05/11/2020
Stocks shrugged off another round of abysmal economic data to post their best returns in the past four weeks. The S&P 500® index climbed 3.5 percent, with the best daily rise occurring on Friday following the April jobs report. Despite the worst unemployment rate in the history of the record-keeping series dating back to 1948, at 14.7, it was slightly lower than expected due to a sharp decline in the participation rate and technical issues related to the classification of workers on temporary layoff due to the virus. Had those workers been properly considered unemployed, the rate would have been five percentage points higher, according to the Bureau of Labor Statistics. 

But as shocking as the reported loss of 20.5 million jobs was, it came as no surprise. That was last month’s news, and stock investors are in the business of looking ahead. And in doing so, they liked what they saw down the road, or at least what they hope to see, and that is an economy re-opening, a subdued pandemic with no serious second wave of infections, and expected progress on the medicinal front. Friday’s rally brought the S&P 500 2930, within 10 points, or just 0.3 percent of its recovery closing high of 2940 on April 29, and 31 percent higher from the low on March 23. 

Earnings Season Winds Down; Futures Price in the Possibility of Negative Rates 

At the sector level, energy was the best performer, both on Friday and for the week. But that is where the similarity ended. Whereas for the week, the next best-performing sectors were technology and communication services, on Friday it was industrials and materials. The XLE energy ETF has now risen in each of the past seven weeks and rallied by 65 percent from its March 23 low. 

First quarter earnings season is winding down, on track to deliver a year-over-year decline of 14 percent. Earnings are expected to decline by more than 40 percent in the second quarter, with full-year results now expected to decline by 20 percent. 
The short end of the Treasury curve was behaving quite differently than stocks. The two-year note yield fell to an all-time intraday low of 0.10 percent on Friday, before rebounding to close at 0.16 percent. At the same time, Fed funds futures were pricing in the possibility of negative rates. Longer rates rose, however, with the ten-year yield rising seven basis points to 0.68 percent, and the thirty-year bond rising 10 to 1.38 percent. High yield credit spreads narrowed for the second straight week, falling 18 basis points to 752. That is well above its January low of 338 basis points, but well down from its selloff wide of 1,087 in late March. 

Economies Re-open as the National Rate of Infections is Rising 

More states are re-opening their economies to varying degrees, as are other countries. But according to the Associated Press, in the U.S., if the New York metropolitan area is excluded, the national rate of infections is rising. Local flare-ups are not the same as breakouts, but there remains the lingering worry of second wave infections of which the healthcare community continues to warn. But those concerns are increasingly taking a back seat to the desire to return life to normal and get economies moving again. Social distancing metrics show a steady erosion of compliance discipline, reflecting that desire. 

This week’s economic calendar will offer a further look at April activity, but tell us little about what lies ahead. As with the jobs report, the numbers will be startling, but backward looking. Retail sales and industrial production are expected to show double-digit declines. Both headline and core CPI are expected to decline, as are consumer sentiment and small business optimism. New jobless claims are expected to continue their moderating trend but remain elevated at 2.5 million. Overseas, first quarter German and U.K. GDP will no doubt confirm the period’s economic decline, but only foreshadow the deterioration in the second quarter. And in China, April retail sales, industrial production and fixed investment are all expected to show modest improvement from March but remain weak overall. 

Important Disclosures:
Sources: Factset, Bloomberg, Economic News Release, U.S. Bureau of Labor Statistics, May 8, 2020.

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The Standard & Poor’s 500 Index (S&P 500® Index), an unmanaged index of common stocks, is frequently used as a general measure of market performance. The index reflects reinvestment of all distributions and changes in market prices but excludes brokerage commissions or other fees.

The S&P 500 Energy Select Sector Index measures the performance of energy stocks, as classified by the Global Industry Classification Standard (GICS). Every Select Sector stock is also a constituent of the S&P 500 Index. It is float-adjusted market capitalization weighted. 

The S&P 500 Telecommunication Services Index comprises those companies included in the S&P 500 that are classified as members of the Global Industry Classification Standard (GICS) telecommunication services sector. 

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