ND&S Weekly Commentary 6.1.20 – Green Shoots?

June 1, 2020

Global stocks advanced last week for the second week in a row as investors pinned their hopes on a successful reopening of the economy.

On the week, the S&P 500 gained 3.0% while the DJIA advanced 3.8%. The Russell 2000 which represents small/midsized US companies also moved higher as it added 2.8% for the week. International markets joined the party as developed international markets (MSCI EAFE) jumped 5.1% while emerging markets (MSCI EM) tacked-on 2.9%. Bonds were a bit higher as the Bloomberg Barclays Aggregate finished ahead by 0.2% on the week. The 10yr Treasury ended last week at a yield of 0.65%. Gold prices closed at $1,736.90 for a 0.1% advance for the week while oil prices leapt 6.7% to $35.49 per barrel. Even after last week’s surge, oil prices are down 41.9% year-to-date.

Economic news continues to be dismal although many reports were better than feared. Perhaps some green shoots are beginning to appear. On Tuesday, the U.S. Census Bureau reported that April new home sales inched higher by 0.6% month-over-month and down 6.2% year-over-year. The news was much better than the consensus expectation of a 20% decline. On Thursday, the Commerce Department released its reading of new orders for manufactured durable goods; orders fell 17.2% versus expectations for a 19.1% drop. Also on Thursday, the Bureau of Economic Analysis reported a revised first quarter real GDP of -5.0% (driven by weaker than expected business investment spending), below expectations of a 4.8% decline. Pending Home Sales declined 21.8% in April while expectations were for a 17% drop. U.S. initial jobless claims for the week ending May 23 declined from 2.4 to 2.1 million. Of note, 41 million people have filed initial claims for unemployment insurance over the past 11 weeks.

We certainly recognize that markets have advanced handsomely off of the March 23rd bottom and that market valuations are no longer favorable. It is reasonable to expect that the market advance during the past two months or so is unlikely to persist. The five largest stocks in the S&P 500 represent 20% of the index, exceeding the previous 18% peak during the internet bubble in March 2000. The market will need to broaden out for the index to climb meaningfully higher from here … fortunately, we have seen such a broadening out over the past two weeks. We will keep a close eye on the persistency of this rotation.

Investors will be watching the results of the reopening in most states along with escalating trade tensions with China. After a strong May, we would not be surprised if the markets took a breather in June. Of course, the tragic and senseless killing of George Floyd and the resulting protests will cast a pall over the country until a healing process takes hold.

George Floyd – Rest in Peace.