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Double Digit Returns on Friday – Did You Participate?

A surprise improvement in U.S. employment helped propel stocks on Friday, capping a week of big gains for sectors that were hardest hit by the coronavirus shutdown.

The unemployment rate declined to 13.3% in May from 14.7% in April, while the labor participation rate increased, with 2.5 million non-farm jobs being added to the economy. Economists polled by MarketWatch had expected the unemployment rate to climb to 19%.

President Trump hailed the good news, predicting “we’re going to be back higher next year than ever before.”

The Dow Jones Industrial Average shot up by 829 points (or 3.2%) for the session, capping a 6.8% gain from a week earlier, led by Boeing Co., which was up 11.5% Friday and up 41% for the week. The index is now down 5% for 2020, after losing as much as 34.9% through the crisis bottoming on March 23.

Note: All price changes in this article exclude dividends.

The S&P 500 rose 2.6% on Friday. The benchmark index was up 4.9% from a week earlier and has decreased only 1.1% this year, after being down 30.7% through the 2020 closing bottom March 23.

The Nasdaq Composite Index added 2.1% on Friday for a one-week gain of 3.4%. The index is now up 9.4% this year, after falling as much as 23.5% through its 2020 closing bottom March 23.

West Texas Intermediate crude oil for July delivery rose 5% to $39.91 for a one-week gain of 13%. OPEC+ oil producers are expected to finalize a deal to cut production this weekend.

Among the 11 sectors of the S&P 500, energy was the strongest Friday and was also up the most from a week earlier.

What’s “Black Gold” Doing?

Crude-oil futures were bouncing around Sunday night, but tilting higher at last check, after OPEC and allied nations agreed on Saturday to extend a production cut of nearly 10 million barrels of oil a day through the end of July.

West Texas Intermediate crude for July delivery, the U.S. benchmark, was most recently up 33 cents, or 0.8%, at $39.88 a barrel, but had been trading at $38.88. On Friday, the front-month WTI contract finished for the trading period, with a weekly gain of 11.4%, according to Dow Jones Market Data.

Global benchmark Brent oil for August delivery, meanwhile, picked up 53 cents, or 1.3%, at $42.85 a barrel on Sunday, after the contract posted a weekly gain of 11.8% on Friday.

Both grades of oil finished Friday trade at their highest levels since March 6 and booked a sixth consecutive weekly gain in anticipation of the pact from the major oil-producing giants.

The Organization of the Petroleum Exporting Countries and some of the biggest oil producers in the world, collectively known as OPEC+, concluded a videoconference meeting on Saturday, adopting measures aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the coronavirus pandemic. The curbed output represents about 10% of the world’s overall supply.

Markets had hoped that the alliance of major crude producers could strike an accord to extend a cut of output, which would have begun to taper in July, for at least another month as the crude industry contends with a pandemic that has sent much of the world spiraling into recession — an economic backdrop that is bearish for oil uptake.

“Although the whole OPEC/OPEC+ meeting build-up is always a messy process and more public than it probably needs to be, at the end of the day, the market is pleased more crude oil is off the market than the scheduled 7.7Mbd (down from 9.7Mbd) from July 1,” wrote Stephen Innes, global chief market strategist at AxiCorp, in a daily research note.

OPEC+ had initially agreed in April that it would cut supply by 9.7 million barrels per day during May-June to prop up prices that collapsed due to the coronavirus crisis. Those cuts were due to taper to 7.7 million bpd from July to December. The cuts will be reviewed monthly, with the next meeting slated for June 18.

Goldman suggested that the limited scope of the extension implies a shift in strategy for major OPEC producers that may be aimed at reining in U.S. oil production.

“By targeting normalized inventories without committing to an extended cut that would benefit long-term sentiment and high-cost producers, we believe that OPEC remains focused on sustainably increasing revenues through a combination of higher prices but also higher market share,” wrote commodity analysts at Goldman Sachs, including Damien Courvalin, Callum Bruce, and Jeff Currie, in a research report that was published before OPEC’s deal.

Reuters reported that Saudi Arabia sharply raised its monthly crude prices for July.

However, compliance to the deal, which was a sticking point headed into the gathering, remains an issue going forward, experts said.

“While the errant producers such as Iraq and Nigeria have vowed to reach 100% conformity and compensate for prior underperformance, we still think they will likely continue to have some commitment issues over the course of the summer,” Reuters quoted Helima Croft, head of global commodity strategy at RBC Capital Markets, as saying.

Meanwhile, U.S. oil may face some pressure from North American shale-oil producers if they respond to the partial recovery in crude prices by rapidly ramping up their output, during a time when oil uptake is expected to taper for season reasons. 

GAME CHANGER – Long Time Bull Puts His Cards on the Table

Long-time bull Edward Yardeni believes the historic May jobs surge is a game changer for Wall Street.

According to Yardeni, it debunks the notion there’s a disconnect between the significant market rally off the March 23 low and the coronavirus-battered economy.

“The market has been a ray of sunshine — basically investors being convinced that we’ll get out of this, and the economy will recover along with earnings. So far, that forecast seems to be working out pretty well,”  the Yardeni Research president told CNBC’s Trading Nation on Friday. “The economy may very well be catching up with the stock market rather than the stock market going off on its own.” 

May’s payroll increase of 2.5 million was the largest on record while the unemployment rate fell to 13.3% from April’s 14.7%. The Street consensus forecast had called for payrolls to drop by 8.3 million and for the unemployment rate to rise to 19.5%. 

Yardeni, who spent decades on the street running investment strategy for firms including Prudential and Deutsche Bank, credits the government’s unprecedented steps to soften the virus’s economic blow as the main catalyst for the surprise jump.

“In hindsight, it kind of makes sense because we had the Paycheck Protection Program that was basically implemented in April, encouraging small businesses to keep people on their payrolls,” he said. 

Yardeni speculates that’s exactly what happened: Main Street started bringing back laid off workers once they got the funds.

Barring a second wave of virus cases, he believes the jobs boost helps set the stage for a sharp economic rebound this year before leveling off by winter.

“It is going to be a V-[shape] initially,” said Yardeni. “Real GDP could be down 40% to 50% in the second quarter. But the worse it is in the second quarter, the greater the likelihood we’ll see something like a 20% increase in the third quarter.”

He speculates that’ll be enough to drive the S&P 500 to record highs over the next couple months — even exceeding his 2021 year-end target of 3,500. On Friday, the index closed at 3,193, 3% below the all-time high hit on Feb.19.

“Not too long ago we were in the midst of a terrible meltdown in the stock market. But it turned out to be a 33-day bear market lasting from Feb. 19 to March 23,” noted Yardeni. “Ever since then, we’ve had a melt-up that’s all related to the Fed coming in with what I call QE4-ever.” 

His best advice for investors right now is to go with the flow.

“Ever since March 23, we’ve seen a rebalancing away from bonds and into stocks,” he said. “That will continue to be a theme here for the next several months — maybe through the end of the year. So, stocks rather than bonds make sense.”

Yardeni’s top picks include technology, health care and financials. 

He also adds, “It’s going to be a pretty broad bull market here.”

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