tensions and domestic civil unrest. For the week, the S&P 500 gained 3.0%, which brought its monthly return to 4.8% for May, while the Nasdaq Composite and Dow Jones notched returns of 1.8% and 3.8%. Although the Nasdaq Composite has been the strongest relative performer this year (with a positive 6.2% return year-to-date) due to its heavy weighting to the resilient tech sector and biotechnology stocks, cyclical sectors—like materials, industrials, and financial services—have started to close the gap and have been the top performing sectors in the past two weeks as economic activity begins to resume.
While U.S. economic data broadly remains far below pre-crisis levels, most high-frequency data or weekly indicators that we monitor suggest that the worst of the economic fallout probably ended in mid-April and that the economy has begun to stabilize. Last week, another 2.1 million citizens filed for unemployment, but continuing jobless claims dropped for the first time since February as more people returned to work than the number of new unemployment filings. However, the economic data also suggested that the road back to a new normal may be long and uneven. Government stimulus provided a significant boost to personal income, which rose 10.5% in April, but that increase didn’t translate to consumption, which dropped a record -13.6% for the month, as citizens reined in discretionary spending and increased savings in an effort to weather the loss of wages from the pandemic.
On the international trade front, both the U.S. and China have engaged in further escalations of the trade conflict in recent weeks. Most recently, President Trump announced that he is stripping Hong Kong of its special trading status, while Chinese government officials have considered ordering state-run agricultural companies to pause purchases of some U.S. farm goods. Despite these actions and intensifying rhetoric between the two economic superpowers, some market participants have taken solace that both sides have fallen short of more severe measures including additional sanctions or calling off the Phase One trade deal, which could compromise the progress of the global economic recovery.
Meanwhile the rise in civil unrest and protests across the U.S. in recent weeks has taken on increasing focus, though the financial market response so far has been muted. Market participants will continue to assess the implications of these developments on the upcoming presidential election and monitor the potential for a spike in new Covid-19 cases in the coming weeks resulting from the protests.
In the week ahead, there are several notable economic updates on the docket for investors, including data on the health of the U.S. manufacturing and service sectors, as well as the headliner May employment report on Friday. The consensus forecast anticipates that the unemployment rate will hit almost 20%, up from 14.7% in April. Although unemployment has hit very high levels, a large portion of those job losses may be recovered quickly as the economy reopens. Therefore, our investment team will continue to monitor the portion of job losses categorized as temporary rather than permanent as well as the trajectory of weekly continuing unemployment claims to build a better picture of the pace of the recovery.
