Market Watch: Reopening Rally on Wall Street Slowed by Rising China Tensions

The global shutdown has impacted the economy in unprecedented ways. In April, the financial damage incurred from the coronavirus was evident, affecting every sector in a seemingly endless cycle. However, recent indicators are showing signs that the worst may be over in terms of economic damage. In the final days of May, the epicenters of the U.S. have reported a decline in case counts and increase of testing abilities, pushing government officials to ease restrictions. The New York Stock Exchange opened this week with social distancing guidelines in place, bringing traders back to the floor. With heightened optimism, Wall Street is set to have a winning week with a boost in consumer and investor confidence that overperformed predictions. Despite the ongoing feud between the U.S. and China, investors bet on promising vaccine reports and the robust abilities of American businesses.

“We’re seeing the economy gradually, in phases, reopen in May and June. These are the transition months. We see some glimmers of hope amidst all the hardship and heartbreak,” Larry Kudlow, director of the U.S. National Economic Council, said to CNBC on Thursday.

Wall Street had significant gains this week, the market rallied and investors redirected their spending. The Dow Jones Industrial Average closed above 25,000, and the S&P 500 exceeded 3,000, both for the first time since early March. There were winners across the board, but the S&P 500 was on track to make history. Since the onset of the three-month plunge, the S&P 500 has gained over 35%, yielding one of the most significant bear market bounces ever seen. Investors focused on stocks that would benefit from a stay at home orders being lifted, including airline, cruise and bank stocks; However, they pulled out of the COVID-19 beneficiaries, including Zoom, Shopify and Netflix. Tech stocks primarily lost their base this week as investors switched their focus. 

During the early weeks of the pandemic, the Labor Department reported an average of 5-6 million unemployment claims per week. Unemployment claims dropped by nearly 4 million in the past two weeks; The pace of filings dramatically plunged for the first time since the early days of the coronavirus outbreak. The data suggest that stages of reopening businesses are forcing owners to rehire some of the employees they previously had to lay off; Despite slight progress, the ten-week total claim count leveled out to over 40 million. As Kudlow pointed out, a high percentage of unemployment numbers were filed as “temporary,” which assumes businesses will put their employees back on the payroll as they begin to reopen. 

Along with millions who are still unemployed, global production and trade has changed drastically. The U.S. Department of Commerce released data showing a shrink of -5% in GDP in the first quarter of 2020, which is the first negative GDP account since 2014. The detailed data and predictions of the second quarter have many economists skeptical of the market rally this week; Adverse economic reports have persisted through each month. Some economists believe that stocks rallied far too quickly with the number of unemployment claims that continue. The host of CNBC’s “Mad Money” argued that investors are jumping too quickly this week without a solid reason. “You can’t keep building on a castle of sand. I see a lot of quicksand underneath some moves. I wish we would calm down and digest some of these things,” he said.

On Thursday, Wall Street’s winning streak reversed after President Trump announced that he would hold a news conference on Friday to address the China tensions with Beijing. In the final hour of trading, the Dow Jones Industrial Average fell -.6%, the S&P 500 plunged -.2%, and NASDAQ decreased -.5%.

Investors pulled back as President Trump signaled action against the national security bill China presented this week. Mike Pompeo, Secretary of State, told Congress on Wednesday that Hong Kong was no longer politically autonomous from China, indicating that the U.S. is considering removing Hong Kong’s special trade status. The feud between China and the U.S. has significantly heightened since the pandemic began, threatening the preliminary trade deal made in January. Just four months before this week, China had agreed to buy billions of dollars in American goods; However, the domestic market would benefit immensely from the transactions underway in the early days of 2020. The world has changed, and the market will need to adjust. Despite the post-lockdown confidence, investors drew back in fear of the rising political tensions. 

In the coming days, investors will watch politicians negotiate globally. The country has made significant progress that has rallied the markets throughout the past week, showing vital signs of American perseverance. Wall Street is keeping the economy optimistic each day, waiting for a complete return of health and jobs. 

“We want the economy to recover,” Kudlow said. “But it’s got to be done safely. … I remain optimistic … that we’re going to have a strong bounce-back in the second half of the year.”