May Market Overview
The rally in stocks continued throughout May with most major equity indices gaining several percentage points for the month, including the S&P 500, which climbed 4.8%. Elsewhere, the majority of Fixed Income indices were modestly positive as well.
One interesting aspect of the current market is that risky assets, such as stocks, and safe havens, such as fixed income and gold, are all climbing. Meanwhile, bearish bets on the S&P 500, as measured by short interest, remain at multi-year highs. We can glean from all of this that sentiment remains mixed as investors digest some of the worst economic data in memory, juxtaposed against a hopeful view that the worst of the COVID-19 issues are behind us and life will return to a “new normal.”
Indeed, the market remains largely focused on any developments relating to COVID-19, including datapoints that suggest infections are dissipating, indications that a treatment and/or vaccine may successfully come to fruition, and news that the economy is gradually reopening.
Another factor that we believe has contributed to the rally in stocks is that many corporations have demonstrated remarkable prowess in navigating the challenges that COVID-19 brought with it. Many companies – remembering the challenges from the financial crisis – were quick to borrow money to shore up their balance sheets. For the most part, companies also responded swiftly in delaying planned investment activity, implementing cost saving measures, and eliminating share repurchases. These actions helped to reassure investors that many companies would be able to weather the storm.
Of course, not all companies have survived the economic fallout of the pandemic. Companies that come to mind include some retailers, who have long struggled to survive in the ecommerce world and were in weak financial positions entering the crisis.
Regarding economic data, a positive sign emerged as U.S. manufacturing (as measured by the ISM index) rebounded off April lows. To be clear, manufacturing activity remained contractionary in May with the ISM index at 43.1 versus April’s reading of 41.5; anything less than 50 is contractionary. Still, the slight rebound shows signs of stabilization, a welcomed step in the right direction.
Meanwhile, the unemployment rate climbed to 14.7% in April but fell to 13.3% in May as some local economies began to reopen. As more reopen, we are optimistic that the unemployment rate will continue to gradually retreat.
Finally, toward the end of the month, markets responded negatively on renewed tensions between the U.S. and China. While this has not caused any meaningful selloff thus far, we are mindful that both politicians and markets can be fickle, so we continue to monitor these developments as well.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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