Jobs, Rally, Sentiment

Wow. Just Wow.

This relentless rally from the Market abyss in March has been one for the ages. The crash lower to start the year has been followed by a crash upward as the calendar approaches its midpoint. The S&P 500 just recorded its biggest 50-day rally in 8 decades, up over 40%. I guess it just fits the narrative of 2020, with so many unprecedented events.

The big story for the Market this week, unequivocally, was the much better-than-expected May nonfarm payrolls report. 2.5 Million jobs were added to the US Economy last month. It was expected to be an 8 Million reduction. Think about this: What was expected to be another 8 Million jobs lost in the month ended up being an actual increase in job creation, by 2.5 Million. This occurred during the pandemic. The unemployment rate is now 13.3%. The Street was estimating 19.6%. It was a complete and total stunner. Economists are often wrong. That is no surprise. How could the economists be that wrong?? I have looked into it. I found no answer.

As soon as this report hit the wires, stocks launched higher again. Stocks have been super strong for weeks, despite the really bad earnings and economic data. The thing is though, the bad data keeps getting less bad. The numbers keep rising, but the rate of change is slowing. In the case of jobs, the report was actually good. It’s a total head-scratcher.

The recent economic data suggests the worst is over. The question is about recovery; V-shaped or U or something longer. The Stock Market has been reflecting a V-shaped recovery all along. The Market has been screaming loudly for weeks. The industries that saw the biggest job losses in April saw the biggest gains in May. Leisure & hospitality accounted for about 40% of the job loss in April and 40% of the gain in May.

The rise in the labor participation rate in May could soothe worries about the longer-term economic damage. The job report will no doubt add to optimism for the economic reopening. The Market rally is already founded on fiscal and monetary stimulus, a heightened focus on an uptick in high-frequency data, and Corporate America seeing demand strengthening.

There has also been more and more discussion about whether stocks are right to largely ignore the negative forces. There have been widespread violence and protests in the US. China made an aggressive move to impose a new security law on Hong Kong. There’s a Cold War brewing between the US and China, which clearly threatens the Global Economy. And it’s as if the Market forgot about Covid. Right or wrong, the coronavirus is no longer slowing down the Bulls whatsoever.

Investor sentiment has been volatile too. It was close to euphoric in February, just before the crash commenced. The crash triggered panic sentiment, something that always happens during major declines. Investor sentiment hit lows in March commonly found around Market bottoms. It’s back up near the highs of the year. The chase is on.

Investor sentiment is always an effective tool to gauge tops and bottoms. It is very much a contrarian indicator. The best time to buy is, as Baron Rothschild famously phrased, “when there is blood in the streets.” Warren Buffett was a bit more eloquent when he said he gets fearful when others are greedy and he gets greedy when others are fearful.

This rally is bordering on the ridiculous now. It sure is great to see these signs of improvement as recovery takes hold. We certainly enjoy that. But there has been a lot of short-covering and downright panic buying this week. Leadership has moved from Growth, like Tech and Health Care to Value, like Financials and Industrials. Attitudes have gone from fear to fear of missing out. There seems to be a real fear of missing out in this rally.

The point is, investing can be quite emotional. Fear is a much stronger sensation than greed. And making money can mask a lot of problems below the surface. American voters are still divided on politics. But American investors seem to be in agreement on the Stock Market. Time and again, investors have a proven track record of chasing rallies by buying high and then selling low. It’s the complete opposite of design.

Recovery is a process. It requires patience. We still anticipate a lot of back-and-forth as the American Economy continues to reopen. The Stock Market is downright giddy right now. That said, the momentum is undeniably strong. The job report was almost certainly artificially influenced by the Congressional Paycheck Protection Program. When payroll benefits expire in July, things could certainly look much different. A resurgence of the virus would be trouble too. There’s also that not-so-little event called an election later on in the year. The second half of 2020 is going to be eventful too.

Investing is a marathon and recovery requires patience. This rally has been explosive and certainly boosts investor confidence. Sentiment is historically driven by past returns. There’s nothing like price action to change sentiment. The rally has done it. It’s already priced in a lot of good. We just have our eyes wide open for what comes next.

Have a nice weekend. We’ll be back, dark and early on Monday.


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