Jobs and Recovery

This is going to be another long one.

The April non-farm payrolls report showed a record 20.5 Million jobs were lost as the US Economy was shut down to stop the spread of the coronavirus. The unemployment rate more than tripled to nearly 15% in just a month.

Putting it in perspective: America has never lost more than 2 Million jobs in a single month, and while the unemployment rate reached 25% in 1933, during the depths of the Great Depression, it got there much more slowly. The impact has been broad-based. Job losses in Silicon Valley are thus far on par with the Dot-com recession as well as 2008. Low wage jobs were the biggest decliners. Importantly, 78% of the total are considered temporarily unemployed. Due to the scale and speed of the job losses, some expect a quicker recovery as things reopen. That seems pretty hopeful that all the fired get rehired. We just aren’t convinced that happens. The fast recovery call seems overly optimistic.

So, 20 Million jobs were lost in April. 3 Million more Americans filed for unemployment in the first week of May. The total is now over 33 Million since mid-March. That number equals approximately 21% of the US labor force. Just two months ago, the unemployment rate was the lowest it had been in five decades. The economic shock has been so damaging to American workers.

Everyone knew this job number was going to be awful. The key now is for how long. The measurement to watch is the continuing claims; How many Americans continue to collect unemployment. The level of continuing claims over the previous six weeks is now 22.6 Million. We will be studying this trend closely.

According to data from Challenger, Gray & Christmas, layoffs surged 201% in April to a record of 671,129. In case you were wondering, this is more than double the amount of layoffs in 2001 and 2008. Layoffs were widespread. 70% of the industries reported an increase. Entertainment and Retail were responsible for roughly 60% of the job cuts. The unemployment rate in these areas is over 20% now. Retail continues to struggle big time. Neiman Marcus filed for bankruptcy this week. That follows J Crew and Gold’s Gym last weekend. No sugar coating in physical retail: It’s bad.

A University of Chicago study found that 16% of lost paid employment was due to business exit. Some companies closed their doors for good. Small Business is the backbone of American employment. Starting a business is a process. Employees are expensive. Companies still functioning during the crisis have had to figure out how to do more with less. Software has played a huge role here. Some jobs just won’t come back. Some office space will not see workers return. A big risk ahead is having more workers than jobs.

The Stock Market is not the Economy and the Economy is not the Stock Market. But they have significant overlap. Right now, they seem to be as disconnected as ever, and this horrific April job report and the April rally reflect that. The Market is forward-looking and is a discounting mechanism. It prices in expectations. The Market is clearly looking past the economic shock and onto much brighter days ahead. Is that optimism warranted or is the Stock Market ahead of itself? That’s the big debate on Wall Street.

Looking forward: Activity has begun. Traffic is picking up as more cars are back on the road across the country. Gasoline demand rose 9% for the week ending May 1st, the third consecutive weekly increase. Gasoline demand has recovered 40% of its drop since mid-March, but is still down 32% against year-ago levels. This is another sign that the Economy hit some sort of bottom at the end of March and a gradual recovery has already begun.

Shanghai Disney is reopening and its first day reportedly sold out within three minutes. The park will not start with the normal 80,000 crowds. The Chinese government asked Disney to cap attendance at 30% of capacity, or roughly 24,000 people, as it adjusts to new safeguards like social distancing, masks and temperature screenings. The theme park closures cost Disney roughly $1 Billion in profits. There was a three-month shutdown in Shanghai due to the coronavirus outbreak. Back home, it was announced Disney Springs in Orlando would begin a phased reopening on May 20th. The Disney World parks and resort remain closed. There is no talk of opening the California properties anytime soon.

This is an important test for Disney and the rest of the world. It will be a slow process returning to a new normal. There will be no parades to start. Lines will be spread out. No buffets. No hugging or close up photos with characters. You’re going to have to wait to get that squeeze from Goofy. But it’s reopening, which is the start that is needed.

Stadiums and Movie theaters won’t see packed crowds for who knows how long? That said, Apple is planning to open some stores in the US next week. The NFL announced its schedule yesterday, with games planned in September. Does that mean games in front of empty seats? Regional governments will play a major role here. The Mayor of Los Angeles is already on the record stating that professional sports will not continue in his city this year. There are strong feelings on both sides here.

Back to the Stock Market. So far, buying the lockdown has worked in this V-shaped Stock Market recovery. But stocks have been going sideways at this high end of the range for nearly a month. The S&P is back to the levels from September. But a V-shaped recovery for the Economy seems darn near impossible.

The reopen test continues as California joins other states in slowly opening some additional businesses. It will be largely curbside activity for now. Does that signal a “sell the reopen” is in the offing? It’s been a tug-of-war on Wall Street. Some argue the Stock Market is topping and about to roll over. Others believe it’s about to breakout higher. We think the former, but are prepared for the latter. Nothing surprises us anymore. Fundamental analysis is unhelpful here. This Market is not operating on fundamentals. Most companies have withdrawn guidance for the rest of the year. The extent of the lockdown and what a reopening looks like is completely unknowable. It’s guesswork at this point.

We keep our focus on the old reliable for clues. The Bond Market keeps telling a different story. Negative rates in America are dangerously close. Yields on the 2-year Treasury note hit a record low of 0.11% and the 5-year at 0.25% as investors digested the prospect of a surge in debt supply. The Federal Funds futures market is currently pricing in negative rates into next summer. While the Stock Market has risen, Treasury yields keep falling. The spread across the curve is a new low of just 36 basis points (0.36%). How is that healthy? That question was rhetorical. It’s clearly not. The Bond Market does not reflect the optimism of the Stock Market.

I don’t need to tell you how fast and volatile the Market has been. We’ve seen the Stock Market crash down in March, followed by a crash up. Bear Markets do that. It just doesn’t make sense to us that the worst is over and everything is going to be rosy from here. The economic lockdown has never been done before. The unemployment rate is at highs not seen since the Great Depression. We are in a deep recession. The average recession has lasted 13.5 months. Why is this so much different than 2001 and 2008? It’s not over.

We still think there will be a long U-shape for the Economy, taking months for recovery, which will result in a W-shaped Stock Market. Bear Market rallies are powerful and often suck scared investors back in before the turn. That would suggest we are at the top of the second peak of the W, and lower levels are ahead for the necessary back-and-filling to confirm a healthy and sustainable recovery. We have absolutely enjoyed the large moves higher and all the green on our screen. We just don’t think a full blown recovery is anywhere near and believe the Stock Market is ahead of itself. It’s indeed a process.

So just as a Polar vortex is expected to knock out the warm Spring weather back East, we are gearing up for a bit of a Market vortex in the coming weeks that could put a freeze on this rally. We know all too well how quickly things can turn. We are ready for anything that comes our way.

Happy Mother’s Day to all you moms out there! We anticipate a lot of Zoom, FaceTime and social distanced celebrations this weekend. We need more celebrations.

We will be back, dark and early on Monday.


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