Bloomberg
In yet another week of divergent developments, the stock market plowed ahead, eschewing dismal economic indicators. The Bureau of Labor Statistics (BLS) released their latest jobs data on Friday, which revealed a 20.5 million drop in non-farm payrolls, bringing the unemployment rate from 4.4% in March to 14.7% in April. This represents the worst such one-month drop since the Labor Department began tracking this information beginning in 1939. The bulk of the decline is comprised, not surprisingly, of the following industries: leisure and hospitality (7.6 million), education and health services (2.5 million) and professional and business services (2.1 million). Additionally, the weekly number of jobless claims came in at 3.17 million on Thursday, bringing the total number to 33.5 million. One can find some semblance of consolation in the fact that this number was lower than the previous week’s 3.846 million number, which indicates the rate of jobless claims is slowing down, but this is still a significant number.
Despite this news, markets trudged on. The three major indices all posted weekly gains- S&P 500 +3.5%, closed Friday at 2,292.80; DJIA +2.6% , closed at 24,331.32 and the Nasdaq +6.0%, closed at 9,121.32. Fueling the ongoing rally is increasing investor belief in a “v-shaped” recovery buttressed by a moderation of new Covid-19 cases, gains in leading tech companies (Amazon, Apple, Alphabet, Microsoft and Facebook), high corporate earnings expectations in the next few quarters, and most importantly, backing from the Federal Reserve and the US government, which have made clear they will not allow a liquidity crisis to happen.
On the energy front, West Texas Intermediate climbed 25% last week, settling at $24.74 per barrel on Friday, but not before stumbling a bit as doubts arose as to whether or not OPEC+ countries would remain compliant with the production deal struck last month. Refiners adjusted their operations in March and April to produce more diesel and less jet fuel and gasoline to power trucks transporting food and other necessities while accommodating the drop in demand stemming from stay-at-home orders and travel restrictions. As economies gradually begin to re-open, the increasing demand may deplete excess supplies faster than producers are drilling and downstream companies are refining which may help crude and refined product prices return to their normal levels. Since “turning back on” shuttered wells and restarting operations isn’t as easy as flipping an on/off switch, this may very well happen.
Meanwhile gold has remained around its level of $1,705 per troy ounce in the past week, while the US 10-yr Treasury note’s yield climbed from 0.635% on Monday to 0.682% on Friday, noting a slight increase in bullish equity sentiment among investors. The prices of US government notes are typically inversely correlated with those of stocks.
At this point, it seems only a rapid increase in covid-19 cases and/or a sudden withdrawal of support from the Fed and US government could stem the current stock market rally. A good course of action: identify companies with solid balance sheets and avoid the overlevered ones poised for bankruptcy, such as retailers like J Crew and JC Penny or weak E&P companies like Whiting Petroleum. Good luck and stay safe out there.