This marked the third consecutive week of a +3% or greater advance for the S&P 500, leaving many scratching their heads about the disconnect between the markets and the economy. Furthermore, over the last few trading days we’ve seen the economic sensitive sectors such as small-cap and value stocks take the lead from growth stocks. Even airlines have taken off, so to speak, and interest rates have hooked higher on better growth expectations. To put the last few weeks into perspective, Bespoke Investment Group noted on Friday that the last time the S&P 500 was up at least +3% for three straight weeks was in September 1982. My first reaction was there’s no way that is true. But apparently even during the go-go late 90s we didn’t see such moves. Wow!!
Certainly, the economic news this week had something for everyone.
1. The closely watched ISM surveys managed to bounce, but still remain mired in deep recession mode (any number under 50 indicates contraction).
2. After the ISM numbers were released, projections for 2nd quarter growth took another tumble. As you can see below, the widely followed Atlanta Fed projection is now tracking at close to -53% on an annualized basis. In fairness, the number for the third quarter is expected to be between +15% to +20% (again, annualized), but still.
3. Almost 1.9m Americans filed for unemployment benefits for the first time last week, taking the total number of new claims to almost 43m since lockdowns began in mid-March. Continuing claims, which counts the number of people actually receiving benefits, edged up to 21.5m for the week ending May 23. This means roughly 15% of the labor force is out of work.
All this set the stage for Friday’s payrolls report. We all knew it was going to be bad. But how bad?
4. Well, actually it was pretty good. As a matter of fact, it was a true shocker!! The government reported job gains of +2.5mm (about 10 million better than consensus forecasts), and the unemployment rate decreased to 13.3% (consensus thought it would be close to 20%).
What??? This wasn’t meant to happen.
What appears to be happening is some of those workers who were temporarily laid off are returning to work. The number of workers in this temporary idle category declined in May from 18.1m to 15.3m. For example, bars and restaurants recalled 1.4m workers following a loss of more than 6m positions in the last two months. Construction was up 464K, retail 368K and manufacturing 225K.
But regardless of the details, this report has to be the biggest forecasting miss in a long, long time. No one saw this report coming, other than maybe the market. After all, stocks have seemingly been defying gravity the last couple weeks as we noted above.
This report also underscores the idea that none of us have any experience with what we are going through. To have strongly held conceptions of what the future holds in today’s environment is challenging at best and reinforces the idea that we don’t want to be making “all or nothing” bets with our portfolios today. All cash, all bonds, all gold……none of that makes sense in the any environment, but particularly the current one.
Next week we get the Fed meeting on Tuesday and Wednesday. They shouldn’t surprise us with anything, but then again, never say never!!
Charts We Found Interesting
1. There is the old adage of “don’t fight the fed.” For time being at least, the markets are embracing expanding liquidity with both arms.
2. Maybe I’m missing it, but it’s surprising this isn’t getting more attention from policy makers, regulators, etc.
3. The contrast between case growth in Italy and the U.S. (excluding NYS, NJ, CT, MA) is interesting, and a little disturbing.
4. For all the talk about a second wave, it doesn’t seem like the first wave is over in Texas and California.
5. Testing is now running at slightly under 500K per day with the percent positive bouncing around 5%.
6. With the markets in rally mode, corporate America isn’t wasting any time raising money. Through the end of May investment grade companies had raised $1tn in the fixed income markets, a record. Unlike prior years they aren’t raising the money to fund buybacks or some other type of financial engineering. They were borrowing to ensure they could weather a once-in-a-century storm.
7. Continuing the theme of “it’s tough to make predictions, especially about the future,” Warren Buffett is probably a little peeved right now. Over the last few months airline stocks were pummeled, not only by the coronavirus crisis, but also when Buffett disclosed during his annual meeting on May 2nd that he’d dumped his large stakes in Delta, American, United, and Southwest. He’d probably take that trade back right now. It just goes to show how tough this market is, even for one of the best investors out there.
Have a good weekend.
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