The courage to press on regardless – regardless of whether we face calm seas or rough seas, and especially when the market storms howl around us – is the quintessential attribute of the successful investor. – John Bogle
The economic data last week focused squarely on the unprecedented number of job losses that the economy has suffered since the Covid-19 pandemic and one would have thought that stocks would have reflected the grim news with plunging share prices. But just the opposite happened to everyone’s surprise. Despite an April employment report that showed that 20.5 million jobs had been lost and that the unemployment rate soared to 14.7%, the major stock averages posted strong gains, ranging from 2.6% for the Dow Jones Industrial Average to an eye-popping 6% for the Nasdaq Composite Index. It was the highest unemployment rate since the Great Depression and was in direct contrast to the jobs report as recently as February that showed job gains of 230,000, which was considered high for an economic expansion that had lasted nearly 11 years. In addition, ADP reported that 20.2 million private-sector jobs were lost in April as businesses were forced to close to slow the spread of the coronavirus. Weekly jobless claims showed some improvement from previous weeks’ totals but still amounted to 3.17 million, bringing the 7-week total to a staggering 33.5 million. The virus has had a devastating effect on retailers, tourism and transportation and travel-related industries and the biggest hit to jobs in April was to the leisure and hospitality industry, which lost 7.7 million workers. Still, there were some bright spots amidst all of the doom and gloom reports. New cases of the coronavirus have been leveling off and there were signs of the economy and businesses reopening. Of the 20.5 million jobs that were lost, 18 million of them were classified by employers as “temporary” as the majority of the people will be rehired quickly when it is safe to do so. Oil prices also rebounded as investors believed that demand would return as prospects became brighter for reopening the economy. Since the stock market is forward-looking, investors shrugged off the horrible jobs data and chose to believe that the worst of the coronavirus pandemic and its impact on the economy might be over. Time will tell whether or not this is true but stock market volatility is likely to remain on news of states reopening, possible treatments and vaccines and ongoing economic data.
The ISM non-manufacturing or services sector index in April fell to 41.8 from 52.5 in March, its lowest level since March 2009. A reading below 50 indicates contraction or even recession.
In corporate news, Walt Disney reported that quarterly earnings fell over 90% as the Covid-19 pandemic cost the company over $1 billion in theme-park revenue. Legendary investor Warren Buffett said that he had sold all of Berkshire Hathaway’s airline holdings and admitted that the airline purchases had been a mistake.
For the week, the Dow Jones Industrial Average rose 2.6% to close at 24,331 while the S&P 500 Index climbed 3.5% to close at 2,929. The Nasdaq Composite Index surged 6% to close at 9,121.
Retail sales in April are expected to be dismal as economists are forecasting a decline of over 10%, worse than the drop in March and the biggest monthly decline on record. The producer price index (PPI) in April is expected to fall slightly on a year-over-year basis while the consumer price index (CPI) is expected to show a modest year-over-year increase. The preliminary reading in May for the University of Michigan consumer sentiment index is forecast to be below 70, a level not seen since 2011.
Among the most prominent companies scheduled to report quarterly earnings this week are Cisco Systems, Applied Materials, Ingersoll Rand, Toyota Motor, Marriott International, Duke Energy, Cardinal Health, Mylan and Simon Property Group.
Many investors were left scratching their heads last week as the government reported a record number of losses yet the major stock averages all posted solid gains, led by the technology-laden Nasdaq Composite Index which was up a whopping 6%. In fact, the Nasdaq is actually positive for the year while all three major stock averages are up over 30% since the market’s nadir on March 23rd. Although the employment report was certainly bad and cause for concern, the jobs data is also backward-looking. Most people laid-off due to forced shutdowns of businesses were furloughed, meaning that they will be hired back soon. The stock market is discounting what will happen when states and businesses reopen and the unemployed are rehired in coming months. Investors are also taking into account the unprecedented amount of stimulus announced by the government and the Federal Reserve to stabilize the economy. Although the major stock averages fell into a bear market at the fastest pace on record, the $2 trillion federal stimulus package known as the CARES Act and the Fed’s unlimited asset purchases have helped offset the temporary hit to corporate earnings. The Fed’s accommodative monetary policies in the form of zero interest rates have also supported equity prices and rates should remain low for the foreseeable future. Investors appear to be optimistic that the stock market will rebound as there are signs that the infection rate is slowing and states have begun reopening. The future holds many uncertainties and unknowns with regard to the virus and its longer-term impact on the economy, but the U.S. has always managed to bounce back in the past. This time should be no different if history is a guide.