Monday Market Briefing 06-08 — Back to Work!

How could they be so wrong?

Friday’s employment report for May featured the biggest payroll surprise in history!

Economists believed the U.S. economy lost 7.5 million jobs during the month. But in reality, there were more than 2.5 million jobs added.

That’s an encouraging sign pointing to a healthy rebound as individual communities begin to re-open after the coronavirus lockdown. And since many large cities like New York City are just getting started with the reopen process, we should see payroll gains continue through the month of June.

Dow June Futures: Up 240 (0.89%)
S&P June Futures: Up 21.00 (0.65%)
Nasdaq June Futures: Up 18.75 (0.19%)

Economist Mohamed A. El-Erian has been discussing the “win-win” scenario for investors that is propelling the market higher.

On one hand, if the coronavirus crisis continues to be a challenge for the economy, government stimulus programs will accelerate. This process will pump money into the economy and has the effect of driving investment securities higher.

On the other hand, if the coronavirus crisis eases, we will see economies open back up and corporate profits rebound.

Either way, investors win. Or so goes the thinking for now.

While there is a limit to how far this logic can be applied, the current situation continues to push stock prices higher. And it pays to ride along for the time being. Let’s not fight the strong market trend!

Gold June Futures: Up 11.2 (0.65%)
Silver June Futures: Up 0.26 (1.60%)

Gold and silver prices were knocked back on Friday thanks to the good economic news.

Thanks to the positive payroll news and the strong market advance, investors had an incentive to move cash out of safe haven assets like precious metals and back into more speculative areas of the stock market.

Its important to note that neither gold nor silver actually “broke down.” Both precious metals moved back to key support areas on their charts and still look healthy from a long-term perspective. This may wind up being a good place to add exposure.

Remember, as the economy picks back up, there will be more fear of inflation thanks to all of the cash that has been created. This could be a very bullish backdrop for gold and silver.

10-Year Yield: 0.904%  
2-Year Yield: 0.212%

Bond yields moved higher at the end of last week. This makes perfect sense because as the economy shows signs of strength, investors will expect less help from the Fed.

Remember, bond prices move in the opposite direction from bond yields. So as yields start to move back toward more “normal” levels, there is risk that bondholders will sustain losses.

This is a bit ironic because bonds are supposed to be “safe” investments. But in today’s extremely low interest rate environment, there can be more risk in holding long-term bonds coupled with very little potential return over time. Tread carefully and maybe consider shorting bonds as a speculative trade.

Breaking Morning News

Today marks the beginning of New York City’s reopening. Certain industries including construction, agriculture, manufacturing and wholesale trade are now able to get back to business. An estimated 16,000 retail businesses and 3,700 manufacturing businesses should once again open their doors this week. We’ll be watching closely to see how the process goes, and what the health results down the road will be.

Now that oil prices have moved back toward $40 per barrel, some U.S. shale oil companies are bringing production back. This market is an intriguing example of the complexities of supply and demand. As oil prices move higher, there’s more incentive for producers to pump crude out of the ground. But the more crude produced, the more pressure on oil prices. With so many influences on oil demand and supply, we’ll likely continue to see a lot of back and forth in this market for the rest of the year.

This market rally has not treated all stocks equally. Tech stocks in particular have been the biggest drivers of growth as investors flock toward “work from home” solutions and also bet on the 5G revolution. While businesses in these areas should continue to grow, there are other areas of the economy which will obviously remain under pressure. We’re clearly in a stock picker’s market.

Chart of the Day

 

It has been quite inspiring to see such a shift in workers who were previously unemployed now finding work again.

As jobs come back on line, and consumers feel more confident about their financial situation, we should see much of the stimulus cash start to be spent. This will drive retail sales which has historically made up 70% of our U.S. economy.

Quote of the Day

The first step to be a good man is this: You must deeply feel the burden of the stones someone else [is] carrying. – Mehmet Murat Ildan

Final Thoughts

Optimism is driving a strong trend on Wall Street, while Main Street is still getting started on the coronavirus recovery process.

As long as this trend remains intact, it pays to stay invested. There will be periods where we need to lock in gains and protect our capital. But for the time being, following the trend is the best course.

Talk to you tomorrow!

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Zach Scheidt