Highlights
• Stocks rose more than 3% for the third week in a row on reopening momentum and a better-than-expected May jobs report.1
• The 10-year Treasury yield broke out from its two-month range, rising 25 basis points to 0.9% on improved hopes for economic recovery.1
• Despite investor confidence, we think the stock market is expensive and discounting an optimistic outlook for corporate earnings in 2021.
The S&P 500 Index rose 4.7% last week, posting its third weekly gain of 3% or more for the first time in 38 years.1 In addition to reopening momentum and the upside surprise in the May jobs report, the massive fiscal and monetary stimulus seems the biggest tailwind. Last week’s uptick in high-frequency data indicators and corporate commentary about demand pickup are playing out in the outperformance of value and cyclical plays, a bearish Treasury curve steepening and a softer dollar.
10 Observations And Themes
1. The May nonfarm payrolls report was much better than expected, with new jobs up 2.5 million versus expectations for 8 million jobs lost.2 The unemployment rate was 13.3% against the consensus of 19.6%.2 The report added to optimistic assessments of economic reopening already paved by fiscal and monetary stimulus. The report was a positive surprise and employment is increasing ahead of schedule, but there is a long road ahead, as we’ve only recovered about 10% of what was lost.
2. Many data series are improving off rock bottom levels, but there’s more ground to recoup to equal pre-crisis levels. Yet, every story has two sides. Consider Lyft, which reported that May ridership increased 26% month over month, but was still down 70% year over year. Monetary and fiscal stimulus, reopening states and businesses and easing financial conditions are driving economic healing.
3. The good economic news could make the next stimulus negotiations more challenging in Congress. We still think one more bill will likely pass before the August recess. The good economic news will keep the size in check and makes it more likely that negotiations could fail.
4. Coronavirus statistics are gradually improving: the daily numbers of confirmed cases and hospitalizations are decelerating, while more states are meeting gating criteria. However, recent protests could interrupt this progress. A secondary surge of coronavirus is not guaranteed, but this is an important test and would be significant if a second wave doesn’t materialize.
5. The 10-year Treasury yield has been stuck between 0.6% and 0.7% for two months, but rose 25 basis points last week to 0.9%.1 In our revised 10 predictions put out in April, we suggested the 10-year yields will be above 1% by year end.
6. When the pandemic started, we said copper was one of five data elements to watch. Based on our expectations for continued economic recovery, we think copper prices will likely end the year higher than the current level of about $2.50 per pound, which is significantly higher than the bottom of $2.11 in March.1 Surpassing the June 2018 level of $3.30 per pound would require either a significant increase in global demand or a short contraction supply that we do not expect.
7. Joe Biden’s odds of a victory have spiked to 54% according to the PredictIt forecasting market.3 A Democratic sweep would open up the range of outcomes for legislation, with tax increases on corporations, high-income individuals and capital gains the most notable issue.
8. U.S./China relations continue to deteriorate. White House policies announced recently are significant but not severe, and will not likely dissuade China and Hong Kong. We expect Congress to recommend stronger measures in upcoming policy bills. Bipartisan unity on China is currently the only common issue in Washington.