The Dow Jones Industrial Average ended the week up 6.8%, making it the best week since April 9 while the Nasdaq closed near all-time highs. The indices closed at 27,110.98 and 9,814.08, respectively. This came on the heels of the gravity-defying jobs report on Friday which indicated 2.5 million jobs were added in May, contrasting significantly with an expected loss of 8.3 million jobs. This caused the unemployment rate to drop to 13.3% from April’s 14.7% when many expected it to increase to 20%.
The factors contributing to the bear case regarding jobs and the stock market include the ongoing pandemic and, more recently, the social unrest that has caused businesses to board up and close following the death of George Floyd. Now the worry is the potential coming of a second wave of coronavirus, particularly in light of the protests that have erupted across the country.
One caveat to the jobs report is that it may not be completely accurate. It is a survey sent out to several thousand households consisting of 45 pages of questions. One question that asks about job status is leading many to indicate they are “employed but absent from work” when their true status is “temporary layoff.” This slight distinction throws off the unemployment rate by 3 percentage points, which, if corrected, would make May’s unemployment rate 16.3%- an increase rather than the decrease currently being reported.
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Many of the jobs coming back are in the areas hardest-hit by the pandemic- bars and restaurants - which made up over 1.4 million jobs- more than half the overall gain. Still, owners are finding it difficult to re-hire the employees they laid off, as some are worried about contracting the virus after returning to work, while others are making more money through the expanded unemployment benefits of $600 per week, which are set to expire at the end of July, at which point more people will be inclined to return to work.
Energy
On Saturday Opec and Russia agreed to extend their oil production cuts for another month as the price of crude oil has steadily recovered. WTI crude closed the week at $39.99 per barrel, while its pre-pandemic price was about $50.
The original agreement struck in April helped stabilized prices after they fell to historic negative territory in the midst of a supply glut where producers literally ran out of places to store their product and tankers found themselves floating at sea awaiting delivery while global consumption collapsed in the wake of the covid lockdowns. Not all countries that agreed to the cuts have been able to comply, prompting Saudi Arabia to make up for the shortfall, but they vowed to compensate for this in the weeks to come.
The deal was set to expire at the end of June but will now expire at the end of July. In prior negotiations, countries had discussed a 3-month extension but Russia worried too much of a price recovery would allow US shale companies to capture additional market share. Indeed, E&P companies have struggled- for instance, California Resources Corporation’s stock nearly halved as rumors spread they were considering declaring bankruptcy as prices deteriorated and a bond maturity fast approached. Meanwhile, majors like ConocoPhillips and Chevron have seen their stock prices nearly double from their March lows as they’ve cut capital expenditures to help weather the current bust period and now are benefiting from recovering prices.
SARS-CoV-2
According to the CDC, nationally, the percentage of people testing positive for covid-19 has decreased week-over-week as of the week ending May 30, but they are also seeing an increase in positive cased in the following regions: the southeast,the south central region, the west coast, and the Pacific northwest. This coincides with the areas that began relaxing their restrictions earlier than others, particularly Texas, Georgia and Tennessee, while Southern California saw droves of beach-goers defy stay-at-home orders. It will be interesting to see if these trends continue and/or arise in parts of the country where large protests occurred in the past week and a half. Because it takes covid 10-14 days for a carrier to present symptoms, it will take that long to see whether this second wave of cases begins to manifest. Time will tell.
Some market participants have acknowledged their bewilderment at the current market rally but have conceded that perhaps the monetary and fiscal response was indeed well-timed and appropriate, which has contributed significantly to the quick recovery. Other remain skeptical the rally will continue as expanded unemployment insurance benefits expire at the end of July (and are unlikely to be renewed). Once this happens and the reality of lower consumer spending sets in, a market correction will likely follow. I find myself in the latter camp.