The Economy Sends Mixed Messages to the Market
The May job’s report was released on Friday June 5th and it was a huge surprise. As a result of some states reopening in May, more than 2.5 million jobs were added to the economy. The unemployment rate declined from 14.7% to 13.3% in May. This far exceeds expectations and the stock market responded with great enthusiasm. The Dow Jones Index added over 800 points the day May employment numbers were released, and it was up nearly 7% in the first week of June. On Monday, June 8th the Dow Jones Index hit its highest level since the end of February.
Then the National Bureau of Economic Research (NBER) made it official that the US is in a recession. NBER declared that the expansion which began in 2009 officially ended in February 2020. It lasted a record 128 months. This may be a short recession, the optimists say. The shortest on record was six months in 1980. There was a seven-month recession in 1918-1919 at the time of the Spanish Flu pandemic. There have been five recessions that lasted only eight months. If the worst is over, then this will go down as the shortest recession in our history. Only time will tell.
Reports began to surface in mid-June that coronavirus cases were on the rise as a result of businesses re-opening in May. This fueled speculation of a second shut-down. As a result, in the second week of June the market lost most of the gains achieved in the first week. Volatility continued into the end of the month and the Dow Jones Index was only up a fraction of a percent for the month of June.
June Job's Report
In July the June job’s report was released a day early due to the Independence Day holiday. It revealed a whopping 4.8 million jobs gained in June. In reality, we know that these represent the recovery of jobs lost a few months ago due to COVID-19, and not new jobs. But, it is encouraging to see jobs coming back so rapidly. The market once again took this data as an indication that the US economy is on the path to recovery.
Looking at the period from the first of June through this writing on July 9th, it is easy to see that the economy is sending mixed messages. If you are optimistic you can find support leading to a conclusion that it will be a short recession and a relatively quick recovery. If you are pessimistic and the glass is half empty, you see concerns of a second wave of the virus this fall and perhaps closures again. The market may also begin to react to the uncertainty around the presidential election which is only four months away.
It is notable that the market rally involves a narrow group of industry sectors. We would prefer to see broader participation. Most of the gains are focused on big technology stocks, communications, and the healthcare sector. Growth stocks are leading this rally and the Nasdaq is trading at all-time highs while the Dow Jones Index and the S&P 500 are still in the red year to date. Most industry sectors are trading below their 200 day moving averages. The weakest sectors are energy and financials. We wrote last month about sector rotation to the weaker sectors in May, but in June that leadership focused again on the technology, communications and healthcare groups.
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