For the S&P 500 (Index: SPX), the biggest news of the week ending 5 June 2020 was the surprisingly positive jobs report that came out on Friday morning, which prompted the index to soar 2.6% to close the week at 3,193.93. This level is 956.53 points (42.7%) above where the index bottomed on 23 March 2020 and is 192.22 points (5.7%) below the S&P 500's current record peak that was recorded on 19 February 2020.
What made the May 2020 jobs report so surprising is that it showed a substantial gain in jobs when significant losses had been expected. That surprisingly positive outcome has already begun altering the outlook for the S&P 500, where we saw some initial movement away from expectations of potentially negative interest rates compared to what we observed last week.
Since the CME Group's FedWatch tool has not been adapted to handle the potential for a negative Federal Funds Rate (FFR), the right way to read the probability shown for the lowest "0-25" basis point range is that investors are giving 91% probability the FFR will be at that level or less as of the close of trading on 5 June 2020, lower odds than the were expecting a week ago.
There was also a significant improvement in the outlook for expected future dividends over what we saw last week.
Though it still appears negative, we may be seeing the value of the amplification factor starting to move in a positive direction, which if it continues to become positive, would be a sign the market is leaving the upside down for a more normal right side up relationship in how stock prices work.
What happens next is unlikely to involve a smooth transition from the current regime, as expectations will be affected by the random onset of new information. Speaking of which, here are the market-moving headlines from the week that was, where you might be surprised to find it wasn't just the U.S. jobs market that offered unexpectedly positive news for investors on Friday, 5 June 2020:
- Monday, 1 June 2020
- Daily signs and portents for the U.S. economy:
- Oil steady; U.S.-China tensions weigh, possible output cuts support
- Trade tensions rise, fall between U.S., China:
- China halts some U.S. agri purchases amid Hong Kong tensions: Bloomberg News
- China buys at least three cargoes U.S. soybeans for Oct or Nov shipment: traders
- 'Lemon' or not, Trump stuck with Phase 1 China trade deal for now
- U.S. manufacturing activity crawls off 11-year low
- Mixed picture for recovery emerging in Europe, Asia
- Europe's factories starting to recover, Asia's pain worsens
- Worst may be over for euro zone factories, recovery to be slow: PMI
- Japan's May factory activity sinks as pandemic lockdowns hit demand: PMI
- Bigger stimulus developing in China:
- Wall Street closes higher as recovery signs soothe protest, pandemic worries
- Tuesday, 2 June 2020
- Daily signs and portents for the U.S. economy:
- Coronavirus and the global economy
- Oil up more than 3% ahead of OPEC+ meeting and on easing lockdowns
- Bigger trouble developing in Japan, "developing" world:
- Japan's service sector activity shrinks for fourth month in May: PMI
- World Bank says coronavirus to leave 'lasting scars' on developing world
- Bigger stimulus developing in Japan, Taiwan, UK, South Korea:
- Japan's cash balance hits new high as central bank pumps money to combat pandemic
- Taiwan says planned stimulus coupons could boost consumer spending by $3 billion
- UK lends 21 billion pounds to small firms hit by coronavirus
- South Korea announces $29 billion third stimulus budget to fight virus misery
- Recovery signs, bigger stimulus developing in China:
- China's services sector bounces back into growth, job losses continue: Caixin PMI
- China auto sales growth seen for second straight month, boosting recovery hopes
- Exclusive: China approves $20 billion mega petchem complex in Shandong oil hub - sources
- Wall Street closes up on signs of economic rebound
- Wednesday, 3 June 2020
- Oil moves higher, hovers below $40 as doubts emerge over next step on OPEC cuts
- Bigger trouble developing in Japan, bleak outlook in Eurozone:
- Japan's factory, retail sectors slump as pandemic hits auto sector
- Euro zone deep downturn eased in May, growth some way off: PMI
- Bigger stimulus developing in U.S.
- Fed expands municipal liquidity program to include transit, airports, utilities
- U.S. House to vote on infrastructure funding plan in July
- Wall Street closes sharply higher on signs of economic rebound
- Thursday, 4 June 2020
- Daily signs and portents for the U.S. economy:
- U.S. jobless claims dip below 2 million, road to recovery rocky
- Oil prices steady as market awaits clarity on OPEC+ output cuts
- Much more massive stimulus developing in the Eurozone:
- ECB boosts pandemic stimulus to 1.35 trillion euros
- Lagarde comments at ECB press conference
- ECB policymakers debated 500-750 billion euros package before compromise, sources say
- ECB sees big 2020 recession, partial rebound next year
- Bigger stimulus also finally developing in Germany:
- Germany finally splurges, but not without fresh criticism
- German coalition parties agree 130 billion euro stimulus package
- Factbox: Germany's stimulus package helps consumers and companies
- S&P 500 closes down, snapping four-day rally
- Friday, 5 June 2020
- Surprise May U.S. payrolls rise fans hopes for economic recovery
- Trump touts job gains as 'greatest comeback in American history'
- EXPLAINER-May's jobs report stunner: real deal or head fake?
- U.S. labor market unexpectedly improves; recovery years away
- Explainer: No one really knows how many Americans need unemployment benefits
- Other surprising good jobs news elsewhere:
- Oil climbs 5% on U.S. jobless drop, OPEC+ meeting hopes
- Bigger trouble developing in Eurozone, China, Japan:
- Germany will need two years to recoup growth lost in recession, Bundesbank says
- China May exports seen tumbling as coronavirus hits demand; imports fall: Reuters poll
- Japan's household spending falls at record pace as virus stalls economy
- ECB's plan for bigger stimulus in Eurozone to face legal challenge:
- ECB nemesis Kerber says new scheme may be forbidden aid to debtors
- ECB still needs to underpin 'fragile' markets, Lane says
- Wall Street closes up sharply on surprise U.S. jobs report
Elsewhere, Barry Ritholtz lays out the positives and negatives he found in the past week's markets and economy news.
Since we've been discussing how this week's expectations for the Federal Funds Rate and the S&P 500's dividends have changed from last week, here's our analysis from last week. For other recent and related analysis, please follow the links to our S&P 500 chaos series.
A One-Two Punch for the S&P 500
Update 11 June 2020, 6:30 PM Eastern: The S&P 500 (Index: SPX) plunged 5.9% to close at 3,002.10 today, as the outlook for investors turned gloomier.
We think today's rout may primarily be the result of delayed fallout from the Federal Reserve's "commitment" to hold the Federal Funds Rate at the zero bound range (between 0% and 0.25%) for the next two years, where investors had been expecting the potential for negative rates. In effect, investors are realizing the Fed's monetary policy will be less expansionary than what they were expecting, with the result being that stock prices are falling, just as considered in the "what if" scenario we presented back on 26 May 2020.
At the same time, the U.S. is seeing a new increase in coronavirus infections, primarily in states that had not been part of the initial wave of infections, which will delay the recovery of key parts of the economy, with the aerospace industry and airlines especially hard hit, where we may soon seen greatly expanded layoffs.
The effects of this one-two punch can be seen in the S&P 500's dividend futures, where distant future quarters fell today, and also in the alternative futures chart, which saw the S&P 500 drop below the bottom end of our redzone forecast, which potentially indicates our "what if" scenario was correct.
We'll cover however the week closes on early Monday, 15 June 2020 in the next regular edition of our S&P 500 chaos series.