Market Commentary – June 2020
In April, stocks rebounded from a dismal March by posting their best monthly returns since 1987, as investors were encouraged by the expectation of additional government stimulus programs and hope that the economy would be reopening soon. The Paycheck Protection Program and Health Care Enhancement Act replenished the Paycheck Protection Program, providing funding for additional small business loans, and offered financial support to hospitals, while increasing the availability of more virus testing. The Federal Reserve added trillions of dollars in funds to its lending programs. Crude oil prices rose nearly 30.0% despite collapsing into negative territory on April 20th. A few states began easing lockdown restrictions and reopening a range of businesses. While there were plenty of ups and downs in the market during the month, April closed with each of the benchmark indexes listed here climbing notably higher. The Nasdaq gained 15.45%, followed by the Russell 2000, the S&P 500, the Dow, and the Global Dow.
In May, investors pushed stocks higher as more states and foreign countries eased restrictions put in place in response to the COVID-19 pandemic. The economy continued to stagger, however. The unemployment rate reached its highest level since the Great Depression while claims for unemployment insurance pushed past 25 million. On the other hand, news of possible breakthroughs in the treatment of COVID-19 cases and the development of a vaccine for the virus provided optimism for investors. Once again, the Nasdaq led the way, advancing 6.75% by the close of May. The Russell 2000 gained 6.36%, followed by the S&P 500, the Dow, and the Global Dow.
June was a month of drastic highs and lows for stocks. For example, the Dow climbed 6.8% in the first week of the month, then fell 5.5% in the second week. However, by the close of June, each of the indexes listed here posted gains with the tech holdings of the Nasdaq leading the way, up nearly 6.0% from its May closing value.
The second quarter of 2020 notched the best quarterly performance since 1998, with each of the benchmark indexes making sizeable gains over their historically poor first-quarter tallies. However, much of the second-quarter growth in the stock market and economy is more of a bounce back from a dismal March and April, when pandemic-related lockdowns and restrictions virtually shut down the economy. Nevertheless, stocks rose as investors focused on favorable economic data and the possibility of further government stimulus, despite rising virus cases and tepid trade relations with China. Of the benchmark indexes listed here, the Nasdaq again proved the strongest, soaring more than 30.0% for the quarter, followed by the small caps of the Russell 2000, which gained 25.0%. The large caps of the S&P 500 and the Dow closed the second quarter up nearly 20.0% while the Global Dow vaulted ahead by more than 14.0%.
Year to date, the Nasdaq remains the only index well ahead of its 2019 year-end closing value. While still in the red, the S&P 500 is within 5.0 percentage points of last year's final mark, followed by the Dow, the Global Dow, and the Russell 2000. By the close of trading on June 30th, the price of crude oil (WTI) continued to climb, closing at $39.35 per barrel, ahead of the May 29th price of $35.34 per barrel. The price of gold finished June at $1,798.80 per ounce, slightly higher than its May 29th closing value of $1,745.80 per ounce.
|Market/Index*||2019 Close||As of June 30 th||Monthly Change||Quarterly Change||YTD Change|
|S & P 500||3,230.78||3,100.29||1.84%||19.95%||-4.04%|
|Federal Funds||1.50% – 1.75%||0.00% – 0.25%||0 bps||0 bps||-150 bps|
|10-yr Treasury||1.91%||0.66%||2 bps||3 bps||-125 bps|
*Chart reflects price changes, not total return
Last Month's Economic News
- America’s labor market unexpectedly rebounded in May, signaling the economy is picking up faster than thought from the depths of damage from the coronavirus pandemic. Nonfarm payrolls rose by 2.5 million after a 20.7 million tumble the prior month that was the largest in records back to 1939. The jobless rate fell to 13.3% from 14.7%. Economists had called for a decline of 7.5 million in payrolls and a jump in the unemployment rate to 19%. One caveat noted by the US Labor Department: the unemployment rate “would have been about 3 percentage points higher than reported” if data were reported correctly, according to the agency’s statement. That refers to workers who were recorded as employed but absent from work due to other reasons, rather than unemployed on temporary layoff.
- A closely watched measure of US manufacturing rose in May for the first time in four months, suggesting the industry is beginning to stabilize at a depressed level after a pandemic-driven plunge. The Institute for Supply Management said Monday that its gauge improved to 43.1 last month from an 11-year old low of 41.5 in April. The purchasing managers’ group’s gauges of production and factory employment edged up from multi-decade lows, while an index of orders rose after the largest single-month slump since 1951.
- US service providers started to emerge in May from a pandemic-induced tailspin as nationwide lockdowns on business and social interaction began to lift. The Institute for Supply Management said Wednesday that its non-manufacturing index rose 3.6 points to 45.4. While the monthly increase was the largest in more than two years, the gauge remained below the 50 mark that shows most service-related industries continued to contract. The purchasing managers’ group’s gauge of business activity, which parallels the ISM’s factory production index, jumped 15 points, the most in records dating back to 1997, to a still tepid 41. Along with an improvement in new orders, the figures are a welcome sign that the economy is stabilizing and will gradually recover from a deep recession. The report, however, also showed the labor market remains severely disrupted by the pandemic. The ISM measure of employment at services only rose 1.8 points from the worst reading on record in April.
- The record-long US expansion ended in February, according to the academic panel that serves as the arbiter of America’s business cycles, putting an official date on the start of the coronavirus-induced recession. “The committee has determined that a peak in monthly economic activity occurred in the US economy in February 2020”, the National Bureau of Economic Research’s Business Cycle Dating Committee said in a web statement. The NBER said the past expansion lasted 128 months, the longest in the history of US business cycles dating back to 1854. Its statement hinted that the downturn could be shorter than usual, with signs of recovery already evident, including an unexpected gain in jobs last month. If that continues, the recession could be dated to last only a few months.
- US consumer prices declined in May for a third straight month as the coronavirus-induced recession continued to depress demand. The consumer price index fell 0.1% from the prior month after a 0.8% drop in April that was the biggest since 2008. The gauge increased 0.1% from a year earlier following a 0.3% gain in the year through April. The core CPI, which excludes volatile food and fuel costs, also fell 0.1% from the prior month after a 0.4% decrease in April. Consumer inflation by that measure rose 1.2% from the prior year, the smallest advance since 2011, following 1.4% in April.
- US consumer sentiment climbed in early June by the most since 2016 as more states began to reopen their economies and employers restored jobs. The University of Michigan’s preliminary sentiment index increased 6.6 points to 78.9. The median projection in the Bloomberg survey of economists called for a gain to 75. Even with the improvement, the gauge remains well below pre-pandemic levels. The increase in sentiment highlights optimism that the reopening of the US economy will restore jobs and help spur the spending needed to dig out of a deep recession. Still, two-thirds of respondents anticipated unfavorable economic conditions in the year ahead because of concerns about a resurgence in the coronavirus as well as lingering weakness in the job market.
- US retail sales jumped in May by the most on record and double forecasts, regaining more ground than expected after unprecedented drops the prior two months as states allowed more merchants to reopen. Sales soared 17.7% from the prior month, the most in data going back to 1992, following a revised 14.7% slump in April. The median forecast in a Bloomberg survey of economists called for an 8.4% gain in May. The figures suggest that the economy is rebounding faster than anticipated after entering in February what’s likely to be the steepest downturn since the Great Depression. All categories increased in May, including a 44.1% surge in sales of motor vehicles and a 29.1% jump in restaurant receipts. Together, those categories account for more than half the overall gain in sales. Even with the improvement, the value of all retail sales remained 6.1% below last year’s level.
- US industrial production rebounded by less than forecast in May after a record slump a month earlier, indicating a gradual recovery for manufacturing as coronavirus-related shutdowns continued to restrain demand. Output at factories, mines and utilities increased 1.4% from the prior months after a revised 12.5% plunge in April that was the largest in records back to 1919. The median projection in a Bloomberg survey of economists called for a gain of 3%. Factory production rose 3.8% in May, compared with the median estimate for a 5% advance.
- US orders for durable goods jumped in May by the most in nearly six years as nationwide re-openings rekindled demand for a broad range of merchandise and equipment. Booking for durable goods, or goods meant to last at least three years, surged 15.8%, the most since July 2014, after a revised 18.1% decline in April. That compared with the median estimate in a Bloomberg survey of economists for a 10.5% increase. Core capital goods orders, a category that excludes aircraft and military hardware, increased 2.3%, more than twice the median projection.
- US consumer spending surged by a record in May, while remaining below pre-pandemic levels, as Americans spent relief payments and ventured out of their homes to newly reopened stores and restaurants. Household outlays rose 8.2% from the prior month, the sharpest increase in more than six decades worth of data, after falling by the most on record in April. Incomes declined 4.2%, just short of a record decrease, after posting the largest ever increase in April that was driven mostly by household relief payments, or the $1,200 refundable tax credits distributed to Americans. The report said relief payments continued in May but at a lower level than in April, while unemployment insurance payments surged, helped by the federal government’s extra $600 in weekly benefits. The personal savings rate, which surged to a record 32.2% in April as a result of the rise in government social benefits, fell to 23.2%, still almost triple February’s 8.4%.
- The International Monetary Fund downgraded its outlook for the coronavirus-ravaged world economy, projecting a significantly deeper recession and slower recovery than it anticipated just two months ago. The fund said it now expected global gross domestic product to shrink 4.9% this year, more than the 3% predicted in April. For 2021, the fund forecast growth of 5.4%, down from 5.8%. Announced fiscal measures amounting to about $11 trillion globally, up from $8 trillion estimated in April, have helped cushion the blow to workers and businesses. Swift and innovative interventions by central banks have limited the rise in borrowing costs, and portfolio flows into emerging markets have recovered from record withdrawals.
While the stock market has pushed forward, indicators do suggest the economy is slowly on the upswing. As states ease restrictions and businesses reopen, the economy should begin the slow process of recovery. However, increases in the number of reported virus cases may prompt the imposition of restrictions at least in some states, which could impact economic growth.
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