U.S. equities tumbled lower last week as a surge in new Covid-19 cases in several regions caused some state and local governments to pause or roll-back business reopening plans and implement stricter social distancing measures. For the week, the Dow and S&P 500 fell -3.3% and -2.9%, respectively, while the tech-heavy Nasdaq lost -1.9%. News of tightening social distancing measures hit cyclical stocks the hardest, with the energy, financial services, and industrial sectors of the S&P 500 all down -4.0% or worse for the week. The communications sector also shed -5.2%, weighed down by social media company stocks as an increasing number of companies announced that they were pulling advertising spending from social media platforms citing the prevalence of divisive content. The negative coronavirus developments overshadowed economic news including positive manufacturing and durable goods orders data and a continued rebound in consumer spending.
Investors have been closely tracking the uptick in Covid-19 cases, which have recently surpassed 10 million worldwide. The global death toll from Covid-19 has hit 500,000, doubling in less than two months. In the U.S., new daily confirmed cases hit a record of almost 40,000 last Thursday with four states, Florida, Texas, California, and Arizona, accounting for almost half. Health and Human Services Secretary Alex Azar warned that “the window is closing” to suppress a flare-up in cases in the South and West. In response to the recent surge in new cases, the European Union is preparing to bar most Americans from entry when it reopens for travel on Wednesday.
On the economic front, U.S. consumer spending rose 8.2% in May rebounding sharply off of April lows, though consumption remains down -11.7% from February levels. That is despite personal income actually increasing 3.8% over that time period because of the significant boost from federal stimulus to replace lost wages. The disparity between the increase in personal income and the drop in personal consumption reflects the cautious attitude of the U.S. consumer base as a whole as many citizens are more prone toward saving their aid money rather than spending right now given the difficult job market.
The early stages of the recovery through May and likely through June based on early indications has been strong and rapid. A little more of the economy has reopened in every week over the past 9 weeks, but that progress threatens to be stalled or rolled back by a resurgence in new cases. Additionally, the continued momentum in the recovery is dependent on improving consumer and business sentiment to drive spending and investment. A significant amount of cash remains on the sideline from fiscal and monetary stimulus and the wave of corporate borrowing, but it may remain there until consumers and businesses are sure that they won’t need the funds for another rainy day, especially as some stimulus measures, including increased unemployment benefits, are set to expire next month.
One of the most important drivers of collective sentiment and consumer demand is the health of the labor market. So in the holiday-shortened trading week ahead, market participants will be very focused on the June employment numbers to be announced later this week to see if May’s progress of rehiring continued at the same pace in June. Economists project a gain of 3 million jobs during the month to move the unemployment rate to 12.2% from 13.3%. The developments in the economic data will continue to be weighed alongside the progression of coronavirus spread and government response.
Financial markets will be closed on Friday ahead of the holiday weekend. We wish a safe and happy Independence Day to you and your families!