Market Commentary for the week ending June 6th, 2020
- The May employment report is another indication the post-pandemic economic recovery is underway
- Stocks worldwide surge continuing an unprecedented rally from the March lows
- The NASDAQ 100 index closes at a record high and his up more than 12% for the year
The Biggest Rally Since the 1930's
At the close of the week the S&P 500, the popular measure of U.S. stock performance, has climbed +42.8% in just 50 trading days since its March 23rd lows! As the accompanying table shows, a rally of this magnitude in such a short period of time has not happened since the depression and bear market of the ‘30s.
Source: www.YahooFinance.com, Patton analysis
Big rallies are relatively common coming off bear market lows like we’ve seen. The rallies in 1932, 1975, and 2009 were the same, off bear market lows, although in each of those instances prices remained well below all-time highs while today the S&P 500 is less than 6% from hitting record levels.
The logical question is “what’s next?” As always, it’s impossible to know and each experience always feels different but as the table shows the strength tends to continue with prices more often than not higher a year later. Of course, this would be expected as these rallies, excluding the period of the Great Depression, have all marked the start of new and long-term bull market.
Powered by the Fed!
The market’s massive rally driving prices back near all-time record highs has many investors wondering if the market has become disconnected from the economy and reality. It’s an excellent question but one I think we as investors are always asking in various forms (“Are stocks cheap?”, “Are stocks expensive?”, etc.)
Regardless of what is going on in the economy or otherwise, we must remember what drives prices higher…simply more buyers than sellers! The catalysts creating such an environment are probably infinite but two of the biggest are actions taken by the Federal Reserve and by the federal government.
Here’s a look at some of the most aggressive steps taken by the Federal Reserve during the past 3 months:
- Lowered interest rates on March 3rd and March 15th to a target range of 0.00% – 0.25%. This initially scared investors with stocks plummeting. In addition to lowering rates, they provided guidance that rates would remain low for the foreseeable future.
- New Quantitative Easing, or QE, announced on March 15th and expanded on March 23rd. QE is the Fed’s purchasing of securities on the open market, in other words becoming a massive buyer, including U.S. Treasuries (government debt), mortgage-backed securities. The March 23rd expansion ramped up their purchasing to an unprecedented pace of $125 billion per day!
- Lending money to securities firms providing credit to households and businesses helping credit markets run smoothly and avoiding a 2008 environment.
- Backstopping money market mutual funds as an additional measure to provide credit to households and businesses. This program is intended to avoid the risk that money market funds “break the buck” or fall in price.
The above actions by the Federal Reserve and more are financial stimulus that fuel investor confidence as well as brings the biggest “buyer”, the Fed itself, to the markets pushing prices higher.
In addition to the support of the Federal Reserve, congress has authorized approximately $3 trillion of money for various purposes in four separate bills. This money is intended to support business of all sizes, individuals through one-time cash payments and increased unemployment benefits, state and local governments, and more. This response has been unprecedented in both the speed at which it was done and the amount of money committed.
European markets are getting similar support with the European Central Bank announcing this week that it is committed to purchasing approximately $1.5 trillion of bonds making this central bank a massive buyer in the markets.
There’s a saying…”don’t fight the Fed”. This seems to be as true today as ever!
Interesting Numbers of the Week
The Federal Reserve has increased its balance sheet by nearly $3 trillion in just over 3 months since the start of the pandemic. This is the result of its aggressive purchasing of U.S. Treasuries, mortgage-backed securities, and more to help stabilize and prop up financial markets and the economy.
Prior to the bailouts during the 2008 Financial Crisis, the Fed’s balance sheet was less than $1 trillion. It expanded through 2015 to hit $4.5 trillion then declined through 2019. Immediately prior to the pandemic it was just below $4.2 trillion and has since grown to $7.2 trillion.
The difference between economists’ forecast and the actual number of jobs added back to the economy in May was 9.75 million. Economists’ expected another 7.25 million jobs to be lost during the month but instead 2.5 million were added. This is a reminder to be careful about relying on any predictions including those of so-called experts!
This Week’s Performance Highlights
As discussed above, the markets this week extended its nearly unprecedented rally. The stocks beaten up the most during the bear market continue to be those most favored by investors during this rally. The following table shows the 10 best performing stocks in the S&P 500 this week. As you can see the gains for the week are staggering and all remain sharply lower for the year even after this surge higher.
- Large U.S. stocks posted big gains but did lag behind others. As measured by the S&P 500, large stocks were higher by +4.9% and are now lower year-to-date by only a fraction of a percent. The Dow Jones Industrials faired meaningfully better gaining +6.8% while the NASDAQ Composite lagged behind higher still by +3.4% as large tech stocks underperform.
- The NASDAQ 100, a stock index dominated by many of the largest technology companies, hit an all-time high this week. Although this index has lagged behind since the markets began really surging higher in mid-May, as the accompany graph shows it declined far less than others during the pandemic and is now higher by more than 12% for the year.
- Small U.S. stocks jumped +8.1% for the week, another sign of investors desire for the poorest performing stocks at the depths of the market lows, as illustrated in the above graph, but still remain lower by -9.0% for the year.
- Every sector was higher for the week with energy, industrials, and financials all up double-digits while healthcare lagged behind gaining only a fraction of a percent.
- International stocks were among the best performers this week helped by the European Central Bank ramping up its stimulus efforts committing to purchase approximately $1.5 trillion of bonds. Developed country markets rallied for the week with Eurozone stocks up +10.1%, Australia’s market surged +12.5%, while Japan lagged behind rising just +3.0%.
- International emerging markets turned in the best performance of all up +8.5% with Brazil and Hong Kong’s markets among the best up +15.9% and 11.3% respectively.
- Real estate stocks posted their third consecutive big weekly gain, this week’s being the best by far gaining +12.2% on the heels of a +5.0% and +7.0% gains the prior weeks. From the market lows these stocks are up +46.5%!
- Commodities prices continued to recover up +5.9% helped by the price of oil moving further higher. Gold was the biggest loser for the week falling -3.0% as investor confidence regarding riskier investments improves.
- Bond prices fell -0.5%, resulting in higher yields, as reports continue to suggest the economy has bottomed and started its recovery.
The May employment report shocked investors and economists showing 2.5 million jobs added for the month. Half of the jobs added were in the leisure and hospitality sector as restaurants and bars as well as travel begin to reopen. This report was in stark contrast to economists’ forecast of another 7.5 million job losses as noted above. The unemployment rate fell from 14.7% to 13.3% and hopefully now will not reach the 19% rate economists had expected.
Although the report is a great sign for the economy and the people able to return to work, there are still about 20 million fewer people working today than pre-pandemic with the unemployment rate at depression-era levels. The question now is whether or this strength will continue or is it a one-time blip immediately following the reopening of the economy. Optimists point to the fact that this month’s reporting period did not fully capture the reopening and we should see more strong numbers in the future.
A more timely read on employment is the weekly jobless claims report showing new claims of 1.88 million. This continues the downward trends since peaking above 6 million two months ago. Continuing claims, the total number of people receiving benefits, did inch higher this week to 19.3 million but is off the peak of 23 million a couple of weeks earlier.
The ISM manufacturing index, a measure of manufacturing activity, came off its prior month low of 41.5% to 43.1% in May. Although the trend is improving, any number below 50% indicates contraction with expectations generally that it will take at least a couple of years to fully return to normal levels. Separately factor orders were reported down -13% but this government report is a bit dated for the month of April.
Upcoming Economic Reports
- Consumer Price Index
- Producer Price Index
- Fed Chaiman Jerome Powell Press Conference
- Initial Jobless Claims
- Consumer Sentiment Index