Daily Capital

Weekly Market Digest: Is the Stock Market Recovery Warranted?

Global stocks continued their impressive rebound. Despite unemployment hitting record levels dating back to 1948, the figures came in better than expected and the rate of new jobless claims appears to be slowing. This is fueling optimism that the economic fallout is nearing a low point. Bonds were relatively flat, with almost every other asset category positive for the week, including gold, real estate and commodities.

Weekly Returns

S&P 500: 2,930 (+3.5%)
FTSE All-World ex-US (VEU): (+3.1%)
US 10 Year Treasury Yield: 0.69% (+0.05%)
Gold: $1,706 (+0.4%)
EUR/USD: $1.084 (-1.3%)

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Major Events

  • Monday – Tensions once again escalated between the U.S. and China, as the U.S. increased its assertions that the coronavirus originated in a lab in China.
  • Monday – Florida and Italy both began reopening their economies.
  • Tuesday – Pfizer started trials of its experimental vaccines on the first U.S. patients.
  • Wednesday – Private payrolls dropped by more than 20 million in April, according to a report from ADP.
  • Wednesday – The U.S. Treasury announced it will increase the auction sizes of its longer dated bonds and issue a new 20-year bond to help fund coronavirus related spending.
  • Thursday – Neiman Marcus filed for bankruptcy, marking another large retailer that succumbed to the coronavirus lockdown.
  • Thursday – An additional 3.2 million people filed for unemployment last week, bringing the total to more than 33 million in the last seven weeks.
  • Thursday – Reports surfaced that U.S. and Chinese negotiators are planning to speak in an apparent effort to deescalate recent tensions.
  • Friday – The April unemployment rate increased to 14.7%, the highest level since 1948 when data was first tracked.

Our Take

The market continued its climb, with the S&P 500 up more than 30% from its March 23rd low. The tech-heavy NASDAQ is now in positive territory for the year. That is quite a spectacular recovery—one that is more akin to a V-shaped correction than a typical bear market recession and rebound. Investors seem to be pricing in a relatively fast economic recovery, one that potentially returns to some form of normalcy later this year. But is that warranted?

Tough to say. As we pointed out in last week’s digest, the market is related to the economy, but is not the same thing as the economy. Moreover, it is forward looking. So it’s possible it is directionally accurate, and our economy makes a stunning recovery in the not-so-distant future. States are in fact beginning to reopen their economies, and jobless claims appear to be slowing.

But there is still a sizeable amount of uncertainty in the world. No one knows if or when a second wave of infections could strike, or if the virus resurfaces again in the fall. And even if economies begin to open, people will not return to their normal lives until they feel safe to do so. It could be some time before restaurants and retailers are buzzing again, and this is going to weigh on overall growth. Moreover, many of those currently out of work are earning more in unemployment benefits than their previous jobs, reducing the incentive to return to the workforce.

Point being, there are still a number of downside risks. So as the year progresses and we gain more clarity on the full extent of economic damage, we would not be surprised to see additional bouts of volatility.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Brendan Erne, CFA
Brendan Erne serves as the Director of Portfolio Implementation at Personal Capital. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.
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