Stocks opened slightly higher. Amid increasing skepticism about whether the rally is justified, today the S&P 500 Index will try to add to Wednesday’s strong gains that propelled it over its 200-day moving average for the first time since March and above the psychologically important 3,000 level. This morning’s market headlines are focused on rising US-China tensions and social media regulatory risk. International markets were mixed overnight with Japan a standout—up over 2%—and gains in Europe, but losses in Hong Kong, Taiwan, and South Korea.
Social media regulatory risk rising. An executive order from President Trump may narrow liability protections for social media platforms. The move raises the question of social media’s role as a gatekeeper of content and highlights the regulatory risk associated with the internet giants. Our view is the risk to future profits is manageable, and the group’s growth outlook remains strong, supporting our positive view of the communications services sector; however, this headwind may contribute to a pause in the group’s strength.
Japan’s stimulus lapping the field. As the Japanese government puts the finishing touches on another stimulus package, its total fiscal stimulus amount to fight the pandemic will reach 40%, measured as a percent of gross domestic product (GDP). Comparatively, another possible $1.5 trillion in the United States would bring this statistic up to only about 18% of GDP. Japan’s economy is expected to shrink less than the US and European economies this year, based on Bloomberg’s consensus GDP growth forecasts, while earnings growth is expected to hold up better in the United States and Europe (source: FactSet).
US-China tensions ratchet higher. China approved sweeping national security legislation in Hong Kong, bringing the city’s autonomy into question and endangering its special trading status with the United States and its place as a global financial hub. Though the US-Hong Kong trade relationship is significantly smaller than that of the US and China, the potential for another trade war may weigh on US and Asian markets in the near term.
Fed Beige Book reflects subdued sentiment. Despite the gradual reopening of the economy in several states, sentiment on Main Street remains suppressed, as the effects of COVID-19 appear to be keeping a lid on American optimism. We look at the most recent Federal Reserve Beige Book today on the LPL Research blog.
Unemployment claims remain elevated. For the week ending May 16, the Department of Labor stated 2.1 million workers filed claims for the unemployment insurance, in line with expectations and the eighth straight weekly improvement. Continuing claims unexpectedly fell 3.9 million to 21.1 million during the reporting period, an encouraging development as it reflects people getting re-hired as business reopened.
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