Broker Check

Market Commentary

June 9, 2020

Global markets rise for second straight month
on reopening optimism

With all 50 states beginning or preparing to lift restrictions with phased reopening guidelines, hope and optimism fueled a second straight month of gains for the global financial markets. Backed by some encouraging news on vaccine development as well as strong evidence of slowing daily COVID-19 infection rates across the US and abroad, investor confidence improved further in May. From extreme fear in late March, investor confidence has cautiously climbed to a more neutral level, as reflected in stock values that have risen sharply (CNN Fear and Greed Index). Given all that has happened, including initial unemployment claims since March surpassing 40 million and unemployment hitting a post-war high of 14.7%, that is a remarkable change.

Despite continued dire economic data mounting to the worst economic decline in history since and second only to the Great Depression, markets solidly advanced across the board in May. The market’s rebound from the March 23 low has been powerful and impressive, and yet another painful lesson in the school of trying to time the market.

The Fed’s and US government’s unprecedented “all-in” support of the economy, financial system and markets have given investors enough of a confidence lift to see beyond the here and now and towards recovery both economically and from the coronavirus pandemic. Similar positive health news, reopening optimism and massive support from foreign central banks and governments lending to a global economic recovery, have lifted markets overseas as well.

May Quick Takes

  • Tech-heavy Nasdaq, which has shown leadership throughout the selloff recovery, finished May in positive territory for the year at +5.8%, after gaining 6.8% for the month
  • Market recovery broadened out in May, with small and mid-cap stocks also providing leadership, gaining 6.4% and 7.1%, respectively, but remained down double digits YTD
  • Benchmark S&P 500, gained 4.5%, while the Dow gained 4.3%
  • Developed Foreign markets posted strong gains of 4.1% in May, as represented by the MSCI EAFE, but Emerging Markets lagged edging higher by just 0.6%
  • Fed support of the corporate bond market, saw corporate bonds outperforming Treasuries in May with a gain of 1.6% and finishing up 2.3% YTD (Barclays Bloomberg US Corp Bond Index)
  • Interest rates remained near historic lows, as the Fed’s balance sheet neared $7 trillion, and the 10-year T-Note yield finished at 0.65%

The Outlook and June Update

It has not been a V-shaped rebound for the market, as commonly referenced, though it has felt like one. There was a healthy sideways consolidation from mid-April to mid-May, before resuming the COVID recovery. From the March 23 low and ending May, the benchmark S&P 500 gained 36%, while the tech-heavy Nasdaq gained 38%.  Recovering roughly 70% of the selloff, we still have a way to go, about 11%, to get back to new all-time highs for the S&P 500. Nasdaq is much closer, less than 4%, while foreign markets are farther away at 17%. Economic data have largely been as ugly as expected, but as health news has been improving with declining cases and death numbers, as well as encouraging vaccine developments, hope and optimism surrounding reopening have carried the markets higher. Simply “less bad” news and some green shoots have been good enough for now. 

Markets and economic fundamentals remain disconnected; however, they will converge at some point. Has the market gotten ahead of economic reality? Perhaps and certainly as measured by stock price to earnings valuations. Corporate earnings declined about 14% in Q1 year-over-year (JP Morgan) and are expected to contract further in Q2; however, as stock prices have risen, valuations are higher than at the February market highs. The market is a discounting mechanism and is looking forward to economic recovery and stronger earnings in the future. Even with median forecasts for a Q2 GDP contraction of 38% (CNBC survey), a strong second half rebound is widely expected. Though it may take a year or more to recover fully.

June is off to a strong start, culminating the first week with a much better than expected jobs report on June 5, which pushed stocks 2-3% higher on Friday. The market and analysts were looking for more job losses for May and were surprised with a gain of 2.5 million jobs and the unemployment rate dipping to 13.3% from April’s 14.7%. It may be an early sign the recovery is further along than first thought by many. The S&P 500 gained 4.9% for the week, while small- and mid-caps surged over 8% each, further broadening the market rally. That move put the S&P 500 just 6% from its all-time high and recovering 83% of the selloff.  

Stocks posted their third straight week of gains amid nationwide civil unrest and protests over the death of George Floyd in police custody. 2020 will go down as one of the most pivotal years in our country’s history, and not simply due to COVID-19. Racial injustice and inequality must be defeated in America.

Volatility has steadily declined from its March highs but remains elevated and in the forecast, thus keeping a long-term perspective is crucial. As the economy slowly reopens, the market and economic recovery will likely continue in fits and starts. We urge investors to resist FOMO (the fear of missing out) with the market’s strong rebound by staying disciplined and diversified with your investment portfolio.

From all of us at Nelson Securities, we continue to wish you and your family good health and well-being.

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.

~Your Nelson Securities Team 

*Past Performance is No Guarantee for Future Results