Recovering Labor Market Pushes Stocks Higher

July 6, 2020

Despite record numbers of new daily Covid-19 cases in the United State and near-record cases globally, equity markets continued higher last week. For the week, the S&P 500 and DJIA rose 1.55% and 0.36%, respectively. The Russell 2000 increased 1.37%. International stocks were also strong with developed international (MSCI EAFE) up 1.62% and emerging markets up 2.16%. Treasury yields increased slightly last week with the 10yr US Treasury settling at a yield of 0.68%. Oil prices (WTI) rose to around $40 a barrel.

A strong labor market report, improving manufacturing PMIs globally and surging pending home sales propelled markets last week. The improving data has some momentum behind it but economic activity is still well below pre-coronavirus. More than 4.75 million workers returned to payrolls in June, which was well ahead of consensus estimates of about 3 million. The May payroll number was also revised higher. As a result, the unemployment number declined to 11.1%, down from 13.1% a month ago. Economic activity in manufacturing grew in June according to the The Institute for Supply Management (ISM) manufacturing purchasing managers’ report. The June PMI reading came in at 52.6%, up 9.5 percentage points from May’s reading of 43.1%. Pending home sales posted a record comeback in May with a 44.3% increase from April. This week, there will be reports on non-manufacturing, car sales, job openings and inflation.

Banks are set to kick off the second-quarter of earnings season in less than 2 weeks. Estimates are for an earnings decline in the Q2 2020 of 43%. It is anyone’s guess how accurate the estimates will prove to be, as over 400 S&P 500 companies failed to guide over the last 3 months. Stocks are coming off their best quarter in decades, so there is pressure to deliver good news or at least some clarity in company strategy to navigate the current Covid-19 environment.

We wouldn’t be surprised to see markets take a pause here. Continuing spikes in cases or temporary shutdowns on a local level will likely begin impacting markets. The uncertainty around company results won’t be answered for at least 3-4 weeks so some caution may be warranted.

“What then is freedom? The power to live as one wishes.” – Marcus Tullius Cicero