U.S. equities rose higher last week despite reports of spikes in Covid-19 cases in some states and disappointing jobs data as markets were buoyed by the Federal Reserve’s corporate bond purchase program announcement and a stronger than expected rebound in May consumer spending. For the week, the Nasdaq Composite continued to lead the way on strong technology sector performance with a gain of 3.7%, while the S&P and Dow Jones posted solid returns of 1.9% and 1.0%, respectively. Meanwhile, energy prices continued to rally higher with U.S. crude oil prices surging 9.7% last week to end just below $40 per barrel as the reacceleration in economic activity drives further demand.
Last week’s retail sales report reassured investors of the stabilization in the economy in May with a 17.7% increase in sales off of the lows set in April. However, the significant shift in spending patterns resulting from the pandemic lockdowns continued to drive stark differences across the retail landscape. Grocery store sales were up 14.5% year-over-year in May while restaurant sales were down -39.4%. Home improvement store sales grew 16.4% while furniture, electronics, & appliance store sales dropped -25.3%. Nonstore retail (e-commerce) sales rose 30.8% from May a year ago, which matched the -30.8% decline in gas station sales. Certainly some of these trends will show some reversal as economic activity normalizes, but unfortunately there will be businesses and jobs in those hardest hit segments that aren’t able to hold on through this period of disruption in demand, despite the best efforts of government stimulus.
The fallout in those hard hit segments of the economy continue to show in the elevated level of new and continuing weekly unemployment claims. Weekly unemployment claims came in at 1.5 million last week, marking the 11th consecutive week of declines in job losses, but they remain elevated compared to pre-crisis levels with just 218,000 unemployment claims per week on average in 2019. Continuing jobless claims, the number of people currently filing for unemployment benefits, also came in above expectations at over 20.5 million last week, down just 65,000 from the week prior. Continuing claims have shown some improvement in coming down off their peak of 24.9 million at the start of May, but investors have been eager to see greater progress in the decline of unemployment claims to demonstrate that the strong momentum in rehiring shown in May is persisting along with the reopening of the economy.
Although the recovery in economic activity and corporate earnings may take time, massive stimulus from the U.S. government and Federal Reserve have underpinned financial market valuations in the short-term, and another potential tailwind to financial markets that has emerged is the vast amount of cash that remains on the sidelines following the surge in pandemic fears in March. According to FactSet, U.S. money market fund assets sat at $4.68 trillion last week, just off the peak of $4.79 trillion and well above the peak levels of $3.9 trillion during the Global Financial Crisis. The elevated cash level demonstrates the outstanding concern regarding the fundamental economic outlook and uncertainties around the potential for a resurgence in the coronavirus, but also could be a future source of demand for risk assets as confidence in the recovery takes hold.
In the week ahead, market participants will be paying close attention to a bundle of data on the health of the U.S. consumer later in the week, including consumption spending, personal income growth, and consumer sentiment, in addition to the weekly unemployment update and the final revision of first quarter GDP growth. New coronavirus cases will also continue to be monitored closely as investors track if there is any uptick in cases related to the recent protests and business reopening activity.
