U.S. equities surged higher last week, closing out one of the strongest market quarters in decades, as U.S. employment data continued to show swift progress in the recovery of the labor market through June. For the week, the S&P 500 jumped 4.0%, while the Dow Jones and Nasdaq Composite gained 3.3% and 4.6%, respectively. The second quarter marked the highest quarterly return for the S&P 500 since 1998 with a 20% gain, recapturing much of the losses that occurred during the first quarter sell-off in which the index lost 34% in a matter of six weeks. Meanwhile, the bond market response to the positive jobs report was a bit more muted as the 10-year Treasury yield edged only slightly higher to 0.67% from 0.64% in the week prior, indicating a more cautious economic outlook.
Last week’s employment report was the latest indicator to confirm positive momentum in the economic recovery off of April’s lows as 4.8 million jobs were added to the economy in June, which far exceeded the consensus forecast for just over 3 million payrolls added. The job gains drove the unemployment rate down to 11.1% from 13.3% in May. The service sector, which was has been particularly hard hit during the economic lockdowns, also showed improvement as a leading indicator on the health of the sector, the non-manufacturing index from the Institute for Supply Management, jumped to 57.1 in June from 45.4 in May, once again surpassing expectations of 50.2 for the month (an index reading above 50 represents expansion).
Although the initial economic data through May and June have shown swift progress, the resurgence of Covid-19 cases in several areas of the country threatens to stifle that momentum as some municipalities have put reopening plans on hold. According to data compiled by John Hopkins University, the 5-day moving average of new Covid-19 cases in the U.S. sits at about 50,000, up from a low of about 20,000 daily new cases at the start of June. Much of the data from last week’s employment report was collected in mid-June, so market participants will be closely watching July’s employment numbers to see if the momentum has been dampened.
We expect to see continued economic progress from here for the nation overall but believe the pace of recovery will start to decelerate from the initial May and June rebound as many industries will see much more tepid progress until there is a commercially available vaccine. Until these industries can fully participate in the recovery, there is likely to be an elevated level of unemployment and a more cautious U.S. consumer base as a result.
The week ahead will be relatively light from an economic news perspective with most of the focus on the weekly employment numbers and the job openings and labor turnover report. Investors are gearing up for the second quarter earnings season, which will kick off next week with several large banks and financial service companies. There is a high level of uncertainty going into earnings season as the bulk of companies have suspended guidance amid the pandemic, but the current analyst consensus forecast for the S&P 500 is for earnings to be down -44% compared to the second quarter of 2019.
