Before The Bell
The final trading week of May, an abbreviated affair given that the U.S. markets were closed last Monday for Memorial Day, was a good one that saw the major equity indexes continue their rallies on the strength of growing optimism the many states were reopening their economies. The bulls were emboldened by this news and were able to look beyond a batch of terrible economic news, including another two million-plus initial weekly unemployment claims. The four-day stretch, which included respective gains of 3.8%, 1.8%, and 3.0% for the Dow Jones Industrials, the NASDAQ, and the S&P 500 Index, capped another productive month for equities. Over the month stretch, the aforementioned averages climbed 4.3%, 6.8%, and 4.5%, respectively.
As noted, the big catalyst behind last week’s buying was more states reopening their economies, as data has shown that the COVID-19 curve has flatten enough to give states some confidence that more commerce activity will not create enough new coronavirus cases to overwhelm hospitals and the healthcare system. The continued reopening has Wall Street believing that the U.S. economy, which is expected to fall by an historic amount in the second quarter (Value Line believes the April-June quarter GDP will contract by more than 30%), will begin to rebound in the second half of 2020. That thinking, along with commentary last week from Fed Chairman Jerome Powell that the central bank will continue to aggressively support the U.S. economy, pushed investors into riskier assets. In fact, the CBOE Volatility Index (or VIX), also known as the fear gauge, fell sharply last week.
Friday was wild day for stocks. The market opened sharply lower, continuing Thursday’s late-session selloff. The early morning selling was prompted by the uncertainty about what President Trump might say about China at a White House news conference. There were worries that a tough stance by the Trump Administration would jeopardize the January trade deal between the world’s two-largest economies. However, the big news was that the Administration is pulling the United States out of the World Health Organization, will look to eliminate some exemptions for Hong Kong, and will step up its vetting of Chinese students that were studying in the United States. The Trump Administration said it would monitor the fluid situation in Hong Kong, where there are protest against moves by China, and take actions if necessary. Once it became obvious that the tough talk against China would not include any additional tariffs or sanctions that could disrupt trade, at least at this time, the U.S. market quickly reversed course and turned positive. The technology-heavy NASDAQ was the big beneficiary, especially the stocks of the technology giants that do a tremendous amount of business in China. (Earlier in the week, the tech stocks traded lower after President Trump signed an executive order that may open the door for the U.S. government to assume oversight of political speech on the Internet. The new directive seeks to change a federal law (Section 230) that has spared tech companies from being sued or held liable for most posts, photos and videos shared by users on their sites.) For the day, the NASDAQ Composite and the S&P 500 Index climbed 121 and 15 points, respectively, while the Dow 30 was down a meager 18 points, but way off of its session low.
So with the new month of trading set to kick off, investors, despite a quiet time for corporate earnings, will have no shortage of stories to focus on over the next five trading sessions. The investment community will continue to monitor the U.S. economy reopening, the U.S./China relationship, which includes the fluid situation in Hong Kong, and the fallout from the U.S. protests across the nations’ major cities this weekend. On the economic front, the biggest news will be this Friday’s report on May nonfarm payrolls. The report will show one of the worst employment situations since the 1930s. Before the May jobs report, we will get some other key data from the business beat, including the latest figures on manufacturing and nonmanufacturing activity. Those releases are not going to be pretty either, and will likely bring the stocks of the manufacturing and services companies onto the radars of investors this week. Speaking of equities, Eli Lilly (LLY) is the latest healthcare and pharmaceutical stock with a notable move, as reports surfaced this morning that the company has started dosing patients in the world’s first study of a potential antibody treatment designed to fight COVID-19. The investigational medicine, known as LY-CoV555, is the first to emerge from the collaboration between Lilly and AbCellera to create antibody therapies for the prevention and treatment of the coronavirus.
Before the opening bell, the futures point to a mixed and relatively flat opening for the U.S. equity market. Investors should note that the futures rallied off of earlier lows and trading on the Continent is higher (Germany’s stock market is closed today). The aforementioned news that many U.S. economies are reopening and that there doesn’t appear to be any disruptions in the U.S./China trade agreement are helping give support to global equities. Stay tuned.
— William G. Ferguson
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
