May Economic Update
Just as it appeared that April might be a repeat of March, stocks rebounded sharply in April, fueled by a flattening pandemic curve and positive results from a clinical trial investigating a treatment for COVID-19. Stocks continue to climb higher as more states begin the initial phase of reopening their economies and others have announced target reopening dates.
Although jobless claims were breathtakingly high, they were anticipated and allowed investors to focus on more positive developments. A more stable bond market supported by the Federal Reserve purchasing troubled debt also helped support the rally.
Restarting the Economy
The national dialogue over the COVID-19 outbreak has shifted toward restarting the economy, with state and national leaders devoting more attention to plans of loosening the shelter-in-place and social-distancing guidelines.
The first factor is the nature of the reopening. The White House has proposed a plan which leaves the decision-making process to the governors of each state for the reopening timing and process. These decisions would depend largely upon health experts’ assessments, as well as the public’s confidence in resuming their pre-quarantine routines such as work activities, going out to eat, and traveling.
Market Moves & The Federal Reserve
The S&P 500 has thus far retraced about half of its drop from the February highs. Although it is an impressive rally, the sudden drop caused the market to be very oversold and a bounce from the lows is analogist to what we experienced in the first leg down back in 2008. As noted in April’s newsletter, the market is likely to recover before the actual economy does, as the stock market is forward-looking and economic data is a lagging indicator (events which have already taken place).
The Federal Reserve has taken unprecedented measures over the last two months. In addition to providing liquidity to the markets (essentially the printing of money), the Fed has also stated that it would provide a “backstop” in the bond markets by purchasing bad corporate debt issuances to