The latest U.S. employment report showed a record 20.5 million jobs lost in April, and an unemployment rate of 14.7%, which is the highest since the Great Depression. Unemployment claims from the start of the coronavirus pandemic through May 2nd total 33 million. Yet, stocks continue to rally out of the March 23rd bear market bottom. The divergence in the economy and markets is a paradox. Capital markets started their rally based on massive monetary and fiscal stimulus. The continuation of the rally hinges on an economy that safely reopens and recovers in the second half of 2020.
On Friday, the U.S. Bureau of Labor Statistics (BLS) released The Employment Situation – April 2020 edition to the dread of most everyone. The release reiterated the job market fallout from the COVID-19 shutdown, reporting a 20.5 million net loss in jobs during the month of April. There were also some downward revisions of February and March figures. That translated to the headline unemployment rate increasing 10.3% to 14.7%. It is the largest one-month jump and the highest unemployment rate since the BLS started this data series in 1948. Please see the table below for changes by industry.
Nearly all industries showed a negative impact (grocery/supercenter general merchandise stores at +93,400 were the only industry or sub-industry to post meaningful net job gains). Industries that deal with people directly and in close proximity have been affected the most. Restaurants, bars, entertainment, hotels, health care (dentist offices alone shed 500,000+ jobs), retail trade, and childcare businesses accounted for 60% of the total jobs decreases.
The numbers do not come as a surprise. On March 16th, President Trump announced social distancing guidelines to go into effect. Here in Memphis, Mayor Jim Strickland issued a shelter-at-home executive order on March 23rd. Economic activity ground to a halt at the end of March as most of the country sheltered at home in an attempt to “flatten the curve” of COVID-19.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 27th to try to flatten the economic curve, but it would take some time to administer. Banks started taking applications for the Payroll Protection Program (PPP) loans on April 3rd (April 10th for self-employed individuals), and it took a few weeks if not longer to distribute the loan proceeds. The PPP stimulus also only applied to businesses with fewer than 500 employees (with a loophole for restaurant and hotel franchises).
Furloughs and layoffs continued at a rapid pace in April as business revenues and cash reserves wound down. And there wasn’t just anecdotal evidence. Initial unemployment claims are reported weekly and have totaled 33 million since the start of the pandemic.
As the pandemic continued, capital market investors knew that April jobs data would be terrible. However, it may still seem absurd that stock markets rallied approximately 2% on a day in which the U.S. officially reported job losses at historic levels. Here’s the screenshot along with headline from CNBC.com on Friday.
The dislocation between the economy and markets over the last month has caused some consternation and disbelief from the investing public. So, why does the market continue to shrug off terrible economic data and climb out of its hole?
1. Timing. Economic downturns and stock market downturns are not typically in sync. Economic data, such as the April jobs report, tends to look backwards. Market data tends to look forward. Investors buy stocks for future earnings, not trailing earnings. As we’ve written previously, the market is almost always the first to fall coming into an economic downturn as well as the first to recover in anticipation of an economic improvement. In 10 out of the past 11 U.S. recessions (2001-02 is the outlier), the S&P 500 bottomed and began to recover on average 5 months prior to the end of the recession.
2. Stimulus. The stock market low-water mark as it currently stands was on March 23rd with the S&P 500 and MSCI All Country World Index both down 34% and Dow Jones Industrial Average down 37%. March 23rd was also the date that the Federal Reserve announced that they were restarting their Quantitative Easing (QE) bond buying program with no limits on the amounts of purchases and no end date. The Fed also moved for the first time into corporate bonds, purchasing investment-grade bonds and bond ETFs. On April 9th, the Fed announced logistics including the Special Purpose Vehicles (SPVs) to purchase assets provided by the Treasury through the CARES Act. The CARES Act provided $2.3 trillion of stimulus through the PPP program, advanced payments to taxpayers, enhanced unemployment insurance, and other bailout programs.
Warren Buffett at Berkshire Hathaway’s annual shareholder meeting last week noted the unprecedented size and speed of the Fed’s intervention. “Jay Powell, in my view, and the Fed board belong up there on a pedestal. They acted in the middle of March probably somewhat instructed by what they’d seen in 2008 and 2009. They reacted in a huge way and essentially allowed what’s happened since that time to play out the way it has.” He went on to say that corporations should send them thank you notes for unfreezing the bond market and allowing bond issuance in April.
3. The nature of the crisis. There has been optimism that the economic side of the crisis will subside as soon as the health crisis is mitigated through antivirals or a vaccine. Some of this optimism may recede as the shutdown continues, but there is a considerable focus on health solutions. There were market swings in the last 2 weeks based on trials of the anti-viral Remdesivir. The Johnson & Johnson and Oxford University vaccines, and Regeneron monoclonal antibody therapy are treatments worth watching as well.
The recovery may start before the health solution even comes to fruition as parts of the country have already started to ease shelter-in-place orders and reopen their economies in phases. Job losses and GDP declines have been somewhat self-inflicted in our attempt to flatten the curve, protect people, and preserve health care capacity. There is hope that those furloughed or laid off will be rehired when the economy normalizes. To that end and on a positive note, 78% of those who lost their job in April said they were furloughed, which suggests that their unemployment will be temporary.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist