As coronavirus infections surge in the U.S., fears are rising that the momentum of the nascent economic recovery may be stalling after a sharp initial rebound in May and June. But equity investors have generally brushed aside the recent resurgence in Covid-19 cases so far as equity markets extended their gains this past week. For the week, the tech-heavy Nasdaq Composite continued to lead the way with a 4.0% gain, while the S&P 500 and Dow Jones posted returns of 1.8% and 1.0%, respectively. However, not all financial markets showed the same bullish outlook as demand for assets viewed as safe havens picked up as well, with the price of gold rising 1.4% and the 10-year Treasury yield dipping to 0.63% from 0.67% in the week prior.
Daily Covid-19 cases in the U.S. are pushing new highs, with Florida recording the highest one-day total of any state to date over the weekend with 15,200 new cases on Saturday. Fourteen states had a 20% or more increase in new cases in the past week, while another eighteen states had an increase of 10% or more, according to John Hopkins. In response, more state and local governments are imposing social distancing restrictions, with the latest being California where Governor Gavin Newsom ordered the entire state to halt indoor activities in restaurants, bars, museums, zoos and movie theaters.
Despite the pick-up in new cases and resulting restrictions, equity markets have taken these developments in stride. Many market observers have attributed this resilience to the rapid and significant stimulus support measures taken by the government and Federal Reserve and the expectations that they will continue to step in with further aid and market backstops as needed. Although federal aid to date has broadly covered the gap from lost wage income as unemployment has surged, much of that money is sitting on the sidelines as U.S. consumers remain wary of job market prospects. U.S. personal consumption expenditures sits at levels last seen three years ago and is off almost 12% from the February peak, which demonstrates that though aid keeps businesses and consumers afloat, it does not replace consumer demand, the main driver of economic growth. Investors will continue to keep a keen eye on weekly employment data as well as this week’s retail sales report that will give another perspective on consumer spending in June.
In the week ahead, second quarter earnings season comes into focus with several large banks and financial services companies set to report. S&P 500 companies are expected to report a 44% drop in profits, on average, for the second quarter, though there is a wide disparity in earnings forecasts as over 180 companies in the index have pulled their usual earnings guidance. In general, market participants have been willing to look past the poor expected quarterly results and will focus more on executives’ forward-looking comments and discussions on current trends. However, worse-than-expected results, combined with signs of stalled-out growth, could make valuations look even loftier relative to a difficult and uncertain fundamental earnings outlook.
