The risks are piling up. How long can investors ignore them?
Posted June 1, 2020 7:46 a.m. EDT
CNN — US stocks have been on a tear since March even as the coronavirus pandemic cost tens of millions of Americans their jobs, shut down huge swaths of the global economy and depressed trade.
Market observers have offered various explanations for the rebound. The huge amount of stimulus coming out of the US Federal Reserve has supported markets, some argued. Others said that record low bond yields meant investors had no other choice but to pile back into stocks. A third explanation: Tech companies, which increasingly dominate the S&P 500 index, would emerge from the pandemic even stronger.
These factors, perhaps in combination, may help explain why the S&P 500 has gained over 35% since late March. But a potent new cocktail of emerging risks will test just how much support these trends can provide.
The death of an unarmed black man in police custody in Minneapolis has sparked social unrest in the United States, where clashes between police and protesters continued over the weekend in dozens of cities. Local authorities have imposed curfews and states from coast to coast have mobilized National Guard units in an attempt to prevent further violence.
The worst outbreak of social unrest in decades introduces new risks for investors who already faced an extremely uncertain outlook. The US presidential election could turn into a referendum on race relations, and experts say the protests may spark a second wave of coronavirus cases.
One way to think about it: The United States was already being tested by its first impeachment since 1998, the worst pandemic since 1918 and the toughest economic conditions since the Great Depression of the 1930s.
Now, the country faces social unrest on a scale that hasn't been seen since riots rocked Detroit, Chicago and Watts in the late 1960s. The presidential election, which could produce more social division, looms later this year.
Last but not least, the Trump administration continues to spar with China over its treatment of Hong Kong. Further escalation risks reigniting a trade conflict between the world's two largest economies.
The immediate challenge: The widespread social unrest threatens to derail a comeback by companies that have already been grappling with the pandemic for months.
Target, which is based in Minneapolis, reduced its opening hours to prevent the spread of coronavirus. Now it's temporarily closing 100 stores after some of its locations in Minnesota and Georgia were vandalized.
Other large retailers are following suit. Amazon-owned Whole Foods, Apple, Walmart, Nike and Adidas are reportedly closing some or all of their US stores in response to the protests.
Later this week, investor sentiment is likely to be challenged by another US jobs report. Economists surveyed by Refinitiv predict the US economy shed nearly 8.3 million jobs last month on top of 20.5 million jobs lost in April. That's predicted to push the unemployment rate up to 19.7% from 14.7%.
"Whether risk sentiment can really remain this positive all week is doubtful," said Kit Juckes of Societe Generale. "Unrest in the US and the likelihood of another dreadful labour market report on Friday hardly suggest so."
"The data are far more likely to support the idea of a sharp recovery in activity to a much slower level than before, than the notion of a 'proper' v-shaped bounce," he added.
China's factories continue to recover
New data indicate that China's factories are continuing a tentative recovery from the coronavirus pandemic.
Manufacturing activity in the country unexpectedly rose last month, according to a private survey. Media group Caixin said Monday that its manufacturing purchasing managers index increased to 50.7 in May, up from April's 49.4. That's better than the 49.6 economists had expected.
The Chinese government also reported over the weekend that its official PMI increased in May.
"Manufacturing production recovered faster than demand as the domestic economy recovered from the epidemic," wrote Wang Zhe, senior economist at Caixin Insight Group, in a statement. Exports remain sluggish, however, as the rest of the world continues to grapple with the virus, Wang added.
Elsewhere in Asia, the pain continues.
"The bigger picture remains the same — the region's manufacturing sector is in a deep recession," said Alex Holmes of Capital Economics. "Output is still likely to be well below normal levels for many months to come as domestic and global demand remain very depressed."
People are really missing Starbucks
Forget Gucci, Chanel or Louis Vuitton. It's Starbucks that's emerged as a hot brand for bargain hunters.
Shoppers in the past several weeks have flocked to popular resale marketplaces like Poshmark and OfferUp to score mugs, tumblers and cups bearing the Seattle-based chain's brand.
Why? According to my CNN Business colleague Parija Kavilanz, people miss visiting stores and interacting with their favorite baristas.
"People have been making their coffee at home and pouring it into their favorite Starbucks cups, or taking their Starbucks mugs to their Zoom meetings or now, virtual coffee meets," said Poshmark CEO Manish Chandra.
Sellers are pitching everything from official Starbucks merchandise to items like mini Starbucks coffee cup earrings or even a Starbucks pumpkin spice latte hair scrunchie. Poshmark said orders of all kinds of Starbucks mugs and tumblers, new and vintage, have increased by more than 100%.
HeadHunter Group reports earnings before the opening bell.
NGL Energy Partners will release earnings after the close.US ISM Manufacturing Index will be published at 10:00 a.m. ET.
Coming tomorrow: Reserve Bank of Australia interest rate decision; Dick's Sporting Goods, CrowdStrike and Zoom earnings