Your success in investing will depend in part on your character and guts, and in part on your ability to realize at the height of ebullience and the depth of despair alike that this too shall pass. – John Bogle
There has been a discernible trend in the stock market lately that a down week in the market has been followed by an up week and last week was no exception. All three major stock averages closed higher by at least 3% with the Nasdaq Composite Index actually ending the week at an all-time high. Although stocks have traded mostly sideways since the beginning of June, the performance results for the second quarter were the best in decades and, as a result, the S&P 500 Index is only down about 2% for the year. For the most part, economic data has improved recently but news on the coronavirus pandemic has been a mixed bag. While there are a rising number of Covid-19 cases nationwide, daily U.S. deaths have fallen to a new low. On Wednesday of last week over 50,000 new cases of the virus were reported and Florida alone reported a one-day spike of more than 10,000 cases. Dr. Anthony Fauci said that the U.S. could reach 100,000 new coronavirus cases a day and Federal Reserve Chairman Jerome Powell said that the outlook for the economy is extremely uncertain and will depend on containing the virus. There was some positive news about the coronavirus, though, that was partly responsible for the market’s strength last week. Drug manufacturer Pfizer and a biotech company named BioNTech have developed a coronavirus vaccine that showed promising results in tests by creating neutralizing antibodies. If the drug is approved by the FDA, Pfizer expects to make up to a million doses by year-end. Without a vaccine, the business impact of the pandemic could linger until early next year and beyond. Despite concerns over the spread of the virus, economic data continues to defy forecasts by economists. The June employment report showed that 4.8 million jobs were created compared to expectations of 2.9 million and the unemployment rate fell to 11.1% from 13.3% in May. Other data released last week was also positive and provided evidence that the economy is gaining strength and gradually returning to normal.
While weekly jobless claims rose by 1.38 million, they were less than in the previous week and ADP reported that private payrolls rose by 2.37 million in June and payrolls in May were revised substantially higher. Hiring was particularly strong in the leisure and hospitality industry and small business hiring surged. The ISM manufacturing index topped the 50 mark and was better than expected as a majority of industries are seeing expansion again. Pending home sales in May jumped by a record amount and topped expectations and the June consumer confidence index hit a 3-month high and was also higher than expected.
For the week, the Dow Jones Industrial Average gained 3.2% to close at 25,827 while the S&P 500 Index climbed 4% to close at 3,130. The Nasdaq Composite Index jumped 4.6% to close at 10,207, a record high.
The Institute for Supply Management (ISM) Non-Manufacturing Purchasing Manager’s Index (PMI) for June is expected to be solidly in expansion territory as many businesses have begun to reopen. The index had been in contraction mode for the last two months. The producer price index (PPI) for June is forecast to rise moderately while the core PPI which excludes food and energy is expected to edge just slightly higher as inflation continues to run below the Federal Reserve’s target of 2%.
As companies get ready to release their second quarter earnings beginning July 13th, this week promises to be a quiet one. The most notable companies on the agenda include Walgreens Boots Alliance, Paychex and Levi Strauss.
With few quarterly corporate earnings reports this week and little in the way of economic data, the focus for investors will likely be on the alarming increase in coronavirus cases. Last week investors were encouraged by the positive vaccine news from Pfizer and shrugged off the disturbing rise in Covid-19 cases across the country. One reason for this may be because death rates have been lower in the most recent outbreak and younger people are being infected who stand a much better chance of recovering from the virus. But as Dr. Fauci warned last week, the pandemic is far from being contained and the success in these efforts will ultimately decide the direction of the economy and the stock market. Second quarter earnings are expected to be awful with a decline of nearly 45% due to the forced shutdown of the economy. Making matters worse, most companies have withdrawn their earnings guidance for the balance of the year due to the pandemic. Investors are willing to look past this quarter’s results and believe that with effective treatments for the virus and a possible vaccine by year-end, the economy will recover and that the stock market will reflect that. There also is hope that another stimulus package will be passed by Congress that could include additional unemployment benefits and aid for state and local governments. This week could be the calm before the storm as a deluge of earnings reports are released next week that could the decide the market’s course.