US Economy: Forced savings.

Due to government assistance, personal income in the United States increased by an astonishing 10.5 percent in April, but consumers spent 13.6 percent less, the largest monthly dip on record, as businesses remained closed. Manufacturing and consumer expectations in the United States stabilized in May, but at recessionary levels.

US Stocks: Optimism abounds.

Despite the fact that volatility remained high, US shares surged on rising optimism over vaccine prospects and progress toward reopening the economy. Small-cap stocks in the United States performed particularly well, as "risk-on" mentality took hold at the month's close. Tech has stayed strong, with the "big 5" now accounting for more than 20% of the value of the S&P 500.

Foreign Stocks: Stimulus boost.

Non-US equities also rose in May, with developed markets outperforming their emerging counterparts. Investors applauded stimulus initiatives in both Japan and Europe, where a planned €750 billion recovery fund may establish a precedent for more effective economic cooperation.

Real Assets: Oil bid up.

The price of WTI crude rose 88 percent in May, the largest monthly gain on record, but it is still around 40 percent lower than it was at the start of the year. Reduced lockdown measures, as well as optimism for the global economy to begin recovery, resulted in increased demand for petroleum.

Our Take

The most recent economic figures confirm what we already know: COVID-19 has caused a significant damage in the US economy, and a speedy rebound is doubtful. We previously stated that government assistance in the form of the paycheck protection scheme and increased/extended unemployment benefits could only go so far, given that consumers are unable/unwilling to spend freely and many firms are still on standby. The recent sharp reduction in consumer expenditure demonstrates this. We continue to remain skeptical about the rate at which consumer activity will recover, as well as whether that level of demand will be sufficient to allow many enterprises to return to profitability. Given these concerns, it is surprising that the S&P 500 is down only 5% year to date.

Still, there are hints that a recovery is underway, as economies both locally and globally take little efforts to reopen. Cell phone activity implies that people are leaving their homes more frequently, mortgage applications have increased, and air travel and hotel data have both risen from their previous lows. Nonetheless, financial markets appear to be depending on positive scenarios predicated on a swift reopening and a vaccination provided quickly.

What We Are Doing

We are dubious of the recent stock market rise and believe the market is highly vulnerable to headline risk, particularly in light of disappointing Covid-19 vaccines and therapies and the potential of dismal corporate results in the second quarter of 2020.

The gains made by most asset classes in May disguise the rough journey that financial markets took to get to where we are now, implying that the present advance isn't always stable. Resumption of trade hostilities with China, as well as social instability in the United States and elsewhere, adds to the uncertainties.

We are not going to significantly raise risk in client portfolios at this time, but we are seeing some strategic opportunities in both credit and alternative assets. We are relieved to have left our municipal bond positions mostly intact, rightly recognizing that the primary driver of underperformance was a short-term lack of liquidity, which has since been restored. We anticipate that the spread between Treasury and municipal bond yields will continue to narrow in the coming months, providing an additional boost to client portfolios.