The Dow and S&P/TSX finished the week gaining 3.5% and 2.4%, respectively. Oil was the big surprise, getting a boost off its recent lows thanks to production cuts and anticipation of increasing demand as restoration of economic activity is resuming on a state-by-state basis. The Nasdaq Composite Index returned to positive territory for the year led by Apple. Utilities and consumer staples lagged the market.
Economic news was expected to be negative on both sides of the border and it did not disappoint. Early in the week, manufacturing and service data showed a record contraction in April. On the employment front, the U.S. Labor Department reported 3.2 million people applied for unemployment benefits in the previous week. As of Friday, May 8, 20.5 million jobs were lost in April, bringing the unemployment rate to 14.7% – the highest since the 30’s era Depression. U.S. job losses year to date are approximately 30 million. Of those who lost their jobs or who were laid off, 75% to 80% believe they will be back within six months. The silver lining was consensus expected higher job losses. Canada reported 2 million jobs lost in April.
With the lockdown restrictions loosening in some states, returning to normal will take time, reflecting the reluctance of both employers and consumers to participate in resumption of normal activities. We should expect improving numbers in the weeks and months ahead as businesses slowly reopen. The numbers will not progress as fast as we might like, but there should be a slowing or reversing of the economic data trend. The rate at which labor is re-engaged will be dependent on several factors:
- The willingness of the unemployed to leave the relative safety of their home, with benefits, in many cases, exceeding what they were making on the job
- The ability of businesses that open to generate sufficient volumes to stay afloat
- The willingness of people to resume normal patterns of behavior
This week’s volatility was aided by comments from Trump over last weekend, saying he would terminate the trade deal with China if they did not live up to their end of the bargain. By the end of the week, China and U.S. negotiators expected to meet and work on the implementation of phase one of the deal. News on COVID-19 also added support to the market as clinical trials for a vaccine were approved by the FDA, and Japanese authorities approved the use of Remdesivir as a possible therapeutic.
U.S. Treasuries moved slightly lower during the week on weak economic data; however, it was somewhat offset as the Treasury indicated that it would increase issuance of long-term debt. While municipals were able to attract buyers with relative yields, there could be trouble on the horizon as the fall in revenues generated by the lockdown will add to an already tenuous financial condition. There will be talk of significant increases of property and state taxes as the full weight of the deficits are realized. It would not be out of the question for states and municipalities to apply for relief from the Federal government to stave off bankruptcy in the coming months. These actions will become a further drag on economic recovery.
With the fall elections just around the corner, the blame game will be in full swing, adding to the uncertainty relating to not only the political environment but also the social and economic implications. We expect investor sentiment to be reflected in a pick-up in volatility later in the year.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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