U.S. equities surged higher for the third straight week as last week’s employment data defied expectations with 2.5 million jobs added to the economy in May compared to the consensus economist forecast for 7.5 million jobs lost. For the week, the S&P 500 jumped 5.0%, while the Dow Jones and Nasdaq Composite also posted solid returns of 6.8% and 3.4%, respectively. In early trading this week, the S&P 500 total return has risen into positive territory on the year while the Nasdaq Composite has reached new all-time highs, despite March’s brutal sell-off. Meanwhile, investor sentiment was also positive overseas as international equities broadly climbed 7.3% last week per the MSCI All-Country World ex-U.S. index, though they are still down -8.4% on the year. The broad risk-on movements and improving economic data sent U.S. Treasury yields higher, with the 10-year yield ending the week at 0.91% compared to 0.65% in the week prior as demand for the risk-haven asset fell off.
May’s payroll numbers clearly indicated an earlier-than-expected rebound in the U.S. labor market as a whole as the economy began to reopen in May, with hiring up across a range of industries. The overall unemployment rate dropped down to 13.3% from 14.7% in April, which was much better than the anticipated rise to 19.6%. Though the accelerated pace of rehiring is a critical kick-start to economic momentum, there were still nearly 20 million fewer jobs in May than there were in February, so there is still a lot of ground to cover as economic activity normalizes.
So what’s next for confirming the rebound and pick-up in economic momentum? Our investment team will continue to monitor the weekly unemployment claims data, which is expected to show a decline in continuing claims as more people are rehired than the number of new unemployment claims. More than 80% of the people who have lost jobs in the pandemic have categorized the layoff as temporary. Such a large proportion of temporary job losses implies that the hiring momentum can be sustained but that also depends on a significant recovery in consumer spending and business sentiment to resume investment and hiring. As of yesterday, the NFIB small business optimism index picked up to 94.4 for May, off of its 7-year low of 90.9, and there will be an important update on the health of the U.S. consumer with next week’s retail sales report. Overall, the initial data is promising that a recovery is taking hold, but it remains vulnerable to set-backs, such as an escalation in trade tensions or a second wave of new coronavirus infections.
Market participants will also be watching the number of new Covid-19 cases closely in the coming weeks to see if there is a notable pick-up following strong business reopening activity and the continuation of protests in the wake of the death of George Floyd. In response to the recent civil unrest, Congress is weighing several potential policy changes to police procedures and accountability, including reforms to the officer misconduct prosecution process, amendments to training, and reductions or redirections of funding.
In the week ahead, Federal Reserve Chairman Jerome Powell will be in the spotlight on Wednesday following the monthly Federal Open Market Committee meeting. No significant changes to current monetary policy are expected at this time, though Powell will face questions on the central bank's role in the economic recovery and what tools are still available to use.
