Even a stock market downturn can not endure indefinitely. However, just because a market stops falling does not imply that it will continue to increase.
Last week, the S&P 500 and Nasdaq Composite both ended seven-week losing streaks, while the Dow Jones Industrial Average ended an eight-week losing streak with its best weekly performance since November 2020. The major averages moved into the plus column for the month of May, following the S&P’s brief fall into bear territory the previous week.
Perceptions that the Fed might not need to tighten monetary policy as much in response to indicators of economic weakness or because the financial markets had already exercised caution by correcting may have contributed to the turnaround. Whatever the reason, around $26 billion returned to stock exchange-traded funds for the week ending May 25, according to J.P. Morgan global quantitative and derivatives analysts. This was a reversal from the previous six weeks of net fund outflows.
The recovery reached the credit markets. In tandem with equities, investment-and speculative-grade corporate debt, as well as municipal bonds, staged impressive recoveries. Cliff Noreen, head of global investment strategy at MassMutual, remarked that buyers were attracted to high-yield bonds, which finally lived up to their moniker following a severe price fall. He said that the yields on sub-investment-grade debt have gone up to 8%, which is a good return over the rate of inflation in consumer prices and is much higher than last year’s low yields of 5%.
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Ahead of the Memorial Day–shortened trading week, the normal economic announcements that dominate the beginning of a new month, such as May’s employment report on the following Friday, may have less impact than usual. This is due to the fact that the Fed has all but guaranteed a half-point increase in the federal funds rate goal at its June and July policy meetings.
The employment report is anticipated to indicate a healthy gain in nonfarm payrolls in the low 300,000 area, according to the best estimates of experts. We’ll be on the lookout for any indications of a hiring slowdown, despite the fact that this would fall short of the gains of the previous two months, which averaged over 400,000, and those of the previous six months, which averaged over 500,000. The Jobs Openings and Labor Turnover Survey, or Jolts, with a one-month lag time may be more intriguing. This survey is likely to show that the gap between job openings and people who want to work still exists.
As stated a week ago by Stephanie Pomboy of MacroMavens, the recent decline in the value of stock portfolios may encourage those who have been living off their investments to return to the labor force. In a client note, Macro Intelligence 2 Partners hypothesizes that lengthy COVID may also limit labor force participation.
In an economy with a finite supply of labor and commodities, such as energy, it is the Fed’s responsibility to reduce demand. The recovery of the markets suggests that this process will not involve more suffering. However, this is far from certain.