Recess is over. Stocks rallied strongly on Friday on a surprising uptick in employment for May. Economists were expecting more job losses and an increase in the unemployment rate but the actual number proved them wrong on both accounts… and the market approved.
N O T E W O R T H Y
All work… no play. Talk about missing the mark. There is an old saying that if you have 2 economists you will have 3 opinions. Economists like to opine on things and their track record on those opinions and predictions is actually pretty poor. In fairness, they are actually really good at describing what is happening now and why, but predicting the future… not so good. Friday’s big prediction miss by economists turned out to be one of those that fell in favor of the stock markets. An average of surveyed economists forecasted that May’s job losses would amount to -7.5 million after the prior month saw losses totaling -20.54 million. The number showed that, in fact, there were +2.509 million jobs gained in May, the largest monthly gain since World War II. Why not add yet another one to the record books as it seems to be a daily occurrence these days. Economists were also expecting the Unemployment Rate to top 19.0% after it hit 14.7% last month. The Unemployment Rate actually declined to 13.3%. Even the most exuberant bulls were caught off guard by the positive numbers on Friday. Many of us monitor the weekly employment numbers that come out each Thursday as a more timely, less lagging indicator.
That number, which includes Initial Jobless Claims and Continuing Jobless Claims has shown some improvement over the past few weeks with the pace of weekly layoffs appearing to be slowing down, however the numbers are still big. We are all witnessing a slow resurgence of activity as shelter in place restrictions are slowly eased across the nation, but the activity is in no way near normal. Restaurants in many cases can only offer limited capacity seating in some places while others are only permitted curbside pickup and outdoor seating. Non-essential retail appears to be largely limited to curbside pickup. Based on the numbers and these heuristics one would expect job losses and unemployment to continue to grow, but at possibly a slower pace. Let’s take a closer look at the numbers and see if we can conclude why we were all caught off guard (happily, I might add).
First of all, are companies actually hiring? It turns out that, yes, they are hiring. Remember the PPP program? That stands for Payroll Protection Program, which was part of the CARES act and offers “forgivable” loans to small and medium businesses through the SBA. The lifeline financings only become forgivable if a majority of the loan proceeds are spent on rehiring or retaining employees. As we have seen, many companies have applied for and received those funds. In order not to have to pay back the loans, many companies have most likely hired back some of their laid off employees. The evidence suggests that the PPP is working and may be the driving force behind the increase in new hires. There is a downside to that however. The PPP forgiveness requires rehires by the end of June but offers no restrictions beyond. If economic activity does not rise enough to justify the payrolls, companies may actually re-layoff (if that is an actual word) employees. There is another downside as the Administration and Congress are aggressively negotiating an additional stimulus package and this latest positive development may cause some lawmakers to believe that no additional stimulus may be needed. Though last Friday’s number is encouraging, we have to remember that there are still 21.5 million people filing for continuing unemployment claims and many more employed folks whose salaries have been reduced. For many of them, the unemployment and stimulus money will only carry them another few months, suggesting that more stimulus will be needed. Digging further into the numbers, the majority of the new hires were in Leisure/Hospitality, Construction, Healthcare, and Retail Trade. Air Transportation continued to lose workers and Government job losses were the biggest loser, giving up -585 thousand workers, which is not surprising as local governments are struggling to make ends meet with surging expenses and diminished tax revenues. Still further analysis shows that many of the gains in employment were for jobs which represented workers who were classified as “temporarily unemployed”. In contrast, the “permanently unemployed” category actually grew last month. This latest take on the employment situation is quite positive indeed, but we are no where near the end of the tunnel yet, so investors need to continue to be vigilant and remain focused on the long game.
THE MARKETS
Stocks surged on Friday in response to an unexpectedly positive employment number from the Bureau of Labor Statistics. The S&P500 climbed by +2.62%, the Dow Jones Industrial Average jumped by +3.15%, the Russell 2000 traded up by +3.79%, and the Nasdaq Composite added +2.06%.
Bonds fell on Friday and 10-year treasury yields climbed by +7 basis points to 0.89%. Crude oil continued its rise as OPEC+ neared a supply cut agreement which actually happened over the weekend, WHILE YOU SLEPT. Gold continued to get pressure on the recent positive economic developments, falling by -1.69% while Clorox (CLX) topped the S&P500 biggest losers column, giving up -3.27%. It was that kind of day.
NXT UP
- No economic data today, but the week ahead will feature JOLTS Job Openings, Consumer Price Index, Producer Price Index, weekly jobless claims numbers, and the University of Michigan Sentiment indicator. The FOMC will meet tomorrow and Wednesday and will announce its policy decision on Wednesday, which will be followed by a closely watched press conference.
Please refer to the attached economic and earnings calendars for details.