Last Week:
The S&P 500 gained another 3.01%, with the most beaten-up economically sensitive companies outperforming. The yield on the Ten-Year Treasury dropped one basis point to 0.65%, while the Dollar declined 1.5%. Most of the holiday -shortened week’s gains came Tuesday morning following good news that morning from multiple vaccine programs. Meanwhile the U.S. COVID-19 death toll crossed over 100,000. It is safe to say that the market will be very responsive to news relating to the coronavirus, with a second wave of infections on one end of the pendulum and a vaccine on the other.
The market is now trading at the same level as it did on Halloween 2019. Given how much has changed since then, the market’s recovery seems to be both a trick or a treat. As a result of the Coronavirus pandemic corporate earnings have plummeted and unemployment has surged. Another 2.1 million people filed initial claims for unemployment last week, which is (silver lining) the lowest reading since March 14, and the ninth consecutive week of lower (albeit still extraordinarily high) numbers.
The trick is that the Fed has been handing out as many treats as are needed to keep investors on a sugar high while the economy posts record bad numbers. Investors continued to turn to equities as the 0% risk-free interest rates foster the TINA (there is no alternative) dilemma. What remains to be seen is how bad the multi-trillion dollar indigestion will be when the economy recovers enough to take the candy bowl away.
One also has to wonder if a new Cold War is developing. For those with short memories, in the fall of 2018 the market tumbled 20% as the perception of the “trade war” with China evolved from a negotiating strategy to the reality of a costly implementation of tariffs that threatened to disrupt global commerce. Unfortunately, the bellicose rhetoric is heating up again in U.S.-China relations. Jitters were calmed somewhat on Friday when President Trump’s targeted measures did not spill over into financial markets trading or undo last year’s much hyped phase-one trade agreement. This storyline could very well be a dominant theme between now and the election in November.
The protests across the country in response to the in-custody death of George Floyd in Minneapolis devolved into rioting in dozens of American cities. Curfews were enacted in more than two dozen cities and the National Guard was summoned in over a dozen states. In Chicago, looters smashed windows on the Magnificent Mile and in the Loop, attacked the CPD and set fire to their squad cars.
The wall of worry is about as high as I can remember, so far the market is living up to the adage and climbing it.
This Week:
At the risk of being redundant, developments related to COVID-19, China, and the riots are the primary storylines that will influence the markets. On a positive note, the downward trend in the data for the coronavirus remains in place, so far without any significant surges as the States relaxed their restrictions. Stock futures moved marginally lower on Monday morning after the Chinese government halted some U.S. farm imports as it evaluates the escalation of tensions with the U.S. over Hong Kong. Finally, the riots are taking a toll on the reopening of the economy, as businesses across the country turn their attention to cleaning up the damage or protecting their property rather than welcoming back their customers. Chicago Mayor Lori Lightfoot said they city was considering postponing the reopening of businesses that was scheduled for Wednesday after being closed for 10 weeks.
There are a number of economic releases and a few quarterly earnings reports also on the calendar. Friday’s jobs report is expected to show an unemployment rate of 19.6% in May, the highest since the 1930s.
Final Thoughts:
My theme for the last few months has been to keep breathing, but not on anyone. Tragically George Floyd was not given that opportunity. Now more than ever Pink Floyd’s lyrics are worth embracing:
“Breathe, breathe in the air
Don’t be afraid to care
Leave but don’t leave me
Look around, choose your own ground
For long you live and high you fly
And smiles you’ll give and tears you’ll cry
And all your touch and all you see
Is all your life will ever be”
It seems appropriate that those words could be my final song from the quarantine.