• After holding steady for more than a month, stock markets have been rising noticeably over the last couple of weeks as investors grow more positive about prospects for economic reopening.

• We think investors may be overly optimistic, as we expect economic reopening will likely be bumpy, especially if we see new coronavirus surges.

• While we think stocks can still make advances as economic clarity emerges, volatility is likely to remain high and the outlook is challenged.

Stocks rose again last week, marking the first time since mid-April that equities enjoyed gains for two consecutive weeks.1 Investors appear increasingly optimistic over prospects for economic reopening and are taking solace in signs of improving economic data that indicate the U.S. may have seen the bottom for the current recession. The S&P 500 Index rose 3% last week, with economically sensitive cyclical areas such as industrials and financials faring the best.1

Weekly Top Themes
1. We appear to be emerging from the sharpest and shortest recession in U.S. history. Economic activity is slowly improving from April lows. We think the recovery will be reasonably strong, but bumpy and uneven. If we avoid a policy error and a strong additional coronavirus wave, we think it will take two or three years for the U.S. to move back to full employment.

2. We think unemployment levels are near their peak. Weekly jobless claims remain one of the best sources of real-time economic data. While last week’s number of 2.1 million is still dire, it still represents a downward trend.2 May’s unemployment number will be released this Friday, and we expect it will climb to around 18% to 20%, which should be approaching a peak.

3. Worsening U.S./China relations are a growing risk.​ President Trump is taking an increasingly hard line toward China, as are other politicians in the U.S. and around the world. Investors have looked past these risks so far, but confidence could take a hit as the relationship between the two countries becomes more adversarial.

4. We expect the U.S. dollar to come under pressure.​ Investors’ desire for safe-haven assets has boosted the value of the dollar, but demand should fall as the global economy improves, creating a headwind for the greenback.

5. Upside and downside market risks look balanced. The positives include ongoing and creative monetary policy support, massive fiscal stimulus, a slowing coronavirus infection rate and optimism over restarting the economy. The negatives include a potential second wave of infections, a stalling recovery, U.S./ China trade disruptions and U.S. election uncertainty.

Sentiment Is Improving, But The Outlook Remains Fragile
Following the low on March 23, stocks rallied the subsequent month before stalling. Markets appear to have reaccelerated based on excitement over economic reopening, newfound momentum in credit markets and hopes for additional fiscal stimulus. Interestingly, while stocks have rallied, bond yields have not moved higher, which suggests an upward move may be overdue.

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