Markets, Economy

Weekly Kickstart (05/11/2020-05/15/2020)

5/11/20 8:00 AM

iStock-626627280.jpgThe market rebound resumed last week, as the S&P 500 rose by 3.50 percent to 2,929.80. That left the benchmark index down just 9.32 percent 2020-to-date, and 30.95 percent above the March panic low (closing basis). In many ways this has been one of the most-hated rallies in recent memory. For example, the latest weekly AAII survey showed that 53 percent of investors expect stocks to generally fall in value over the next six months, the highest reading since 2013, and bullish sentiment has similarly fallen over a full standard deviation below its long-term average. Most of the emerging “arguments” against this rally suggest that there is a disconnect between Main Street and Wall Street, e.g. “how can stocks rise the same day the worst job report in history was released?” Such a question signals a lack of awareness of market history and behavior. Since 1949, for instance, the S&P 500 during prior downturns has bottomed an average of eight months ahead of the peak in unemployment. Moreover, while the media likes to constantly remind Americans of how bad things currently are, the stock market is instead a forward-focused discounting mechanism that only cares if things are getting better or worse.


And while incoming economic reports are indeed generally terrible, and likely to remain so for a while, many high-frequency indicators have already started to improve or at the very least stop worsening. This supports our earlier call that economic activity likely bottomed in Q2. However, just because we may have a good idea of the “depth” of the downturn, we still lack clarity on its length. Looking ahead, the S&P 500 is 13.48 percent below the February high, so there is some upside risk that could result from surprise medical breakthroughs and more-successful-than-anticipated economic reopenings, among other things. As for the downside tail risk, the significant support provided by the Federal Reserve and Congress helped eliminate many of the worst-case-scenarios that investors were worried about during the March market tumult, but this does not mean it will simply be smooth sailing for equities going forward. In fact, a pullback could make the next leg higher “easier,” and the potential excuses for such selling are myriad, e.g. a sharp uptick in new COVID-19 cases, uncertainty about Congressional approval of another (perhaps already priced in) stimulus, a re-escalation in the trade war with China, and the November elections. Altogether, the outlook for both stocks and the economy has improved markedly compared to late March, but many unknowns (volatility catalysts) remain. Some regular investors may therefore want to continue to use rallies as opportunities to review their portfolio and make sure it is properly aligned with their risk tolerance, nearness to retirement, and other unique variables. As always, we are here to help with any questions you may have.


To recap a few of the things we learned about the economy last week, the positives included that mortgage purchase applications rose for the third consecutive week, consumers’ credit utilization declined, and average hourly earnings growth jumped (albeit for the wrong reasons). As for the negatives, the nation’s trade deficit widened, service sector activity contracted, productivity growth decreased (but by less than expected), corporate layoffs jumped, small business employment plunged, total nonfarm employment tumbled, the rate of joblessness surged, and millions of Americans continued to make first-time claims for unemployment benefits (although this metric has also fallen for five weeks in a row). This week the pace of economic data remains slow but there are still a few important reports on housing, consumers, employment, small business, and inflation scheduled to be released.


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Sources: Econoday, FRBSL

Post author: Charles Couch