Investors Appear Unfazed by the Surge in Coronavirus Cases – Are They Becoming Complacent?

After their strongest quarter since 1998 in the second quarter, U.S. stocks have picked up right where they left off to start the third. After climbing 1.8 percent last week, the S&P® 500 index is higher by 2.7 percent since June 30, with positive returns in five of the seven trading days. After reaching a recovery high of 3232 on June 8, the index stumbled badly on June 11, falling 7.1 percent that day alone. But the renewed strength of the past two weeks has erased most of that damage, and the index closed on Friday at 3185, just 1.5 percent below that recovery high. And futures are pointing to a higher opening to start the week. 

Markets Rebounded on Encouraging Economic Reports. Will the Upward Trend Continue?


U.S. equities rose each day during the holiday shortened week. The S&P 500® Index added 4.0 percent, more than erasing the prior week’s decline. It was enough to pull the month of June into positive territory with a gain of 1.8 percent and deliver the strongest quarterly return since 1998 of 20 percent. In June it was the tech sector that led the way. Its 6.7 percent return was almost 4.0 percent higher than the next best performer, consumer discretionary. And almost half of the groups in the index declined, led by utilities, healthcare, and energy. Last week was a different story. All eleven sectors rose, led by real estate, materials, and communication services.

Updates on Trade, the Virus Impact on the Economy and A Fourth Stimulus Bill

In January, the United States and China signed the Phase One trade agreement. China committed to increasing its purchase of American goods and services by $200 billion above 2017 levels over two years, enhance intellectual property and forced technology transfer protections, and liberalized market access for U.S. companies. The agreement kept in place most of the $360 billion of U.S. tariffs on Chinese imports. The deal was hailed as signaling a new chapter in the two-year trade war with China, while critics of the deal said it didn’t go far enough, especially in addressing Chinese industrial subsidies. 

What Can Investors Expect as the Economy Begins to Recover?

Last week’s data releases offered further evidence that the U.S. economy is beginning to recover. Retail sales in May rose far more than was expected, as consumers were increasingly free to spend amid the easing of virus-related lockdowns. Particularly strong were vehicle sales and restaurant receipts. This rise comes on the heels of the far better than expected May jobs report. And while housing starts and building permits in May fell short of expectations, they did rise, and the National Association of Homebuilders index saw a record increase in June. And the index of leading economic indicators rose for the first time in four months, and just the third time in the past ten. 

Checking In On COVID-19 Trends

Over recent days, the stock market has struggled to square the rise in coronavirus cases with its more robust outlook of economic activity in the second half of the year. 

Perhaps the Latest Rally Was a Bit Excessive

The three-week rally in cyclical stocks came to a sudden stop last week. The S&P 500® index had climbed 12 percent between May 15 and June 5. Leading the way were industrials, financials and energy, each with gains in excess of 25 percent, in what was a dramatic shift in leadership for sectors that had been largely laggards throughout much of the recovery. Whether driven by in part by speculative fever, monetary and fiscal largess, reawakening economies, a weaker dollar, or something else entirely, it all came to screeching halt last week. These same three sectors led stocks on the way down last week, bringing an end to the S&P 500’s three-week winning streak. Small stocks, which had outperformed large with a gain of 20 percent over the previous three weeks, also underperformed with a decline of 8 percent. Bond yields fell, credit spreads widened, and volatility rose, as the VIX index climbed back up to 36 after three straight weeks of decline had taken it from 32 to 25. And after rising by more than $10 a barrel in three weeks, WTI crude oil fell by more than $3 last week.