Following the Memorial Day weekend, optimism around reopening buoyed stocks in the first half of a shortened trading week before the S&P 500 traded rather skittishly over Thursday and Friday. However, the S&P 500 was still able to finish up about 3% on the week and above the psychologically important level of 3,000. The week was a busy one for headlines and below we have summarized some of the major considerations investors are grappling with as we head into the weekend.
Reopening – Hope Springs Eternal – Hotels, restaurants, airlines, and other industries particularly impacted by recent policies and restrictions have shown signs of encouraging improving business trends. Data such as truck loads, mortgage applications, new business applications, and public transit utilization rates are also showing slight, but steady improvement. New York City could begin a phased reopening in the first or second week of June. Overseas, Germany plans to ease social distancing measures a week earlier than planned. Spain, where tourism accounts for over 12% of GDP, recently said it will scrap a mandatory two-week quarantine for foreign travelers on July 1st. On the vaccine front, some positive indications this week as Novavax has started its first human study with results due in July and Merck is working on two potential vaccines and an experimental treatment.
US-China Tensions Deteriorate – Over the weekend, tensions in Hong Kong surged as Beijing moved to impose national security laws that severely encroach on the finance hub’s autonomy and jeopardize the long held “one country, two systems” framework. Relations between the US and China have already been strained due to coronavirus, and the US has repeatedly threatened retaliation against this controversial Hong Kong security law. As a result, markets acted rather skittish during the latter half of the week due to fears of exactly what this retaliation might resemble. Ultimately, stocks rebounded off their lows today as President Trump’s much anticipated 2PM press conference did not call for additional tariffs on China or a breakdown in the phase 1 trade deal. However, Trump did make several policy statements, including the potential elimination of policy exemptions for Hong Kong, the termination of the US relationship with WHO, and limiting certain student visa holders entry to the US. While today’s announcements could have been worse from a US-China relations perspective, it will be very important to watch for Chinese retaliation over the weekend.
First Quarter Earnings Season Almost Complete – With 98% of the companies within the S&P 500 having reported, Q1 earnings “growth” is on pace to fall almost 14.5%, the worst since Q3 2009. Expectations for Q2 are even worse, with the average consensus estimate predicting a 43% earnings contraction (per FactSet). We generally believe the market anticipates such poor corporate profit data, but the Q2 earnings season will be an important gut check for investors and indications for Q3 guidance will be very heavily scrutinized.
Mixed Economic Data – The majority of economic data continues to be decidedly negative, but there were a couple of bright spots this week. The bad: Q1 US GDP was revised down to -5% from prior reading of -4.8%. Another 2.1M Americans filed initial jobless claims this week. Worst Chicago PMI since 1992. Pending home sales, which measure signed contracts on existing homes, fell a steeper-than-expected 33.8% in April as compared to a year prior, the largest decline since the data was measured starting in 2001. The good: Sales of newly built homes rose nearly 1% in April against forecasts of -22%. While initial jobless claims remained very high, continuing claims, or people who have been collecting unemployment for at least two weeks actually fell 3.86M from the prior week. Perhaps most notable, on the back of government relief payments, personal income surged 10.5% in April, versus expectations for -5.9%, while consumer spending fell sharply and this combination resulted in the highest personal savings rate in history, a whopping 33%.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO