Thursday, 2 July 2020

Ahead of the Independence Day Holiday, U.S. stocks rose this week amid strong economic data releases and positive coronavirus vaccine developments.

Stocks

Despite reports that the U.S. reported a record number of new coronavirus cases this week, both the S&P 500 and the Nasdaq gained over 4%. Meanwhile, the Dow Jones Industrial Average finished up 3%. Gains were broad-based across the market with all 11 sectors in the S&P 500 finishing in the green. Oil prices rose to $40.33 a barrel, a weekly gain of roughly 5%, after U.S. stockpiles fell by 7.2 million barrels last week. So far the third quarter is off to a positive start after posting strong gains in the second quarter. The S&P 500 finished the second quarter up 20% - its best quarter since the fourth quarter of 1998. Much of the S&P 500’s quarterly return was due largely thanks to major tech companies, particularly the FAANG stocks plus Microsoft. The tech-heavy Nasdaq fared even better, up 31% in the second quarter. Small-caps, which have been particularly battered by the coronavirus pandemic, gained 25%. In regards to second quarter earnings, FactSet is anticipating a decline of nearly 44%, which would be the largest year-over-year decline in earnings since the fourth quarter of 2008.

Bonds

Yields declined slightly on Thursday amid the rise in coronavirus cases in the U.S. The yield on the benchmark 10-year government note fell to 0.67%, while the yield on the 2-year government note declined to 0.15%.

Economy

All eyes were on the labor market this week. In June, the U.S. economy added 4.8 million jobs from the month prior. A gain that was much higher than expected. Employment in the hospitality and retail industries, which have been impacted severely by the coronavirus pandemic, posted the strongest gains last month increasing 2.1 million – approximately 40% of overall job gains last month. However, the recent spike in coronavirus cases across the country may affect this as some states pause their reopening plans. The unemployment rate declined from 13.3% in May to 11.1% in June. The Labor Department indicated that the unemployment rate should have been 1% higher than reported as some individuals were misclassified. According to the ADP Employment Report, the private sector added 2.37 million jobs in June coming in slightly lower than expectations. However, May’s private sector payrolls were revised upwards significantly to show gains of 3.1 million jobs versus the initial estimate of 2.76 million job losses. Manufacturing data is also showing signs of recovery. IHS Markit’s U.S. manufacturing purchasing managers index (PMI), which gauges manufacturing activity, rose to 49.8 in June up from 39.8 in May. Separately, Institute for Supply Management’s manufacturing PMI increased to 52.6 in June up from 43.1 in May. Any reading above 50 indicates an expansion.

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