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June 2020 Market & Economic Update

June 2020 Market & Economic Update

U.S. stocks continued climbing higher in May disregarding all the bad news out there. The country is dealing with protests and unprecedented job losses, even as it tries to recover from the coronavirus. None of it seems to matter to the market as hopes of reopening the economy seem to outweigh all the negative headlines. In May, the Dow Jones & S&P 500 increased by 7.17% & 7.61% respectively. (Source CNBC)

 

As of 5/31/2020 Returns

 

US (S&P 500, Symbol: SPY)                              Down 5.45%

The Dow Jones (Symbol: DIA)                          Down 10.81%

The NASDAQ Composite                                Up 5.76 %

Europe (Euro Stoxx 50, Symbol: FEZ)              Down 18.22%

Emerging Markets (Symbol: EEM)                  Down 15.91%

Bonds (Total Bond Index, Symbol: BND)          p 4.84%

Gold (Symbol: GLD)                                          Up 14%

 

(source: cnbc.com)

What a rally it has been! Since the March 23rd low to June 3rd, the S&P 500 had its best 50-day rally in 75+ years. Its up 39.3% in that period (source: bespoke.com)  According to research by Bespoke, historically, sharp moves higher like this have nearly always been met with further buying over the next one, three and six months.

All of this comes with awful employment data: The US Labor department said today that unemployment claims showed 1.87 million Americans filed for unemployment benefits for the first-time last week, taking the total number of new claims to nearly 43 million since the lockdowns began in mid-March.  Initial claims slowed for the night consecutive week ended May 30.  That marked the first-time claims fell below 2 million in the eleven weeks since the start of the pandemic. (source: ft.com)

And concerns remain that largely peaceful protests against racism and police brutality following the death of George Floyd which are accompanied by sporadic looting and vandalism of businesses could delay reopening and slow the recovery.

So, are investors being wise or foolish to disregard all the bad news? The answer is YES

The Covid-19 economic shutdown hit a few sectors harder than others. Some businesses like Amazon, Home Depot, Walmart, Microsoft, and Adobe, flourished from the economic shutdown while others like airlines, hotels, restaurants and apparel retailers suffered.  As the country slowly reopens things are looking better for the latter group. Airline, hotel, department stores and casual retail stocks have rallied between 20% and 30% over the past two weeks, and they have given a boost to the entire market.

You cannot fault the market for focusing on incremental improvement. Wall Street wants to know where things are going and not where things have been. Right now, it is betting there will be no significant “second wave” of coronavirus infections or major economic impact from the unrest.

Another factor that is driving up the stock market is Federal Reserves continued support and commitment to provide liquidity in the markets. While the path of the virus is unknown -- one thing that seems certain is perpetual Fed support.  Make no mistake: as big a role as reopening has played in the rebound, Federal Reserve largess, alongside trillions of dollars in payouts from Washington, has been as a crucial element lifting stocks. While the path of the virus is unknown -- Will there be a second wave? Can a vaccine succeed? -- one thing that seems certain is perpetual Fed support.

Policy makers are “not going to be in any hurry to withdraw these measures,” said Chairman Jerome Powell late last month. That’s comforted equity investors, tamping down concerns over a credit crunch or solvency risk.

Still, every tick higher adds to the risk that the market is pricing in too much good news.

Unemployment is still the highest since the Great Depression! But unlike the 1930s though, we have 43 million Americans collecting unemployment and for those that were making $40k/ year or less prior to the job losses, they are now collecting more than they used to earn. These benefits expire at the end of July and with the coronavirus still with us it will be a challenge to see how all the unemployed are rehired in the months after the expiry of the benefits. The US will likely still have an unemployment rate of over 10% by year end thus consumer spending should still be lower than last year.

In the meantime, should you have any questions please let us know so we can schedule a time to speak.

 

Sincerely,

 

Neal W. Mufti, CFP®                                                        M. Mike Iftaiha, CFP®

Managing Director                                                            Financial Advisor

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S&P 500: The S&P 500 is an unmanaged index comprised of 500 widely-held securities
considered to be representative of the stock market in general.
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