S&P 500 falls nearly 3% as Covid-19 cases increase

I don’t think there is anybody who devotes a life to studying and working on the stock market who doesn’t have something of a gambling instinct. – Burton Malkiel, professor emeritus of economics at Princeton University and author of A Random Walk Down Wall Street

The stock market picked up last week where it had ended the previous week after learning that Covid-19 cases were increasing at an alarming rate in the U.S. and elsewhere in the world. A week ago last Thursday and Friday stocks dropped on news that coronavirus infections had jumped in nine states with noticeable spikes in Texas, Florida and Arizona. That worrisome trend continued last week as the S&P 500 Index fell nearly 3% while the Nasdaq Composite Index declined nearly 2%. The surge in new cases of the virus eclipsed totals in April and Covid-19 cases are now growing in more than 30 states and hospitalizations are growing in 15 states. Florida and Arizona placed a hold on their economies reopening and Texas tightened its restrictions as these states saw a new wave of coronavirus cases. While more widespread testing has contributed to the increase in the reported number of cases, the spread is a big concern as it could hamper the economic recovery and possibly lead to another shutdown of businesses that had just reopened. The stock market received more bad news last week after the Federal Reserve released the results of its bank stress tests. They showed that some banks were getting close to the minimum capital levels in scenarios related to the coronavirus pandemic. Because of this possible capital inadequacy, banks were ordered to suspend their stock repurchase plans and cap their dividend payments at current levels for the third quarter. Future dividend payouts will also depend on bank earnings, which could be weak due to the impact of the virus. The stock market has rebounded strongly on the belief that the economy would come roaring back after the forced economic shutdown caused by the pandemic. Without control of the virus and a steady decline in the number of new cases, the economic recovery could be in jeopardy and the stock market could be vulnerable.

Last Week

Durable goods orders in May surged nearly 16% and non-defense capital goods orders excluding aircraft also rose, a promising sign that business investment is improving. Existing home sales plunged in May and registered the largest annual decline since October 2010, but realtors seem to be in agreement that this represents the bottom and that sales will begin to pick up. On the other hand, new home sales in May jumped nearly 17% and were much better than expected as there has been pent up demand for new homes. Weekly jobless claims were 1.48 million, more than expected for the second consecutive week. Despite the large number of unemployed people, consumer spending in May registered its largest one-month gain since 1959.

The International Monetary Fund (IMF) revised its projected global GDP decline from -3% to -4.9%.

For the week, the Dow Jones Industrial Average dropped 3.3% to close at 25,015 while the S&P 500 Index fell 2.9% to close at 3,009. The Nasdaq Composite Index declined 1.9% to close at 9,757.

This Week

The June employment report is expected to show that 3 million nonfarm jobs were added and that the unemployment rate fell to 12.2% from 13.3% in May. This follows a 2.5 million gain in jobs in May, which was a surprise as most economists expected a big decline. The ISM Manufacturing Purchasing Manager’s Index (PMI) is forecast to be nearly 50, the threshold for expansion, and much better than in the previous two months. Both May factory orders and construction spending are expected to be positive after declining in April and the June Consumer Confidence Index is also expected to be higher at 90 compared to 86 in May. The Federal Open Market Committee (FOMC) releases minutes from its June monetary policy meeting.

Both the stock and bond markets will be closed on Friday July 3rd in observance of Independence Day.

The most notable companies scheduled to release their quarterly earnings reports this week include Micron Technology, Acuity Brands, FedEx, General Mills, Constellation Brands and Conagra Brands.

Portfolio Strategy

Despite the disturbing rise in coronavirus cases in so many states that could slow the economic recovery, there have been a number of economic surprises recently that suggest the economy may be catching up to the stock market. Granted, there seems to be a disconnect between the current dismal state of the economy and the performance of the stock market since it bottomed on March 23rd. Many believe that the stock market has risen too far, too fast given the damage done to the economy due to the coronavirus pandemic. After all, there are still 20 million people in the U.S. that remain unemployed, corporate earnings have been falling and the number of coronavirus cases has been increasing. But there also have been several big economic surprises over the past two weeks that leads one to believe that the rebound in stock prices may be justified as fundamentals begin to improve. Mortgage applications have surged recently, retail sales increased at their fastest pace ever, consumer spending recorded its best month since 1959 and the U.S. economy added 2.5 million jobs in May, a big surprise considering huge job losses were expected. While it’s true that much of this good news could already be reflected in stock prices and that the Federal Reserve’s easy monetary policy and low interest rates have benefited stocks, the big economic surprises could also raise corporate earnings expectations and lead to further gains in the stock market. So far the economic data has been much better than economists have forecast, providing reasons for investors to be optimistic.