In this article, we review:
- The surprisingly favorable May Employment Report showing job gains of 2.5 million
- What this could imply regarding expected timing of the pending economic recovery
- How this jobs report conflicts with recent bearish arguments that the stock market is disconnected from the economy
- The longer-term market catalysts that remain in place and continue to evolve
In perhaps the most stunning result ever produced in a monthly economic report, the Bureau of Labor Statistics (BLS) reported May nonfarm payrolls, on June 5, displaying job gains of 2.5 million. This was the strongest month of job gains in U.S. history and blindsided negative consensus expectations of approximately 8.5 million job losses. These gains follow historic record-shattering job losses of 20.7 million in April.
There is much to draw from this report, realizing of course that investors should never put too much emphasis on any one single month of data. However, some important points still need to be recognized:
- In terms of economic sectors, the largest gains came from within the leisure and hospitality industry where 1.2 million jobs were added. This reflects new hiring from businesses hit the hardest in April, when this same sector reported job losses of 7.5 million. This same theme also played out in education and health services (424,000 jobs gained versus 2.6 million lost in April,) retail (+368,000 vs. -2.3 million) and construction (+464,000 vs. -995,000).
- The Paycheck Protection Program (PPP), a major provision of the CARES Act passed by Congress in late March, likely played a key role in this strong report, particularly pertaining to the large numbers re-hired by restaurants, a business area bringing back 1.4 million furloughed workers. The PPP provision allows small businesses to potentially be forgiven on government loans if they retain their workforce.
- This surprisingly strong report now puts the concept of a V-shaped economic recovery back on the table. Since the horrendous employment and consumer numbers of April began to hit the tape, most of the longer-term economic forecasts began to assume U-shape or even L-shape recovery scenarios, in some cases measuring a full economic comeback over a multi-year cycle. While we believe a U-shape recovery is still most likely (two- to four-year time frame for complete gross domestic product recovery), the concept of a one- to two-year time period is now back in the collective discussion.
- The unemployment rate for May was officially reported at 13.3%, down from 14.7% in April. However, the BLS has since footnoted both of these measures as likely understated due to the official count of initially furloughed workers perhaps more accurately categorized as unemployed. This adjustment could push the April unemployment rate closer to 20% and May to 16%. While this change would represent higher absolute levels of unemployment, it would also represent a steeper decline from April to May.
- This jobs report also throws cold water on recent bear arguments that the strong performance in the stock market since the March 23 lows is indicative of a disconnect between equity prices and economic reality. Based on the June 8 close, the S&P 500 is now less than 5% off its February 8 and is positive on a year-to-date basis. While some may shake their heads at being near break-even given everything that has happened in recent months, we believe present levels on stocks represent long-term opportunity based on current interest rates, the prospect of economic and corporate earnings improvement, and the probability that recently implemented fiscal and monetary stimulus programs will stay in effect for some time.
- It is worth mentioning that the credit markets have experienced strong gains since late March as high-yield spreads to comparable Treasury rates have fallen dramatically from just under 11% to less than 6%, and investment-grade credit spreads have declined from 4% to about 1.4%. The Fed’s unprecedented monetary stimulus efforts — which have included not just cutting short-term rates to zero but applying historic levels of large-scale open market asset purchases — have also played a major role in the recovery of the credit markets over these past few months.
- We believe investors should closely follow the four broad economic and market catalysts we mapped out in earlier pieces that have been driving the markets and should continue to do so:
1) Record fiscal economic stimulus passed by Congress — the CARES Act — of approximately $2.7 trillion and the potential of more to follow in the months ahead
2) Unprecedented monetary stimulus being implemented by the Federal Reserve not only in taking short-term interest rates to zero but also in applying large-scale asset purchases in the trillions of dollars
3) Improved COVID-19 medical data and trends displaying stable fatality rates and rising recovery rates
4) Continued safe re-opening of the economy on a national and global basis
- It is also important to recognize that even as these catalysts move forward, investors should still brace for potential short-term volatility as anytime stock prices recover as rapidly as they have in the past three months (46% increase in the S&P 500 since March 23) there can always be noticeable daily or weekly pullbacks. That said, the longer-term recovery and investment case for stocks and credit has been improved by the May jobs report.
Finally, this jobs report should encourage investors to add one more line item to the list of risks warranting close watch, namely forecast risk. Clearly, the “experts and pundits” could not have been more wrong this past month, which of course means they can be equally so in the future, in either upward or downward direction. In other words, we are now officially in an investing zone where all forecasts are best consumed with a heavy dose of salt.
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