Dismal Data

Today we recorded the worst jobs numbers since the Depression-era. 20.5 million Americans lost their jobs in April, and the unemployment rate spiked from 4.4% to 14.7% in one month. However, the market continues to shrug off this dismal data. The S&P 500 finished roughly 3% higher on the week. We believe participants are still buying the notion that government and Fed actions will plug the void long enough to get over 20 million people back to work. We must consider, however, that the virus crisis remains unsolved, and case numbers are not rapidly decelerating even as economies start to re-open. While it is our view that stocks are attractive compared to the world of low-interest rate bonds, we can't shake the idea that there are too many unknowns ahead for pure V-shaped recovery.  

A few things are apparent when we dig into the horrendous jobs numbers. The bulk of the pain has been concentrated in lower-earning workers in retail, travel, and entertainment. Also, most of these workers believe their jobs will return when the crisis passes. In contrast, 2 million workers have permanently lost their jobs. This number is much lower than the total number but is rising sharply, similar to the beginning of past recessions. The risk is that we are at the beginning of a slow bleed of permanent job losses. With the crisis dragging on and business activity likely to remain subdued for months, it's not a stretch to think that permanent job losses could continue to grow. This is not reflected in current market prices.  

In a similar vein, companies are largely flying blind. Guidance has generally been pulled across the board with so much uncertainty on the horizon. The market has been giving companies a pass on this and participants are doing their best to look towards the other side of the crisis. When companies do get an idea of what is to come, there is a risk that reality could be darker than the picture being painted. It's difficult to imagine that a market only down 12% on the year is properly reflecting that true state of earnings.  

At the same time, a V-shaped recovery certainly isn't impossible. There is a massive amount of stimulus plugging the gap, and if the virus can turn the corner and stay down, there is hope that jobs, spending, and the economy can come roaring back. Stocks seem to be reflecting this outcome currently. Still, we continue to think that the balance of risk is to the downside after accounting for this possibility. Our probability analysis continues to show that the S&P 500 should be closer to 2650. This is just shy of 10% lower than where we are today. We continue to tread lightly.  

Preston May, CBE®
Research Analyst