Have We Turned the Corner?

A little over a year ago, I wrote a blog entitled, “Sell in May and Go Away? No Way!”. It had to do with the old stock market adage that came into being due to the fact that the period from May through October is notorious for being the seasonally weak six months of the year for the stock market. From the looks of things, 2020 has not gotten that message.

U.S. Stocks Continue to Climb Higher

On the heels of a blow out jobs report on Friday morning - easily beating all expectations - the S&P 500 closed at 3,193.93 on Friday afternoon. Since the beginning of May, the S&P 500 has climbed almost 282 points or 9.67%. It’s a good thing that we didn’t follow that old stock market adage.

U.S. stocks (as measured by the S&P 500) are up 45.7% from the March 23 bottom! As of today, they are 5.9% off of their February 19 all-time.

The Big Surprise

It appears as if the U.S. economy is healing faster than just about anyone expected. The stock market was certainly optimistic - even before today’s jobs report. The Labor Department reported that employers added an astonishing 2.5 million jobs in May. This number easily beat the consensus estimates for a loss of 7.5 million jobs! The unemployment rate unexpectedly dropped to 13.3%. This is still high, but well below the 19.0% being forecasted by economists.

The largest employment gains were seen in food services (1,370,000), leisure and hospitality (1,200,000), construction (464,000), retail (368,000) and manufacturing (225,000). These employment gains are the largest ever recorded in a single month. Although this is tempered by the fact that they came immediately after April’s numbers which were the worst monthly numbers ever recorded.

Despite today’s encouraging job numbers, it is reasonable to expect the unemployment rate to remain at unusually high levels for the next few months. That being said, the U.S. economy certainly appears to have turned a corner and appears to be recovering more quickly than was originally expected.

The Wall Street/Main Street Disconnect

Until today, it seemed as if everyone in the financial press was enamored by the fact that the stock market continued to march higher despite all of the terrible economic news. It is important to remember that the stock market looks forward. It is not solely reflecting current events. Investors do not simply look at today’s data, which in many cases is backward-looking. Instead, they are forward-looking as they attempt to price in economic activity, the level of interest rates, corporate profits, and more, over the next 6-12 months. I believe that a combination of factors has fueled the market rally since late March.

The response by the Federal Reserve has far outpaced its 2008 response, which has lent a tremendous amount of support to stocks. The same can be said of government fiscal stimulus.

Investors are also keeping close tabs on state by state re-openings, which will reemploy furloughed workers, help stabilize the economy, and set the stage for a possible economic rebound later in the summer. The talk of vaccines has also helped.

Collective Wisdom

Any given level of a major stock market index represents the collective wisdom of tens of millions of stock market investors. It is not simply an opinion, but an opinion with money behind it. When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy. Tragically, the data did not disappoint.

Has this rally been too much, too quickly? Even in the best of times, economic forecasting can be a fool’s errand. That is why I ignore forecasts. Today, the outlook is clouded with a much greater degree of uncertainty.

1. Will the virus lay down over the summer? 
2. How will reopenings proceed? 
3. How quickly can a readily available vaccine and treatment be developed? 
4. What might happen to COVID-19 next fall and winter? 
5. How quickly will consumers venture back in public and resume prior spending patterns?

These are difficult questions and they will take time to answer. But investors seem to be anticipating that an economic bottom is here.

I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis, not to mention recent civil unrest. It’s a combination none of us have ever faced. I have tried to keep you informed through these types of communications. But if you have questions or concerns, let’s have a conversation.

During uncertain times like these, it is important to remember that the S&P 500 Index has never failed to fully recoup the losses sustained in any sell-off, pullback, correction, or bear market. Ever. The U.S. stock market is proving to be highly resilient once again. I recently read about an interesting theory behind this resiliency. The 33.9% price plunge in the S&P 500 Index from February 19 through March 23 combined with the forced shutdown of large portions of the U.S. economy has attracted some new blood to the stock market. Three of the four largest online brokerages in the U.S. reported that they hit a record number of account sign-ups in either March or April, according to the Financial Times. The three firms added a combined 780,000 customers. It seems that the combination of the stay-at-home mandate and very few live sporting events for bettors to wager on has motivated some people to trade stocks. Hmmm.

Again, if you have any questions or would like to discuss any matters further, please feel free to reach out to me.