Global equity markets continued their impressive recovery last week as investors resumed a dominant risk-on environment, which implies a bias to favoring stocks over bonds. Through Thursday, it appeared that the upside may have been capped for the week, but that was certainly not the case as of Friday morning when we learned about the May labor market update. Businesses across the country added an impressive 2.5 million jobs in May, relative to the expectation of an additional 7.5 million in job losses, and the unemployment rate dropped to 13.3%. Economists’ estimates indicated that we should have expected an unemployment rate near 19%. Not only did the economy observe job gains last month, but the actual jobs created surpassed estimates by 10 million payrolls. Stated simply, the labor market report proved to completely blindside market participants within an environment that has been largely impossible to predict. Having said that, however, the events that transpired during the week, in addition to the historically impressive gains for stocks over the past two months, are not necessarily abnormal. We have discussed extensively since early March that we are living through an event-driven short-term economic contraction, which reflects events that have historically moved quickly, both to the downside and to the upside. Based on recent data, we believe an eventual announcement of a recession is inevitable at this point. But does that matter? We would argue no. The reason we experienced one of the fastest bear markets in U.S. history dealt with self-induced measures so that we may preserve human life (i.e. impact of COVID-19). This means we have a definitive understanding as to the ‘why’ things happened the way they did. This is not always the case with other economic contractions, and it gives market participants objective leverage in correctly understanding the situation. Additionally, as it relates specifically to the labor market, the self-induced closures were not meant to trigger systemic business failures. Everything was meant as temporary and the recent re-opening efforts by states have resulted in positive job gains beyond what was anticipated by now. We should also give credit to fiscal policy measures as it is likely that the Paycheck Protection Program (PPP) may have aided small business in maintaining, or growing, their workforce. One last point on the labor market report that deserves merit is the improvement in the manufacturing space. An impressive 225,000 manufacturing payrolls were added relative to the expectation for a 400,000 loss. We remain in favor of manufacturing upside when considering the sector’s dominant strength prior to the current self-induced economic slowdown.
Global equity markets posted impressive gains last week as the FTSE All World Equity index closed higher by 6% while the Standard & Poor’s (S&P) 500 gained nearly 5%. It is important to note that the S&P 500 has now posted its best 50-day rally in its history (through June 4th). The fact that such a rally occurred during the depths of the recent bear market, and well into bull market territory, is by far the most normal thing that could have happened. In fact, when tracking the top 30 best daily returns of the S&P 500 since 1995, a jaw-dropping 24 of them have occurred during periods of economic contractions and bear markets. What this means is that investors must aggressively fight their emotional stance to exit equity market participation during times of volatility. For those that can sell bonds, to buy stocks, the action may bode well for long-term success. As we look ahead, the possibility for renewed volatility within the current event-driven economic interruption is highly possible. The pace of recovery, however, in addition to unforeseen positive COVID-19 vaccine advances, are things that make it difficult to gauge. We believe that remaining appropriately invested and diversified may prove most beneficial.
Edison Byzyka, CFA – Chief Investment Officer
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.
All return data sourced from Bloomberg. All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.
Small Business Optimism sourced through NFIB. Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.
Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.
Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.
Indexes cannot be invested into directly.