- The U.S. stock market continued its rally in May despite dismal economic data. One reason for the rally’s continuation is the Federal Reserve, which had previously reduced its target interest rate to zero and reintroduced its Quantitative Easing bond buying program, indicating it would do whatever it takes for as long as it takes. In addition, several companies have offered promising albeit early results data for an effective vaccine. The effects of government stimulus like unemployment benefits could ease, however, in the months ahead. While the future remains highly uncertain as the world navigates the pandemic, it is important to remember that the stock market is an efficient market that prices in future earnings. In the last recession in 2008-2009, the stock market started to recover months before the economic numbers justified such a rally. For example, job losses usually continue for months after an economic recovery begins.
- The Commerce Department reported that gross domestic product, the value of all goods and services produced across the U.S. economy, fell 5% in the first quarter of 2020. Current projections show the U.S. economy contracting by 6-7% in 2020 and unemployment remaining in double digits. Some sectors of the economy are leveling off but not getting worse. 68% of economic output in the U.S. is consumer spending which makes the slow reopening of the economy critical to a sustained recovery. Unlike past recessions, this recovery is highly dependent on the level of public health.
- The number of U.S. workers filing for new unemployment claims dropped for the first time since February, reflecting a diminished relation between layoffs and the coronavirus. The number of workers receiving unemployment benefits for the week ending May 16 was 21.1 million. This number is well above the previous record of 6.5 million in 2009.
- Many investors are questioning the sustainability of the recent rally. Risks include a second wave of coronavirus infections, long lasting effects of the unemployment trend and economic downturn and escalating tensions with China. As we approach the U.S. election in November, any uncertainty around the outcome could cause a market reaction. Promising signs would have to include a sustained rally in financial stocks given the strong links of the banking sector to the overall economy. Investors’ embrace of risk since the late March stock market lows are based in large part on hopes for a vaccine. At least ten companies have a viable opportunity to create a vaccine by year end. It will take time for development, approval, manufacturing and distribution of a vaccine to the broad population.
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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