by Connor Darrell CFA, Assistant Vice President – Head of Investments
Last week brought a continuation of recent trends, where market performance seemed to diverge meaningfully from underlying economic and market fundamentals. U.S. equities ended the week over three percent higher, while the bond market posted small losses. Oil prices built upon the prior week’s gains, rising by over $5 per barrel as countries around the globe continue to take steps toward reopening their economies. However, oil prices remain extremely low compared to historical norms.
The most impactful market news last week was the release of April’s nonfarm payrolls report, which provided a glimpse into the severity of the economic damage wrought by the coronavirus pandemic. The Bureau of Labor Statistics reported that 20.5 million jobs were lost in April, pushing the unemployment rate to 14.7%, the highest since the World War II era. Adding to the pain was a footnote in the report which suggested that the unemployment rate would have been as high as 19.7% if certain workers were classified differently in the data. Job losses were concentrated (but not confined) in industries most affected by social distancing measures, such as hospitality, travel, and retail. No matter how the data is sliced, the impacts of the pandemic on labor markets has been incredible.
However, while economic data and stock market returns do not necessarily measure the same thing, they are undoubtedly closely related, and many investors are struggling to understand the dynamics that have led to the divergence we have observed in recent weeks. Some of this is likely due to the differences in what constitutes the building blocks of the labor markets/GDP, compared to the composition of corporate earnings as measured by constituents in the S&P 500 index. The most impacted sectors of the economy make up a significantly larger component of the employment picture than they do of the S&P 500. Additionally, stock markets tend to reflect forward expectations, while economic data is a measure of the past and present. Taken together, this suggests that while the economic toll has been extremely high, markets anticipate the future to be better.
As we move forward, markets will likely continue to remain hyper-focused on new information that helps to provide clarity on how soon and how expansively economies can resume some semblance of normality. For now, there seems to be some optimism surrounding the re-opening of some economies in Europe and Asia, which have not seen extreme resurgences in the prevalence of COVID-19. Markets will also be watching the medical community closely, where the White House has reported that it has “fast tracked” 14 potential vaccine candidates in the hopes that one will prove to be effective and can be made available by early 2021.