Weekly Investment Update

Markets continued to rally last week, marking one of the best weeks in years as the S&P 500 index rose nearly 5%.  However, the productive period for equity markets was overshadowed in a week that may otherwise be remembered for mass protests across the country sparked by the death of George Floyd. 

The index is now approximately flat for 2020 after having declined as much as 34% through late March.  While the decline witnessed so far in 2020 was one of the most significant in the history of the S&P 500 index, Chart 1 below illustrates that large market pullbacks are normal, even in years in which the index makes significant gains (data as of June 4 and does not include large market gain from Friday, June 5).  2020 has certainly been a volatile year so far, but the sharp market pullback and rebound should serve as a reminder to investors that short-term market movements are very difficult to predict. 

Chart 1: S&P 500 Annual Returns vs. Intra-Year Declines

Source: JPMorgan Guide to the Markets, data as of June 4, 2020

Much of the gain last week occurred on Friday following a blowout employment report for May that was one of the most surprising in the history of economic forecasting.  Economists’ consensus expectations were for the US to shed an additional 8.3 million jobs in May and for the headline unemployment rate to spike over 20%.1  The actual unemployment rate fell to 13.3% in May, down from 14.7% in April, as the economy added 2.5 million jobs.  The surprise sent markets soaring Friday, with the S&P 500, Dow Jones Industrial Average, and NASDAQ composite all up more than 2% for the day.  Much of the gain came from leisure and hospitality businesses which added back more than 1.2 million workers.2  Most of these jobs were restaurant-related, but also included hotels, casinos, and amusement parks.  Construction also increases significantly, adding nearly 500 thousand jobs as restrictions around activity eased across the country. 

While May’s employment gains are certainly encouraging, the US economy still has 20 million fewer people employed compared to February prior to the start of the pandemic.  The headline unemployment rate of 13.3% is among the highest in the post-World War II era, and the “U-6” unemployment rate, which includes the headline rate plus those who have stopped looking for work (discouraged workers) and those who are working part-time for economic reasons, is at 21.2%3.  While key US equity indices have already made a sharp recovery, it will be important for investors to continue to monitor the progress of the actual economic recovery, particularly the impact on the ability for these workers to get rehired, to pay their housing and debt service obligations, and return to their long-term spending habits.  The impact on US employment of the 2008-2009 financial crisis was shallower than the current recession, but the recovery took many years and arguably had a lasting impact on the financial habits of households who were scarred by losses in income and investments.  The COVID-19 recession was one of sharpest in history, and while it appears that US economic activity may have bottomed, the pace of the recovery and rehiring of workers will be key to monitor as household spending drives nearly two-thirds of US gross domestic product. 

Chart 2: May Change in US Payrolls by Industry

Source: Bureau of Labor Statistics, CNBC

Key Economic Releases This Week

Source: Marketwatch

Asset Class Returns

Source: Morningstar, Bloomberg, US Treasury (total returns shown gross of fees)
As of June 5, 2020

Prices & Interest Rates

Source: Morningstar, Bloomberg, US Treasury (total returns shown gross of fees)
As of June 5, 2020

Past performance may not be representative of future results.  All investments are subject to loss.  Forecasts regarding the market or economy are subject to a wide range of possible outcomes.  The views presented in this market update may prove to be inaccurate for a variety of factors.  These views are as of the date listed above and are subject to change based on changes in fundamental economic or market-related data.  Please contact your Financial Advisor in order to complete an updated risk assessment to ensure that your investment allocation is appropriate.