FICS Editors' Note

On Friday, June 5, 2020, the Labor Department reported that the official unemployment rate for the U.S. fell to 13.3% in May.

The bulls have taken back the stock market

The S&P 500 is up nearly 40% in just the past 50 trading days, the largest such rally since 1957.

  • By Paul Vigna,
  • The Wall Street Journal
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The bulls are in the driver’s seat again. Stocks rose this week, with investors seizing on incrementally good economic news and ignoring the clashes in the streets, the odds of a long, drawn-out recovery and even the potential resumption of the U.S.-China trade war.

Driven by Boeing Co. (BA), the Dow Jones Industrial Average (.DJI) was up 3.5% for the week through Thursday’s close. The S&P 500 (.SPX) gained 2.2%, and the Nasdaq Composite (.IXIC) rose 1.3%.

Friday morning brings the most important data of the month, the nonfarm payrolls report. It is expected to show the official unemployment rate jumped to 19.5% in May, but the market is already betting that the worst of the economic damage from the coronavirus pandemic is past.

Let’s look at this week’s winners and losers.

Winner: Boeing and the risk trade

It has been a long time since anyone has called Boeing a winner, but the company’s stock staged a big rebound this week. Shares were up about 26% through Thursday, far and away the biggest move among the 30 Dow components.

Boeing managed to get two customers to defer, rather than cancel, orders for 737 MAX planes, and a prominent hedge fund, Dan Loeb’s Third Point, took a position in the company’s debt.

Boeing sits in the middle of many of the swirling issues in the markets. Its primary customers are airlines, which are under duress. They need business people and tourists to resume traveling. And for that to happen, the economy needs to recover, and progress needs to be made toward a coronavirus vaccine.

If those things don’t happen, it is hard to see how Boeing grows. Wall Street estimates, according to FactSet, call for the company to lose $4.17 a share this year.

Moreover, Boeing shares are still down nearly 60% from their 2019 record of $441. What this week’s rally in the stock really illustrates is the degree to which the risk trade has retaken the market.

Despite all the lingering issues, the S&P 500 is up nearly 40% in just the past 50 trading days, according to LPL Financial strategist Ryan Detrick. That is the largest such rally since 1957. Similar rallies have led to more gains over the ensuing 12 months, he said.

The bulls are stampeding.

Loser: Wall Street's street cred

If this rally does keep going, the major indexes are soon going to hit new highs. The Nasdaq is just 2% from its record. The S&P 500 isn’t far behind.

That isn’t going to sit well with the tens of millions of people out of work, or business owners out of business, or politicians who already look askance at Wall Street.

For decades, the stock market has been a reflection of the economy, and a powerful tool to allocate capital where it can be best employed. Right now the market doesn’t appear to reflect the economy, and the capital is directed to a narrow slice of the economy.

If this continues, “there’s going to be calls on the legitimacy of these markets,” said Joseph Brusuelas, chief economist at RSM US. “What happens when that occurs is it opens a door to overregulation.”

Next week: Fed rates decision

The Federal Reserve’s rate-setting committee meets Tuesday and Wednesday. The decision on interest rates will almost certainly be a nonevent: no way they raise rates, and they aren’t going into negative territory either.

The central bank will also release its Summary of Economic Projections. That could be more interesting, providing insights into how Fed officials see the eventual recovery from the pandemic.

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