Concern about increasing numbers of coronavirus cases in the U.S. and the threat to economic recovery weighed heavily on markets this week. Some states hit the pause button on further reopening plans in an effort to stave off overcrowding of hospitals. Positive economic data gives continued hope even in the midst of concerning health data.
After rising early in the week, stocks reversed and finished down. The S&P 500 Index fell 2.9% while the Dow Jones Industrial Average declined 3.3%. For the year, the S&P is down 6.9% while the Dow has lost 12.3%. Stocks fell in response to troubling virus news: daily reported cases have increased, reaching a new high of nearly 40,000 on Thursday. Some of the states with the largest reported numbers are those at the forefront of the reopening effort. While there has not yet been a corresponding spike in fatality rates in these areas with increased cases, some governors have curtailed further reopening plans and/or have stepped up enforcement of current guidelines. Of course, these actions could stall the recovery effort in those areas and serve as a headwind to stock performance.
Consumer spending in May advanced at a record pace of 8.2%, partially recovering from the dismal numbers of March and April. The Federal Reserve’s manufacturing index also rose sharply, as those surveyed reported strong gains in shipments and new orders. Initial unemployment claims fell slightly to 1.48 million, marking the 14th consecutive week of more than one million. Although the downward trend of initial claims is good news, the fragile nature of the recovery also clouds projections for the future of the labor market. If more states curtail reopening, it would be challenging for large sections of the service industry to return to work. Continuing unemployment claims also fell slightly to 19.5 million; while a welcome development, consensus expectations are for the unemployment rate to remain in double digits into 2021.
As we continue to expect significant volatility for the remainder of the year, it is important to maintain perspective on balancing risk versus return. We counsel clients that investing (particularly in stocks) should not be a binary choice – all in or all out. Especially when faced with continuing threats from virus case numbers, it is important to evaluate both your ability and willingness to take on risk in order to arrive at your best investment allocation. While we continue to believe that stocks will recover over the next 18 months and outperform other asset classes on a relative basis, it is critical to diversify across multiple asset classes to help dampen overall portfolio risk while providing growth potential.
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.