May Market Commentary

In May, optimism related to the gradual reopening of the US economy persisted. After some initial weakness in equity prices, the US stock market changed course and closed out the month with a gain of about 5%. As represented by the Russell 3000, US stocks are still down from their all-time highs on February 19th, but those losses have been cut to 10%.

There are other factors supporting the recent resilience of the stock market. Bullish investors can point to unprecedented actions of fiscal stimulus and central bank support for the financial system, as well as a strong domestic economy pre-virus. Additionally, many measures of economic data have begun to show signs of near-term improvement. Weekly jobless claims have been trending down each week after the initial spike back in March, and the latest report shows that while new claims still total in the millions, continuing claims dropped enough to indicate a net fall in unemployment. Other clues can be found in air travel, hotel occupancy, and restaurant reservations, all of which have begun to recover from their year-to-date lows, which were seen several weeks ago.

Still, there are major uncertainties facing the economic recovery and, in our opinion, a swift and easy return to the robustness of January looks unlikely. While we are encouraged to see these signs of near-term improvement, most of these economic data points are still substantially below normal levels, and the economy likely has a long way to go before it can grow back to its prior level. As we’ve mentioned in the past, the flow of data that could confirm a recovery will be released at a glacial pace. While second quarter GDP growth is already being written off, just getting the government’s advanced estimate will take another two months. The far more important third quarter number, which will hopefully confirm a broad recovery, will not be released until the end of October. Despite these delays, other signals of a slow or uneven recovery could take some wind out of the sails of bullish investors and force a return of high volatility.

Other factors may give rise to volatility, too. The ongoing US-China trade dispute, now amplified by the political actions related to Hong Kong, has begun to come back into focus as investors question what will happen with the technology ecosystem, access to capital markets, supply chains and global trade. Additionally, the upcoming US presidential election, which has been out of the spotlight as investors focused on the economic impact of the virus, will introduce its own kind of uncertainty.

If volatility does spike again, we recommend that you stay focused on your financial plan. Long-term stock market performance is compelling, but the path to those outcomes is always unknown. It is important to stay anchored to your long-term goals, and we are here to help.

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