As expected, the Labor Dept. reported a massive spike in unemployment Friday morning. But with the bad news essentially baked in, index futures extended this week's rally in the early going. With the number out of the way, attention may turn back to earnings, trade talks, and the timing of economic reopening.
Jobless rate soars to postwar high of 14.7% in April, with jobs falling 20.5 million
After payrolls, investors await weekly oil rig count, cruise line earnings next week
Nasdaq finished Thursday higher year-to-date for first time since crisis began
(Friday Market Open) For the sake of U.S. workers, let’s hope this is the worst jobs report any of us ever see. The economy shed 20.5 million jobs last month, and unemployment rose to a postwar high of 14.7%, the government said.
That’s the heftiest unemployment rate since the World War II era. The rate previously topped out at 10.4% in 1982. It hit 10% at the peak of the 2008 financial crisis.
As bad as it was—and there’s no way a single number can capture the horrible impact on U.S. employees struggling amid this crisis—the actual unemployment rate was a little better than some Wall Street analysts had expected. The Wall Street consensus was 16.2%, according to Briefing.com. Also, analysts had expected 21.5 million job losses. Still, the numbers aren’t pretty.
Another statistic that helps put things in perspective is labor force participation, which fell to 60.2%, the lowest since January 1973. That rate had been trending lower for years, but typically had been coming in near 62% to 63%. That’s a number you’d rather see grow in good times, because it suggests more workers are finding reasons to come out of the shadows of long-term unemployment. Some of that had appeared to be happening the last few years.
The hardest hit industry, not surprisingly, was leisure and hospitality. Payrolls there tumbled 7.7 million, or 47%. Almost three-quarters of the decrease occurred in food services and drinking places, the government said. Education and health services came in second with 2.5 million jobs lost, and business and professional services saw 2.1 million jobs go away.
Though you might think health care would have done better considering it’s a health crisis, it’s important to remember all the health care that’s not being done, like dentistry and people going in for checkups. It’s a little worrisome because stuff like that means Americans might come out of this with their overall health in worse shape as they let the little things go. This kind of thing can have economic repercussions.
Other than not being worse than expected, there’s really nothing positive about this abominable jobs report. Every category of work saw job losses. Average hourly earnings did rise quite a bit, but keep in mind that’s a reflection of the types of jobs lost, which were heavily tilted toward categories like leisure and hospitality, which tend to pay less. The average workweek in manufacturing declined dramatically, possibly in part due to plant closings caused by virus cases among workers.
Employment had already fallen 870,000 in March, but that didn’t capture the brunt of the pandemic’s impact on the economy. April’s data did.
Despite this abysmal report, U.S. stocks climbed in pre-market trading and many overseas markets rose earlier today. Some analysts credited talks between the U.S. and China, which might have eased some of the growing tension from earlier this week. Others said it’s because the April data represents the past and investors are starting to look more to the future, thinking maybe the worst is over. That’s far from assured, however.
There’s nothing on the calendar today remotely as important as the payrolls report. Earnings slow down a bit to end the week and other data are scarce.
One thing to consider keeping an eye on, however, is the weekly U.S. oil rig count due later today. That could give a sense of whether producers continue to scale back output. U.S. production recently fell below 12 million barrels a day, but even at these levels it’s still near all-time highs, and the front-month crude contract couldn’t hold onto yesterday’s early gains.
Some analysts say this month’s sharp crude rally is starting to look a bit overdone. Still, crude is headed for its first back-to-back weekly gains since the crisis began, and was slightly higher early Friday.
Next week, the earnings schedule looks far slower than the last few. Royal Caribbean (RCL) and Norwegian Cruise (NCLH) both sail into view next Thursday morning, putting the spotlight on one of the hardest-hit industries out there. Other than that, there’s really not much. It’s the following week when retailers hit the aisles, though Macy’s (M) said today it’s putting off its earnings until July 1.
It could be interesting to see if end-of-week profit taking joins the huddle today after the S&P 500 Index (SPX) and Dow Jones Industrial Average ($DJI) both failed attempts yesterday to eclipse psychological resistance at the 2900 and 24,000 levels, respectively. Also, we’ll see if there’s any follow-through to the steep dive in 10-year yields back to below 0.65% yesterday that hinted at investor caution (see chart).
The dollar index is close to 100 again, near three-year highs. One hallmark of the March market collapse was an impressive move into the dollar as investors sought what they hoped could be safety in cash. That’s something you arguably wouldn’t want to see again if you’re a bull.
Yesterday saw the Nasdaq (COMP) swing back to gains for the year, the first time a major index moved above the water line since the pandemic sank its talons into the market back in March. It’s probably no coincidence this happened the same day Information Technology placed high on the sector leaderboard, with so many major tech companies residing in the COMP.
Entering Thursday, a simple glance showed the big role of FAANGs in this comeback story. Facebook (FB), Apple (AAPL), Microsoft (MSFT)—an honorary FAANG—and Alphabet (GOOGL), are all up 29% or more from their March 23 closes, led by FB which has risen more than 40% since then. Amazon (AMZN) and Netflix (NFLX) aren’t far behind.
It’s not just those COMP heavyweights thriving in spite of (or sometimes partly because of) the pandemic. Yesterday’s highlights included big gains for Square (SQ) and Paypal (PYPL) despite SQ missing Wall Street’s earnings estimates. Didn’t appear to matter. Instead, people seemed to hone in on strong business for SQ’s Cash App mobile payment service, which is getting real traction among the “unbanked and under-banked.”
These are two companies (SQ and PYPL) where the economy simply seems to be moving in their direction. The closure of brick and mortar stores is probably hurting SQ to some extent, but electronic payments are catching on and PYPL remains the leading firm, with SQ a worthy adversary.
Things didn’t go so swimmingly for another young company trying to weather the virus impact as Uber (UBER) shares fell after the close amid disappointing earnings. Its competitor, Lyft (LYFT), however, easily beat analysts’ average revenue estimate despite wider than expected losses, and shares rose more than 20% on Thursday. The company emphasized how it plans to cut costs, something many investors love to hear.
It was good to see some other sectors doing better Thursday, including Financials, Industrials and Materials. Those are three that haven’t enjoyed the same kind of investor love lately as biotech and Technology because they’re more on the front lines of dampened consumer sentiment. When people aren’t buying cars or starting major construction projects, that hurts the Industrials and Materials. Recent upticks in auto dealer activity reported in April could be helping these sectors recover a bit, though they’re far from being out of the woods. General Electric (GE), General Motors (GM), and Deere (DE) all had good days Thursday.
It’s amazing to see how the market, especially tech stocks, continues to rally given we’re still working from home. Economic demand would seem to be less, yet these stocks continue to fight through. Even this jobs report can’t seem to put a brake on the rally, maybe because the stock market tends to look forward more than back.
What appears to be happening is the market continues to price in a swift reopening of the U.S. economy after the coronavirus forced economic activity to a near screeching halt. There’s hope that people will go back to work and things will be better. But at what pace are they going to get better, and will that be sustainable? Those are questions to consider pondering this weekend, and there are no easy answers.
CHART OF THE DAY: TWO FACES OF THE MARKET: When an opponent called President Abe Lincoln “two-faced,” Lincoln joked, “If I had two faces, do you think I’d choose to wear this one?” Well, you could argue the market now wears two faces, represented here by the S&P 500 Technology Index (IXT—purple line) and 10-year Treasury yields (TNX—candlestick). Soft yields over the last month reflect investors searching for safety in fixed income. Strength in Technology reflects more bullish investors taking risk-on positions. Who, if either, will be proven right? Data Sources: S&P Dow Jones Indices, Cboe. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Another Jobs Number to Watch: All eyes continue to focus on monthly payrolls and weekly jobless claims, which track how the pandemic is devastating workers and the economy as a whole. Another jobs gauge to consider watching in coming weeks is continuing claims, or the weekly number that shows how many people remain unemployed. “What will be important to pay attention to as the economy opens more and more is what does hiring look like, and what does continuing claims look like, and how quickly can we bring back those tens of millions of jobs lost,” said Jon Hill, fixed income strategist at BMO, in a CNBC article. “It won’t be immediate and it will also be partial. Of 25 million people, are we talking about now that 20 million go back to work? Or 24 million? This will be an important high frequency measure to watch in the next few weeks.”
That’s a great point Hill makes. It spotlights the real question, which is how quickly do reopenings get people out of the unemployment office and onto the job? A poll out yesterday found that 77% of the 33 million Americans laid off since the virus began believe they’ll be going back to their old jobs, The Washington Post reported. However, the same article referred to a new report from the Becker Friedman Institute at the University of Chicago predicting that 42% of the recent layoffs from the pandemic will result in permanent job losses.
Putting in the Time: As today’s payrolls report made clear, a lot of jobs have disappeared. It’s also true that many people lucky enough to still have jobs are balancing them with childcare. At the same time, there’s another category of white-collar employees affected in another way: People working from home and putting in more hours than ever because they don’t have kids to watch or other distractions. There’s nowhere to go, so many people figure they might as well get ahead in their work and just finish that report that’s due next week. Obviously, this can be good and bad. Some at-home workers are getting far more productive, but others say they’re being taken advantage of and forced to work longer hours, media reports say. Either way, when offices start reopening, a lot of these people who’ve been working nonstop might be ready for a vacation, so how does that affect productivity? We might start finding out soon.
Higher Expectations: In general, as companies reopen, investors might start expecting more from them down the road. Many analysts already believe Q2 could be a complete wash for earnings and economic growth, far worse than Q1 because the shutdown was already in place when the quarter began. It’s later this summer as Q3 looms and states reopen that the piper may have to be paid, so to speak.
The concern is that we could get to the end of the month, see more states start to go back to work, and not see demand get to the level that the market would expect. That’s probably not going out on much of a limb considering the 33 million jobs lost since this crisis began. You can’t expect the same sort of consumer demand as before the economic shock.
At the same time, when you think about this rally, where else are you going to put your money? Treasuries and gold aren’t cheap, cash pays nothing at current rates, and some see municipal bonds as a bit more risky now since state and local governments are struggling like the rest of us. The stock market rally that’s more than a month old suggests any extra money people have to invest continues to go into equities.
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