Hope and heartbreak. We seemed to swing wildly from one extreme to the other during the month of May. As the month unfolded, economies around the world started to reopen and people began to move, albeit slowly in most cases, back to something resembling business as usual. Markets rallied, showing something like exuberance. Meanwhile, in the “real world,” economic numbers remained distressingly bad with unemployment continuing to rise to record levels and output falling, but investors continued to show that they remain happy to look beyond the negative data for now.
In support of this view, the tap has remained open on both the monetary and the fiscal side, with the Federal Reserve following through on its pledge to do “whatever is necessary” to support the economy, and Payroll Protection Program (PPP) funds continuing to make their way into the hands of small businesses. Elsewhere, a new 750 billion Euro fund proposed by the European Commission, including 500 billion euros in grants to member countries, was well received by the markets. Japan jumped in with a $1.1 trillion stimulus package passed towards the end of the month. China, too, pledged additional fiscal stimulus. According to the International Monetary Fund (IMF), the fiscal response of the G20 countries has added up to about $8 trillion, or 4.5% of GDP on average. This compares to just 0.5% of GDP allocated during the early stages of the Financial Crisis.
This has helped support both businesses and consumers – personal income was up 10.5% in April, driven by nearly $3 trillion in government transfer payments – but there remained a reluctance to spend. April retail sales recorded a record drop of 16.4%. This lack of demand rippled through the economy with the Producer Price Index experiencing the sharpest drop in its 10-year history, a 1.3% month-over-month decline, suggesting that in the near term, at least, the pandemic has had a deflationary impact.
Stocks, however, were having none of this pessimism. Markets continued to advance, sometimes dramatically, including a 900-point jump on May 18th spurred on by rumored progress on a vaccine for the coronavirus. By the end of the month, the S&P 500 had climbed 6.5% and was up 36% over its March 2020 lows. Oil prices trended up as well, as production cutbacks began to take hold. Corporate bonds rose as the Fed announced it would begin purchasing bond ETFs as part of a series of actions to support the credit markets. Though new filings were up, the total number of people receiving jobless benefits actually declined, from 24.9 million to 21.1 million.
This has not been an especially popular stock market rally; many observers have noted the disconnect between stock market valuations and economic data. There is, no doubt, a wall of worry in place for stocks to scale. But the presumption is that equities are looking forward to the second half of the year when growth is expected to resume. The scope of the rally suggests that markets are expecting something like a V-shaped recovery. There are signs that support this – restaurant bookings and airline travel are picking up, for example – and infection rates have begun to slow. The trading floor of the New York Stock Exchange reopened on May 26th, a largely symbolic move but a welcome one nonetheless. Consumer confidence bounced up slightly (and unexpectedly), from 85.7 to 86.6, according to the Conference Board. More and more segments of the economy began to come to terms with the new post-coronavirus economy.
The end of May however brought events that have left our country reeling. New York Life CEO Ted Mathas spoke for all of us in The New York Life family when he called the death of George Floyd “senseless” and an event that “is ripping at the fabric of our communities, revealing the open wounds of race relations in this country.” The full text of Ted’s message is available here and we at IndexIQ end May reflecting on his thoughts and, as he writes, looking at how all of us can “use this period of pain and anguish to ensure we do better moving forward.”