Contributed by Doug Walters
After watching The Rise of Skywalker on May the Fourth, my family took the rest of the week to finish a Harry Potter marathon we have been chipping away at during social distancing. One constant throughout the movies is images of the official newspaper of the wizarding world, The Daily Prophet. Often, the headlines were sensational and at odds with what was happening on the ground. Here in the Muggle world of investing, we also see a difference between headlines and reality.
Fear not; this has nothing to do with fake news. Instead, we are noting the dichotomy between horrendous economic headlines and a stock market that continues to recover. U.S. stocks rose over 3% in a week where unemployment hit 14.7%, the highest since the Great Depression. How can the stock market go up in this environment?
For stocks, expectations for corporate profits next year and beyond is far more critical than the tragic employment numbers of last month. They are inter-related to some degree, but a rebounding stock market indicates there is optimism about the ability for corporations to return to profitability in the relative near-term. Low bond yields are also likely playing a role in giving investors more incentive to own stocks.
The future cannot be predicted, and therefore we do not know if stocks are right to reflect optimism. But we do know that we are prepared for it with a philosophy and process that are driven by science and facts, not emotion and speculation.
U.S. Unemployment Rate
Source: U.S. Department of Labor
Headlines This Week
Bringing Home the Bacon
- U.S. employers shed 20.5 million jobs in April, sending the U.S. unemployment rate to 14.7 percent.
- Stocks still managed to rally on Friday as many investors expect unemployment-related worries to dissipate once the economy begins to reopen.
- The U.S. and China held discussions concerning the “phase one” trade deal, along with the economy and public health.
- While global equity markets saw this as a positive event, President Trump quickly cast some doubt surrounding further improvement in the trade relationship between the two countries.
Keeping it Real
- While long-term U.S. Treasury yields rose this week, they remain near an all-time low.
- Under current inflation estimates, the real return of short-term government bonds (accounting for inflation) is negative.
- Economists do not see the Federal Reserve using negative policy rates like their counterparts do in Europe and Japan. Instead, the Fed will most likely continue to expand Quantitative Easing and Credit Programs.
- Over 86% of the companies in the S&P 500 index have reported their first-quarter earnings.
- Thus far, S&P 500 earnings growth has declined approximately 13.6% from the previous year.
- The sectors that felt the most pain, not surprisingly, are Consumer Discretionary, Financials, Energy, Industrials, and Materials.
The Week Ahead
The European Union reports preliminarily Gross Domestic Product (GDP) for the 1st quarter. Analysts expect a 3.8% decline in GDP.
- Notable Data: Weekly Jobless Claims. Investors will continue to look for a meaningful deceleration in claims, especially as some parts of the country started to come out of quarantine.
- Notable Data: The April Consumer Sentiment Index from the University of Michigan.
- Notable Data: Consumer Price Index (CPI) and Producer Price Index (PPI). With food prices climbing and gas prices plummeting last month, the overall picture is murky, and some clarity will be helpful.
Look Who’s Talking
Federal Reserve Chairman Jerome Powell will talk about the economic outlook on Wednesday. Investors will be closely watching for insight into where the Central Bank goes from here.
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