This week, markets took their first significant steps back in over a month and a half of trading. The S&P 500 closed roughly 2% lower on the week, but still sits roughly 28% above its March 23rd low. As impressive as the rally has been, we have now seen a few weeks of sideways motion. The advance looks to be running out of steam as participants weigh the slew of catastrophically bad economic data, a slow re-opening of the global economy, and rising tensions once again between the US and China. While it is never fun to see prices go down, we view this pause as healthy and a natural evolution in a market looking to sustainably get back on its feet. In our opinion, A little fear is a good thing.
Exceptionally poor economic reports made headlines throughout the week. The US tacked on an additional 3 million jobless claims bringing the grand total for the crisis to over 36 million now. On Friday, the April retail sales numbers hit the wire and were far worse than analysts had projected. Retail sales set a record by falling over 16% from already weak March numbers. Analysts had been calling for a number closer to 12%. However, the market continues to handle these jaw-dropping numbers quite well, all things considered.
There remains a significant gap between market and economic sentiment. In general, we suspect the market continues to view the Fed as a reliable backstop. So, while prices may pause for a moment, the market believes the Fed is working to ensure they resolve higher. For the first time in weeks, however, participants did hiccup when confronted with the notion of additional Fed stimulus. For a brief moment, it considered the possibility that things could be worse than what was being baked in. This bit of skepticism is welcome and will hopefully prevent the market from prematurely rocketing back to new highs. With the uncertainty ahead, we think two steps forward one step back is more appropriate.
Rising rhetoric from the US and China is also complicating matters. Both sides are looking for a scapegoat in the crisis and the finger-pointing is pressuring the already tenuous relationship. There are rising concerns about follow-thru on 2019's phase 1 trade deal and semiconductor firms being kept out of the Chinese market. This will be important to watch over the coming months, particularly if US/China relations become a key election issue. For now, it is just another piece of the uncertainty pie.
Preston May, CBE®
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