For the week ending June 5th, the markets steamed ahead as optimism of an economic recovery fueled by a surprise in labor market data helped finish off the week with the second record gain in two months. Small-cap indexes joined the rally with the Russell 2000 and the Mid-Cap 400 indexes gaining almost 8% with value stocks outperforming growth. The S&P 500 virtually retracted all the February and March declines, advancing 4.9%, down just over 1% year to date. The Nasdaq reached an all-time intraday high, showing a gain of 9.38% year to date. The TSX also enjoyed a boost with job gains but still lags the broader-based indices south of the border, rising over 4% for the week but in negative territory for the year to date at 7.3%. Energy shares showed strength in the announcement from OPEC, and other exporters considered production cuts.
Economic data started the week with improvement but no real surprises with the ISM (Institute of Supply Management) PMI (Manufacturing Purchasing Managers Index) data release of 43.1 versus the previous 41.5 and the anticipated 43.0. The release of the ADP data showing a loss of 2.76 million workers in May against a forecast loss of 8.66 million fueled investors’ optimism that the worst was over and recovery was just around the corner. Friday’s Labor Department report gave the animals spirits a significant boost and left market observers scratching their heads, as it reported gains of 2.5 million jobs for May, reducing the unemployment rate to 13.3% from April’s 14.7%, versus the forecast of 19.5%. In Canada, the May job numbers were also positive, adding 290,000.
Healthier economic data also pushed Treasury bond yields to their highest level since mid-March. Improvement in economic activity prompted renewed interest in areas previously facing headwinds like issuers of toll roads and airport infrastructure projects. With a reported $5 trillion in money market accounts on the sidelines, there is plenty of fuel for market rallies in all asset classes for some time to come.
As we ponder the recent equity market rally and the likelihood of sustainability, there are a few factors to consider. First, the intervention by both central banks and fiscal authorities is unprecedented. This week in Europe, the European Central bank announced an additional 600 billion Euro bond purchases bringing the total to 1.35 trillion. Plus, Germany promised another 130 billion euros in spending and economic stimulus. There are also rumors of an additional stimulus package later this summer from the US Congress. There is reason to believe the provided accommodative measures will continue to bridge the gap until sustainable economic activity resumes. Second, this week was the first indication of the largest segment of the population worst hit by job layoffs and furloughs returning to work. While there is a long way to go, and there will inevitably be some re-restructuring of the workplace, it is a start and helps restore a sense of optimism. Third, corporate earnings will start the climb from the depths of the first and second quarters with expectations of rebounds into Q3 and Q4 and next year.
Although the worst may be in the rear-view mirror, there are still some challenges and headwinds that ensure the ride to recovery will be anything but smooth. Civil unrest in the US over the reaction to police brutality against races of color will cast a dark cloud over the US, economically, socially, and politically with the upcoming fall Presidential and Congressional elections. The anticipated second wave and the possibility of a resurgence with the fall flu season, COVID-19 will have an impact on consumer behaviour until a vaccine or treatment becomes available. Trade tensions will persist with a resolution not likely until after the US elections.
Last week were early positive signs of recovery. While we have been cautious throughout the past several months, we will slowly become optimistic with confirmation of sustainability. In the meantime, the forward-thinking market is anticipating a return to normal sooner rather than later.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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