U.S. stock indices rose this week as markets continued to balance improving economic data against increasing coronavirus case numbers in parts of the country. The U.S. labor market continued to rebound from its pandemic-induced lows amid a strong recovery in the service sector of the economy.
This week, the S&P 500 Index gained 1.8% while the Dow Jones Industrial Average was up 1.0%. Year to date, the S&P is down 1.4% while the Dow has declined 8.6%. The 1.3 million initial unemployment claims were both lower than last week and better than consensus expectations. Continuing claims fell to 18.1 million, also lower than expected. Absent a return to lockdown conditions, the unemployment figures should continue to trend downward. St. Louis Federal Reserve President James Bullard suggested this week that the unemployment rate could fall below 8% by the end of 2020, which would be stunning considering where we were two months ago.
The service sector continued to recover, as measured by the record increase in the June ISM Non-Manufacturing Index, which measures trends in new orders, employment, and prices for service businesses and is a closely-watched economic indicator. On a more somber note, the federal government deficit for June was $863 billion – almost as much as the entirety of fiscal year 2019 – caused by increased spending and reduced tax receipts. Those who joined us at our Outlook event in February heard Professor Antony Davies speak on the future ramifications of the increasing U.S. national debt. He contends that the government will have to choose between drastically decreasing spending, dramatically increasing taxes, or allowing the Federal Reserve to print money (causing severe inflation) in order to fix our debt problem. The June deficit figure only makes solving the problem more difficult.
We continue to analyze the latest coronavirus case number data and closely watch the associated hospitalization and mortality figures for insight on the continued viability of the economic recovery. While we feel that a return to large-scale lockdowns is unlikely, that possibility cannot be rejected. However, our baseline expectation is for continued economic recovery through 2020 and 2021, albeit with elevated volatility. This expected volatility will continue to help us seize opportunities to purchase undervalued assets in hopes for future growth.
As we continue to navigate through the pandemic, our commitment remains to be here for you each step of the way. As always, please contact us with any questions about the economy and your financial plan.