As this economic crisis evolves, it’s important to remember the stock market is an expectations tool, not necessarily a mirror of reality. Two weeks ago, for example, markets were lifted on the push to reopen states along with several companies signaling the worst may be past. The NASDAQ even reclaimed its 2020 losses and inched into positive territory on the year.

But stocks just finished their worst week in about two months as some of that optimism lost its shine following comments from Fed Chairman Jerome Powell, NIAID Director Anthony Fauci and renewed tensions with China. The pullback wasn’t irrational by any means, especially given the uncertain environment we’re living in. But given that stocks are for long-term financial goals, you shouldn’t get too hung up week-to-week swings in sentiment. With that in mind, let’s dig into the stories that moved markets last week, and set you up for the week ahead.

WALL STREET WRAP

A Reality Check: In a speech Wednesday, Powell lauded the swift, robust policy response thus far. But he warned the path ahead remains highly uncertain and work is needed to prevent avoidable economic casualties. “The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” Powell said.

During testimony to Congress, Fauci tempered expectations for a widespread vaccine by fall while also warning that isolated coronavirus flare-ups could grow to full-on outbreaks if governors reopen too quickly without precautionary measures in place. Lastly, Dr. Rick Bright, ousted director of the government’s Biomedical Advanced Research and Development Authority (BARDA), warned the U.S. could be facing its “darkest winter in modern history” during testimony Thursday.

Currently, the market is looking past awful economic data from April and May and instead seeking any signs of normalization. With prominent voices warning the road remains difficult, it made sense that stocks pared some gains.

Surprisingly Optimistic Consumers: The University of Michigan’s consumer sentiment index reached 73.7 in May, far exceeding analyst estimates of 68. While current economic conditions reading rose to 83 from 74.3, consumer expectations for the future fell from 70.1 to 67.7, a six-year low. A positive current outlook was likely lifted by CARES Act relief in May, but consumers are feeling more uncertain about job prospects, particularly among upper-income households.

Interestingly, 57 percent of survey respondents said their health remained a top concern, while just 17 percent said damage to their finances was top of mind. Ranking hire than their finances? Social isolation. It was mentioned as a top concern by 21 percent of respondents, up from 14 percent in April — isolation, perhaps, is an underappreciated factor shifting views on reopening.

Small Business Surprises, Too: The NFIB Small Business Optimism Index came in at 90.9 in April versus expectations of 83. “The full force of the “recession” has not yet been felt as programs such as PPP encourage firms to maintain employment even as the government shutdown reduces business activity,” said NFIB Chief Economist William Dunkelberg. However, small business owners are seeking flexibility with PPP funds to support business operations and liability protection, Dunkelberg added.

Retail Sales Disappoint: In contrast, retail sales fell 16.4 percent in April, a larger drop than the 12.0 percent that analysts expected. With stay-at-home orders in full effect in April, in-store sales plummeted, with clothing, electronics and home furnishings getting hit particularly hard. However, non-store retailers (think ecommerce) rose 8.4 percent in April. Indeed, Mastercard reported that card-not-present (digital) transactions rose 40 percent year-over-year in April.; the company’s data also showed spending started recovering (normalizing) in May.

Consumer spending accounts for roughly 68 percent of U.S. GDP, which means this economic gauge will be closely scrutinized for signs of improvement in the months ahead.

The Return of U.S.-China Tensions: The Trump Administration last week moved to block chip equipment exports to black-listed Chinese telecom giant Huawei Technologies. That move came on the heels of the administration ordering federal pension funds to stop investing in Chinese stocks. In response, leaders in China are preparing to put U.S. companies on an “unreliable entity list.”

President Trump recently tweeted that “100 trade deals” wouldn’t make up for China’s handling of the coronavirus. U.S.-China trade tensions were primary driver of volatility before the coronavirus. It looks like those tensions are back on the front burner and could be a source of market-moving uncertainty in the months ahead.

THE WEEK AHEAD

A Check on Services and Manufacturing: This week we’ll get flash reads on manufacturing and services PMIs. While they won’t be pretty, they could be better than expected (remember, the market is a relative-to-expectations tool). In China, for example, PMIs unexpectedly bounced in March from February lows. While some question how resilient that bounce back is, a similar surprise could lift markets this week.

Housing Market Heating Up? The housing market has been a relative bright spot before and during the coronavirus crisis. While sales slipped along with other sectors of the economy, industry insiders have noticed activity recovering, starting in the last weeks of April. We’ll see this week if momentum looks like it’s continuing to build.

$3 Trillion in Additional Aid? The House passed another $3 trillion coronavirus relief package Friday, sparking a debate that will likely ramp up through the week. The Fed has said more needs to be done, and the White House has signaled openness to more aid. However, Senate Majority Leader Mitch McConnell described the latest House bill as a “parade of absurdities that can hardly be taken seriously.” Treasury Secretary Steven Mnuchin also pushed back on a new round of funds, opting to wait a few more weeks to let the prior $3 trillion injection work its way through the economy.

Expect stimulus push-and-pull to continue through the week.

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