The U.S. stock market just capped off its biggest 50-day rally in history, while Treasury yields have also surged to the highest level since March. It appears that Wall Street is broadly optimistic that the worst of the coronavirus downturn is over.
Traders got some confirmation on Friday that the economic recovery is underway, as the monthly labor report defied economists' expectations. Hiring rose by 2.5 million in May and the jobless rate declined to 13.3% from 14.7%, according to data from the Labor Department. Economists had forecasted further job losses and an unemployment rated closer to 20%.
The bond market has also followed in the stock market's optimism. The yield on the benchmark 10-year Treasury note, which moves inversely to price, has risen to the highest level since March — another sign that people on Wall Street are feeling optimistic.
In the week ahead, the bond market could continue to offer clues about the economic recovery. In addition, the Federal Reserve is scheduled to meet, and policymakers may reinstate their guidance for the future.
This excitement may seem at odds with what's happening in the country right now. Many areas of the country have yet to fully reopen their economies, and 21.5 million Americans remain unemployed and receiving jobless benefits. And there have been nearly two weeks of protests across the U.S. drawing attention to ongoing issues of racism and police misconduct. The market historically has been unaffected by social unrest, experts explain, because it's focused instead on what will happen 3-6 months from now.
Here's what to watch in the stock market during the week ahead — and how the news could affect your bottom line.
What's happening: The Federal Reserve is scheduled to convene for one of its eight annual meetings on Tuesday and Wednesday. While traders don't expect any change to interest rates, already near zero, they will be keen to hear Chair Jerome Powell's assessment of the economy.
Why it matters: Central bankers have pledged to support markets and the economy and already have taken unprecedented action. Such steps have included slashing interest rates and unveiling plans to help businesses get up to $1 trillion in funding in the short-term borrowing markets and programs to support lending to small and midsize businesses.
Still, Powell and other central bankers have said that more fiscal measures will be needed for the economic recovery. And some traders have speculated about negative interest rates, meaning you'd pay your bank to keep your money or get paid to take on debt. That seems unlikely, however, and instead the market will look for guidance on whether the Fed plans to raise interest rates in the future.
What it means for you: The Fed has been trying to stabilize markets and stimulate economic growth. With interest rates so low, it may make sense to continue with your plans to buy a home or car right now because it's become even cheaper to borrow money. Meanwhile, if you're considering refinancing your mortgage, ask yourself two important questions first.
Video by David Fang
What's happening: As the stock market fell between February and March, traders rushed to assets considered to be safe havens, like gold or Treasury bonds. That demand pushed yields to record lows, but now those rates are rising again. The yield on the 10-year Treasury note rose above 0.9% for the first time since March on Friday, with a boost from the better-than-expected jobs report.
Why it matters: Following that flight to safe-haven assets a few months ago, what's happening now shows that traders are more optimistic about the economic outlook again. While experts believe the U.S. already is in the midst of an economic recession, they now expect that downturn will be the shortest in history.
What it means for you: Higher bond yields can affect the rates you pay on your debt because the 10-year Treasury note is a barometer for 30-year mortgage rates, auto loans, student loans and credit card annual percentage rates, and more. Even after the recent gains, however, yields remain low by historic comparisons.
Times like this can be a good reminder of why it's important to have a mix of stocks and bonds in your portfolio. Diversification can help to reduce your overall risk, because your portfolio's performance doesn't hinge on just one investment.
The U.S. stock market is nearly back to its pre-pandemic levels, with the S&P 500 just 5.7% below its all-time high in February. And one benchmark of tech stocks has actually reached a new peak.
For the remainder of June, traders will watch the market, along with the coronavirus infections, for signs that the worst of the pandemic is over. In the weeks ahead, traders will remain focused on reopening efforts around the country and how quickly different parts of the economy are rebounding.
The past few months have attracted new investors who have taken advantage of a "generational opportunity" to buy stocks at lower prices. Whether you're a seasoned investor or have just started your journey, remember to keep a long-term perspective with your portfolio and avoid making emotional decisions.
Finally, it's important to remember that downturns can benefit long-term investors and selling during a decline could be the biggest mistake of your investing career. In fact, right now could be a "real opportunity to create wealth."
More from Grow: