The 3% rally in U.S. equities last week was bested by a near 5% jump this week as investors received some well-needed good news on the jobs front. Both Small-Cap and Value stocks outperformed, up 8% and 7%, respectively. As we discussed last week (see A Good Deal), the outperformance of Small-Cap and Value stocks is typically expected in the early stages of an economic recovery, and we appear to be bearing witness to that phenomenon. With that said, there was nothing typical about the February and March declines, so there was no reason to expect recovery would follow previous trends.
The jobs number released on Friday just goes to show how uncertain the path to normality will be on this COVID-19 journey. Experts were predicting the jobs report would show eight million jobs lost in May and an unemployment rate of over 19%. Instead, as we discuss below, the report showed job creation in May, and unemployment improved. This report is notoriously volatile, so expect revisions to the numbers next month. But it is hard to imagine the changes would be large enough to reverse this epic, positive surprise.
While this week’s uncertainty was to the upside, investors should not be complacent. The economy is still being propped up by massive fiscal and monetary stimulus, and there is no evidence that it is ready to stand on its own two feet. Proper portfolio diversification and thoughtful rebalancing is the best defense against whatever challenges investors face.
Reported unemployment of 13.3% may not sound great, but compared to expectations of over 19%, it feels pretty good to us, and the market agreed.
Headlines This Week
Back on the Job
The May Jobs report surprised the markets, showing 2.51 million jobs were added to payrolls.
- Employment increased in nearly every sector of the economy.
- Leisure and Hospitality had a notable increase of 1.24 million jobs.
- Unemployment of 13.3% is still above the 10% at the peak of the last recession, but expectations were for 19-20%.
- The report also showed wages increasing in May by 6.7% year-over-year and workweek hours increasing by ½ an hour to 34.7 hours last month.
- Still needing significant improvement is the 21.2% underemployed in the U-6 reading. The U-6 reading includes discouraged workers as well as those holding jobs part-time for economic reasons.
- The European Central Bank is adding roughly $680 billion to its bond-buying operation, bringing the total to $1.5 trillion.
- The notoriously financially conservative Germany also announced a $150 billion stimulus, which includes a temporary slashing of the value-added tax.
- The U.S. Senate has yet to advance another round of fiscal stimulus, but early indications are for $1 trillion and not $3.5 trillion the House of Representatives approved.
- According to Cornerstone Macro, total global stimulus, both fiscal and monetary, is now $24.37 trillion, which is over 28% of global Gross Domestic Product.
- The 10-year U.S. Treasury crossed the 0.90% yield level this week. While not very exciting, this is a large jump from a yield of 0.65% last week.
- The yield difference between the 5-year U.S. Treasury and the 30-year U.S. Treasury hit 1.22%. The last time this spread was this wide was in February of 2017.
The Week Ahead
Chairman Powell and the rest of the Federal Reserve Board will wrap up its two-day meeting on Wednesday with a press conference. The Central Bank will have to answer four major questions:
- How fast will the economic recovery be?
- What will the Federal Reserve do next to aid the recovery?
- Are the emergency tools the Fed is using working?
- What are the forecasts and projections going forward?
An Organization of Petroleum Exporting Countries (OPEC) meeting this weekend lost its luster as early news flow indicates the group agreed to extend output cuts, and several holdout countries have fallen in-line.
- Oil prices have run up over 14% already this past week just on re-opening of the economy.
The European Union (EU) will report the final First Quarter Gross Domestic Product (GDP), and so will Japan.
- No revision is expected to the 3.2% decline previously reported by the EU, while a slight improvement from the previous reading is expected in Japan.
Back at Home
The Federal Reserve meeting will take center stage, but don’t sleep on the weekly jobs numbers.
- Weekly declines in unemployment claims are vital to keeping up the momentum from the May Non-Farm Payroll report.
- America returning to work should also reflect in a better reading of consumer confidence in Friday’s University of Michigan Consumer Sentiment Index.
- Analysts will be watching the May inflation readings in the Consumer Price Index and Producer Price Index looking for signs that the unprecedented fiscal and monetary stimulus are driving prices higher.
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