Published on May 31, 2020
May 2020 | Equity Commentary
Watch a short three minute summary of our thoughts on market activity in May.
Stocks moved higher during May as the S&P 500 returned about 4% for the month. While it appears economic data remained weak in absolute terms, we saw signs of improvement relative to April. Investors appear to seem optimistic that activity will continue to rebound as more states start to allow an increasing number of businesses to reopen.
There are reasons to believe that the worst of the economic damage from the coronavirus may be behind us. While the data in general remain weak in our opinion, several key indices did show improvement in May on a month-over-month basis. Examples include the NAHB homebuilder index, consumer sentiment indices from both the Conference Board and the University of Michigan, and regional Fed manufacturing surveys. The labor market too, which has seen unprecedented dislocations, may be healing. While still elevated, initial unemployment claims have been trending steadily downward over the last several weeks, and continuing claims improved for the 1st time since the job market began to deteriorate in late March. To be sure, much of the economic data remains depressed, and we expect that certain areas of the economy will remain challenged for a prolonged period. Still, we are encouraged by these improvements, particularly given that they tended to occur in metrics that we view as being more forward looking, and therefore better indicators of future activity.
We continue to believe that more fiscal stimulus is necessary to help fully repair the economy, and we think this is the consensus view among investors. Federal Reserve Chairman Powell, at a recent speech, noted that without more support a painful recession could be in store. In our view, some of the recent stock market gains have come in anticipation of more policy action, on both the fiscal and monetary fronts, and we therefore think that stocks could be at risk should politics get in the way of additional stimulus bills. In this regard we were encouraged by Senator Mitch McConell’s recent comments suggesting he agrees that more government support is needed. We will be keeping a close eye on stimulus negotiations as we believe that capital markets may be quite sensitive to them.
We continue to monitor relations between the US and China, as tensions may again be mounting, this time apparently due to the political fallout from the coronavirus. The Trump administration in recent weeks has considered mandating that the Federal Government’s Thrift Savings Plan not invest in Chinese stocks, and has also contemplated imposing further restrictions on Huawei Technologies. We are encouraged though, that President Trump has thus far avoided taking significant actions which may worsen trade relations between the two countries. We think that he is sensitive to the political consequences of further jeopardizing an already vulnerable economy by reigniting a trade war with China, particularly so close to an election. We view this situation as being somewhat analogous to late last year, when despite concerns that the administration was considering additional tariffs on Chinese goods, they ultimately were able to strike a phase I deal.
As we look ahead, we continue to see a plausible scenario whereby stocks can continue to move higher on the heels of an economic rebound. With all 50 states now having begun to ease restrictions on certain business activities, we would expect some economic improvement to follow. We also see the potential for the release of a certain amount pent-up consumer demand as more businesses reopen. In this regard we note that the savings rate is currently quite elevated, and consumer net worth appears to be near all-time highs. These conditions could bode well for a strong 2nd half recovery.
A potential resurgence of the coronavirus is a key risk factor for stocks. Evidence is already beginning to show an increase in cases in some states. We think that the market can handle an increase in new cases if it doesn’t rise to the point which would require further rounds of business closures and social distancing mandates. In this regard, we do have some concerns that the protests over the death of George Floyd and related social activity could exacerbate the spread of the coronavirus, thereby posing a risk to capital markets which we will be closely monitoring.