Positive, market-driving economic news and activity continued rolling in last week. Airlines announced increasing summer flights as passengers slowly return and states continue to reopen. Furthermore, the surprising decrease in unemployment announced by the Department of Labor on Friday and continued oil production cuts announced by OPEC on Saturday will likely provide fuel for this rally to continue into the beginning of the upcoming week. However, with COVID cases slowly increasing again and the impending end to the $600 government support checks in July, will there be another dip? Here are the details:
The unemployment rate unexpectedly decreased by 1.4% in May as employers added 2.5M new jobs. Last Friday, the Department of Labor announced an unexpected drop in unemployment from 14.7% to 13.3% in May. The report noted employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade - areas depressed most by COVID. This unexpected decrease in unemployment drove stocks up significantly towards the end of the week. However, some of this increase in employment could be attributed to employers rehiring employees that were laid off.
Airlines increase summer travel routes as they've begun to see increasing demand by passengers. Airlines expect to fly at ~50% of their normal schedules during the summer as passenger demand has been slowly increasing. This is a dramatic increase from May, when they were operating at ~20% of their schedule. This optimistic and quick recovery by airlines drove investors to invest heavily in airlines, hotels, etc. driving up their share prices significantly. See which airline stocks we like here.
OPEC extends oil production cuts through June in efforts to bring up the price of oil to help battle oil oversupply. In efforts to continue increasing oil prices, OPEC has decided to cut 9.6M barrels of oil until the end of July. This reduction in supply, along with increasing demand for oil as economies open, will likely be a large driver in stock prices for oil companies in the coming week. Small oil companies will likely be the greatest benefactor of this news.
However, investors are wary of the fragile economic state of the U.S. with the end of stimulus checks impending in July. With all the positive news around state reopenings and decreased unemployment, investors are worried about the conflict in Congress around passing the fifth and final COVID relief bill. McConnell has already said Republicans won’t extend the $600 per week supplemental unemployment benefit, which they say is taking away the incentive for people to return to the job market. If a bill does pass, it'll likely be <$1T.
Furthermore, select states saw a rise in COVID cases upon reopening, raising concerns for a second wave of COVID. Last week, Johns Hopkins University observed an increase in the five-day moving average for confirmed cases. Public health officials are concerned that widespread protests may be contributing to the increase in COVID cases. While this is concerning, the overall picture has been mixed as other states have demonstrated significant progress in decreasing COVID cases after reopening. The U.S.'s overall daily COVID cases count has been decreasing gradually, hovering around 20K new cases per day.
Overall, WX Capital is comfortable maintaining our current market positions for several reasons. Firstly, the majority of our investments is in biotech, which is less dependent on consumer discretionary spending and therefore less impacted by unemployment and economic downturns. Secondly, federal support for COVID as the U.S. transitions into a more "normal" state, will likely continue, though at a much lesser degree given the drop in unemployment last month. Lastly, U.S. COVID cases are now dropping steadily. Even if there were another spike in COVID cases, the U.S. hospital system is better prepared to identify and handle COVID cases at earlier stages. Later stage COVID can be supported by Gilead's drug, remdesivir. As usual, don't ever hesitate to reach out with questions!