U.S. Bank Capital Market Update: Has economic recovery begun?

6.5.20 | Market News

Summary highlights:

  • Today’s economic data added to positive momentum in the U.S. and global economy’s improvement
  • Asset prices, which have moved swiftly in recent weeks, continue their ascendency
  • While we remain positive and optimistic about the investment landscape, we encourage clients to stay centered on their financial plan

The current capital market environment remains news-heavy, and today investors are digesting encouraging employment statistics out of the U.S. At 8:30 am Eastern Time, the Bureau of Labor Statistics announced that payrolls increased by 2.5 million in May, following declines of over 20.7 million jobs in April. Further, economists expected payrolls to decline by 7.5 million, so the results caught market participants by surprise. In fact, today marked the largest economist forecast projection miss on this monthly data set in 27 years, according to Bloomberg data. Global stocks and traditionally riskier asset classes rose sharply, and bonds moved modestly lower.

We are encouraged by today’s news not just for economic considerations but most importantly for those adversely impacted by recent events. Applauding a 13.3 percent unemployment rate may seem unusual given long-term employment trends where domestic unemployment spikes above 8 percent have only occurred in one other period in the last 35 years. However, the COVID-19 environment has resulted in many unusual phenomena. Some will argue this data is volatile and historically subject to revision (both true statements), but we note that our neighbors to the north, Canada, exhibited a similar phenomenon; following two straight months of record losses, the Canadian economy added just under 300,000 jobs as well in May. Taken in concert with other country and regional data indicating that economic activity is picking up following reopening, today’s employment report is a positive development.

Within the jobs report itself, we note the following points:

  • Rehiring is occurring in the hardest-hit segments; the report noted significant job increases in retail, food service and hospitality employment from subdued levels
  • Healthcare trends remain strong
  • Average weekly hours worked jumped to the highest on record, which can precede new hiring as companies first stretch their current workforce before ultimately adding more personnel

Muddle-through economy remains as the recovery continues, although risks remain

Contextualizing today’s news within the global economic and policy mosaic, market optimism appears justified. While maintaining an apolitical view on policy and recognizing implementation challenges, U.S. Federal Reserve actions improved financial marketing functioning, the CARES Act and follow on legislation provided liquidity opportunities for companies and individuals, and recent actions by the European Central Bank and the German government reflect policies that in the short term will help bridge economies from the immediate post-pandemic horizon to a future one. Companies have access to capital and are hiring, consumers are transitioning to more normal life activities, and the medical concept of gradual improvement and repair over time, homeostasis, continues.

Risks certainly remain. First, virus resurgence is a significant unknown; while coronavirus-related scientific understanding and medical advancements continue, we do not have a definitive cure or widely available vaccine. As social distancing measures relax, the virus’ path could change, resulting in a resurgence in case growth. Second, while most global equity markets are below where they started this year, recent performance has been extremely positive, almost torrid. Markets are forward-discounting mechanisms, meaning prices today extrapolate what the market deems to be the most likely future path. While the mosaic described earlier suggests a more positive future, the risks of ebbs and flows with companies, consumers, and the eventual stimulus withdrawals could make today’s excitement overdone. With those risks in mind, we continue to lean towards a glass half-full outlook.

Stay focused on your plan

So what does this mean to you as a client? As we have stated throughout our conversations and communications, the most powerful thing you can have is a financial plan and an active dialogue with your wealth professional. Working with your U.S. Bank team, determining the right asset mix and plan for your unique situation remains job number one. Whether we are at all-time high levels in many stock measures in late February or at multi-year lows like we were just five weeks later, investors who center on a well-defined financial plan can weather volatility and work in concert with their lifestyle. As we have said often, living and investing within your means is critical, and today’s data does not alter the need for a plan or the need to remain within your means.

Within our optimistic outlook, we expect to see continued volatility in parts of the market that may have extrapolated a too buoyant future relative to our analysis. Seeing how the economic restart plays out for consumers, businesses, and local governments will be key, and we will retain a global vantage point as we evaluate this dynamic landscape.

We will keep you posted on any changes to our views that could affect your specific portfolio. As always, thank you for your trust and do not hesitate if we can help in any way.

Print PDF


This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.
Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The MSCI EAFE Index includes approximately 1,000 companies representing the stock markets of 21 countries in Europe, Australasia and the Far East (EAFE). The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. The Nikkei 225 Stock Average is a price-weighted index comprised of Japan’s top 225 blue-chip companies on the Tokyo stock exchange. The Euro STOXX 50 Index is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

U.S. Bank and its representatives do not provide tax or legal advice. Your tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.