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U.S. CITIES STILL RECOVERING FROM LOCKDOWN: The reopening of America was always going to be fraught with competing fears of new virus outbreaks and an economic meltdown. Now cities across the nation, from New York to Chicago to Los Angeles, are reeling from unrest that could worsen both. Violence erupted in dozens of cities following the death of George Floyd and looks to continue into the week to come.  Markets thus far have been steady amidst the reports that have made their impact felt all this Monday morning.

 

Adding to the outcry of anger and pain, there is clearly an economic influence at work here as well.  “I think people are coming to the realization that their jobs may not be coming back or coming back quickly. This is all conflating with the racial tensions and completely boiling over,” said Mark Zandi, chief economist at Moody’s Analytics. “This highlights the depth of despair in America,” he added, citing 20% unemployment and 50 million workers who have lost their jobs or had pay cuts without a clear path to recovery before them.[1]

 

THE WEEK ON WALL STREET:  The shortened week, which began with a powerful two-day trading rally, was enough to drive the markets into another week of solid gains.

 

The Dow Jones Industrial Average rose 3.75%, while the Standard & Poor’s 500 advanced 3.01%. The MSCI EAFE Index, which tracks developed stock markets overseas, gained 6.18%.[2]

 

RISING OPTIMISM ABOUT REOPENING: Returning from Memorial Day weekend, stocks surged on rising optimism over the economic impact from re­opening, declines in new infections, and progress in the development of a vaccine.

Stocks continued their march higher, lifted by signs that the White House and Congress started to work on putting together another stimulus package, but their progress lost steam, in part due to news of China’s vote to override Hong Kong’s autonomy.

 

ROTATION IN LEADERSHIP: The recovery from the March lows has been powered by large-cap growth stocks, especially the mega-cap technology names. However, this week saw new sectors leading the market higher, notably the financials and industrials, while the technology and health care sectors lagged.

 

This leadership rotation is being referred to by some market commentators as the “re-opening trade.” For these sectors to remain leaders, it will probably hinge on a steady economic recovery and escaping a second wave of COVID-19 infections.

 

The chart below from Visual Capitalist shows just how large the five biggest mega-cap tech stocks have become, relative to the rest of the market. This leadership rotation described above, if only for a week anyway, is viewed by many as a positive sign of a more broad-based recovery.[3]

CONSUMER SENTIMENT STEADY IN MAY, BUT COULD BE VULNERABLE GOING FORWARD: Consumer sentiment held steady as May ended with the University of Michigan’s consumer sentiment index ticking up to 72.3 from 71.8 in April. We think consumer sentiment remains fragile and could deteriorate quickly as the impact of stimulus checks fades. Additionally, it looks like there is a risk that Congress may not extend emergency unemployment benefits as well.

 

Despite the stabilization in consumer attitudes and the relaxation in some social distancing requirements, we are concerned that lingering virus fears and restrained incomes outside of government benefits will continue to limit consumers’ willingness and ability to spend.[4]

 

AFTER AN INITIAL SPURT, A JOBS RECOVERY COULD TAKE A WHILE: The coronavirus crisis has caused labor market devastation on a scale not seen since the Great Depression. In just the first nine weeks, conditions deteriorated dramatically with the unemployment rate surging from a half-century low to its highest level since WWII. Although the pace of layoffs appears to be subsiding and the overall economy is showing hints of stabilization, we expect the unemployment rate to peak around 20% in May and recede only gradually thereafter as the recovery takes hold.

 

The chart below, from Visual Capitalist, puts into perspective weekly initial jobless claims in 2020 in the United States. This chart is insightful relative to both a historical average and the relative size of the claims as compared to entire populations of other countries.[5] [6]

FINAL THOUGHTS: Most of us have daydreamed about a time when the coronavirus headlines would stop monopolizing our news cycles, but this was not exactly what we had in mind. In these already difficult times, we are now further challenged by the civil and social unrest in our country, including the violence experienced right here in Philadelphia.

 

At Compass Ion, we will seek to emphasize our vision to display unity, generosity, and good stewardship even more. In the end, we are confident that mankind will demonstrate more good behavior than bad. Some days it is just harder to find the good. As many of us have reminded our children: Hate cannot overcome hate. Only Love can do that.

 

We do not assume by any means to have all the answers about how to be more helpful. We would love to hear the good ideas and useful resources you are seeing make a positive difference in this current chaotic environment.

 

CITATIONS:
Bloomberg, May 31, 2020
The Wall Street Journal, May 29, 2020
Visual Capitalist, May 27, 2020
Oxford Economics, May 29, 2020
Oxford Economics, May 28, 2020
Visual Capitalist, May 27, 2020