Jason Gunkel, CFP®, CFA, CAP®, Chief Investment Officer
June 11, 2020
The stock market (as represented by the S&P 500 Index) had been climbing steadily since our last market update article on May 29, growing by about 6%. Unfortunately, those gains were wiped out in one day on Thursday, June 11, when the market dropped by nearly 6%.
The stock market is a leading indicator of future economic activity, but it may have gotten too far ahead of the economy this time. Despite the massive hit to the economy, the S&P 500 was nearly flat year to date before the big market drop yesterday.
The 50-day period after the stock market bottomed on March 23 was the best 50-day rally in history, with the market returning just shy of 38%, according to Financial Advisor Magazine. Investors had been extremely optimistic with economies starting to reopen across the country.
Last Friday, the Bureau of Labor Statistics reported that 2.5 million jobs were added in May. This shocked economists who expected the report to say that 7.5 million jobs had been lost! Instead of the unemployment rate rising to an expected 19%, it declined to just over 13% (all according to Business Insider), suggesting that the jobs lost as a result of the virus may have peaked.
Another driver of the market rally has been optimism in developing a treatment or vaccine for the virus. Since mid-April, the four best performing days for the S&P 500 have come on days with significant announcements regarding drug trials (April 17, April 29, May 18, and May 26), according to Charles Schwab. The combined performance of those four days added about a 10% return to the market.
However, the optimism abruptly turned to pessimism on Thursday as investors digested statements from the Federal Reserve. The Fed chair, Jerome Powell, said there is “great uncertainty” about the economic recovery and indicated unemployment will remain elevated through 2022. The market plummeted on those statements despite Powell also saying the Fed would do whatever it can for as long as it takes to support the recovery, and that it was not even thinking about raising interest rates anytime soon.
Investors who were euphoric about the economy reopening seemed to get a reality check from the Federal Reserve comments. While the worst could be behind us, economic news and company earnings results will likely be grim for the remainder of the year. Certain industries such as travel, entertainment, and food service could suffer for longer. In addition, the protests occurring around the country and the upcoming presidential election add further uncertainty.
Therefore, the roller-coaster ride in the stock market will likely continue. We will continue to try to tame the ride as much as we can for our investors while looking for opportunities to purchase investments at favorable prices.