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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Highlights

  • Markets rose in the final week of May, with the S&P 500® climbing back above 3,000. Major indexes gained more than 4% for the month. However, uncertainty remains high and investors should speak with a financial professional regarding their portfolios.
  • Economic data still suggests caution, as jobless numbers continued to rise and economic activity remains muted despite various levels of reopening around the country. Many observers are perplexed by the apparent disconnect between the economy and the equity markets.
  • Tensions between the U.S. and China are on the rise. While markets have been largely unfazed, investors should be prepared for the possibility of a sudden market reaction.

Markets Make Gains in May

Equity markets rose during the week, closing out a month that saw gains of more than 4% across the major indexes.

  • The S&P 500 closed above 3,000 for the first time since early March. The NASDAQ ended the month less than 4% below its all-time high. The Russell 2000 small-cap index, which was slow to join the market rally, ended up gaining more than 6% in May.
  • Gains in cyclical value sectors, such as financials and industrials, were tied to continued hopes for a strong economic rebound as economies reopen across the country.
  • Markets continued to positively greet every bit of optimistic news on vaccine and therapeutic developments.
  • Recent market performance may give some investors a false sense of security, as uncertainty remains very high. It’s more important than ever for investors to speak with a financial professional about their long-term investment goals.

Economic Indicators Still Suggest Caution

A disconnect persists between market optimism and economic reality, as data continues to show a struggling U.S. economy. Some have suggested that the unprecedented monetary support provided to financial markets by the Federal Reserve may be exacerbating this disconnect.

  • Another 2 million people filed an initial claim for jobless benefits, suggesting that the economy is still shedding jobs, even as states begin to reopen. On a potentially more positive note, continuing jobless claims fell by 16%, from 25 million to 21 million.
  • Questions remain about how many of the tens of millions of jobs lost in the past two months will return. Delta Air Lines offered early-retirement and buyout packages and American Airlines announced its intention to lay off managerial workers when government aid runs out.
  • The latest reading on first-quarter U.S. GDP showed a decline of 5%, the worst quarterly performance since the Great Recession. The second-quarter figure will likely be even worse.
  • Durable goods orders—a key measure of demand for longer-lasting manufactured products—fell more than 17% in April, adding to the big decline of more than 16% in March. Much of the decline occurred in transportation, with orders of airplanes and cars plummeting.

Tensions Rise with China, as Europe Unveils Joint Financial Action

China’s decision to exert greater control over Hong Kong led to increased tensions between the U.S. and China.

  • Partly in response to the Hong Kong measure, President Trump announced potential sanctions and travel limitations on certain Chinese nationals. The president also said, “We will take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China.” This could have implications for trade and economic relations between the U.S. and Hong Kong, which is a major international financial center.
  • White House officials maintain that the rising tensions haven’t yet affected the U.S.-China trade deal reached at the end of 2019, which has been reassuring markets. But with tensions rising, a market response could happen suddenly.
  • In other international news, the European Union announced an $825 billion coronavirus-response plan that would include an unprecedented level of financial burden-sharing among EU nations. It’s widely seen as a helping hand to southern European countries that have faced greater financial and health challenges than their northern neighbors. The plan will have to be negotiated and agreed to by all 27 EU member countries.