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Job Numbers Validate Stock Market Trajectory

June 08, 2020
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Monday Morning QB - Market Observations:

  • Shocking Employment Numbers Fuel End of the Week Stock Rally
  • 2.5 Million Jobs were Created in May, the Most Jobs Created in a Single Month on Record
  • Paycheck Protection Program (PPP) has Approved 4.5 Million Loans
  • PPP Loans Total more than $511 Billion in Aid to Small Business Owners
  • New Home Sales Rose 21% in May
  • Airlines Add Flights
  • Federal Reserve Broadens Loan Program for State and Local Governments to Help Overcome Cash Deficits in the Wake of the Coronavirus Shutdown
  • U.S. Stocks Outpace Global Stock Markets

Monday Morning QB - Market Performance:

U.S. stocks recorded their best weekly gain in two months as investors celebrated the May jobs report.

The Dow Jones Industrial Average added 1,728 points to close at 27,111- a gain of 6.8%. The technology-heavy NASDAQ Composite established an intra-day all-time high before pulling back but still finishing up 3.4%.

The large cap S&P 500 rose for a third consecutive week gaining 4.9%.

The smaller-cap indexes were particularly strong with the small-cap Russell 2000 and mid-cap S&P 400 surging 8.1% and 8.3%, respectively.

The rotation to value stocks over growth stocks continued as value stocks outperformed growth by a wide margin.

Unemployment Rate Drops to 13.3% as Employers Added 2.5 Million Jobs in May

After what can only be described as two months of economic carnage, we finally got some good news. The U.S. economy added 2.5 million jobs in May.

Job growth snatched away the expected headline of more jobs lost. The creation of employment was the real economic note coming from last week’s headlines.

Economic doom and gloom scenarios continued to give way to some economic green shoots, as we discussed in last week’s MMQB. By the end of last week, the shoots gave way to giant holes in the doom and gloom theories. 

The stock market expected the May unemployment rate to move higher with an announcement that more Americans continued to lose their jobs, but the Friday Jobs report missed the consensus memo, crushing expectations by showing job creation in May.

The optimists were hoping for a smaller number of unemployed Americans. What we got was much better, and the stock market responded in kind.

The consensus estimates for the May unemployment rate, among economists, was 20%, which would have been an increase in the unemployment rate from April. Instead, the unemployment rate dropped to 13.3%.

Of course, the stock market loved it! For many investors, the green shoots of a week ago and the blowout jobs number validate the stock markets meteoric rise since April.

Economic Recovery Green Shoots Continue…

The stock market rises and falls based on the hopes and fears of those participating. The much-discussed “V” shaped recovery was in question by many because the data to support it had been missing.

Characteristically, a V-shaped recovery concludes with a sharp return in economic spending and growth after a short and painful economic collapse. Before the last two weeks, the stock market’s rally, for many, included too much hope and not enough substance.

The hope theme, the optimists, continued to look to an unprecedented amount of fiscal and monetary stimulus to lead us forward uninhibited by another virus wave created by reopening the economy to quickly. While the jury still may be out, so far so good. All states have begun the reopening process without significant hospitalizations. There are some spikes, for sure, but not to the point of over-running any city hospitals.

Let us all hope this continues to be the case. If large gatherings of protestors do not spike Covid-19 numbers, then we believe it is genuinely time to remove all the economic restrictions and let life get back on track for everyone.

The Story of a Local Restaurant Owner

Mike and I experienced something neither one of us has been able to do for what seems like forever- meet an out of the area work friend at a restaurant for some good food and good company. Our friend flew in from Charlotte and we arranged a reservation at one of our favorite local restaurants in Wilmington, The Bento Box, a terrific sushi spot.

The owner and head chef (wearing a mask) approached our table. Chef Lee went on to say that take out business over the last couple of months allowed him to keep his staff working, albeit at a reduced capacity. He did not share if he was a PPP recipient, which could have provided a little help as well. The vital point is The Bento Box was now taking reservations in a reduced capacity with the hope of opening fully sometime soon.

We hung out for hours catching up on what everyone had been doing for two months. Our friend flew into town, rented a car, booked a hotel and we met for dinner. Scenes like this are playing out across our economy, and the stock market is counting on it!

So, What Could Go Wrong?

The naysayers, and the people keeping their cash on the sidelines, point to three themes besides the obvious spike in Coronavirus cases.

So, let us take the obvious first- what about the Covid-19 virus numbers?. In my opinion, a spike in Covid-19 cases is not the right variable to look at when determining if we need to shut things down again.

Many people get sick and recover. If you are unfortunate and get diagnosed with Covid-19, you will need to quarantine yourself and take the appropriate actions to get better and not to infect others. People who get sick get counted in the number of cases, but if they react appropriately, the spread will be limited.

The number to concern yourself with is a spike in hospitalizations.  That creates a higher amount of human interaction.

Hospitalizations can give rise to overwhelming our health care system as well as scaring the sick, non-virus people away from receiving the professional care that they need. This leaves family and friends along with an overworked emergency management system to help.

The unintended consequence of underprepared people interacting to help each other, sharing space out of a sense of responsibility, combined with a partially reopened economy, could be the catalyst for a second wave of the virus.

What are the other headwinds?

Earnings are a big one. At some point, companies will need to start reporting earnings again as well as sharing future guidance.

Earnings are an essential element in evaluating company performance. According to FactSet, they expect a 43% drop in second-quarter earnings across the companies that make up the S&P 500 index. As we have shared before, we continue to look for companies that are not only reporting earnings but meeting or beating expectations.

A third issue falls under the political umbrella. Fed Chairman Powell has pressed for more fiscal stimulus. Can the Democrats, Republicans, and the White House put aside partisan politics long enough to produce a real stimulus plan for the economy?

So far, the plans have concentrated on relief from the economic issues created by the virus. Now that the economy is showing signs of life, can the parties come to terms with a plan to create new economic activity propelling our great nation forward?

Lastly, the Chinese/American tensions are real and growing. It appears the relations between the two countries are back near a low point based on the headlines. We should all remember the negative performance from the stock market in the past when tensions between the two countries boiled over before enacting Phase One of the trade deal.

A Final Thought

The stock market almost always has headwinds.

Conflicting opinions about what is going to happen in the future is what makes a market. Ironically, I will be more concerned if at some point soon everyone is happy about the future direction of the stock market.

Jubilation leads to market mania’s which typically end with a market bust—for example, the housing bubble of 2007 and the technology bubble in 1999.

A recent investment survey showed that 67% of the people who responded believed that the next move in the U.S. stock market was likely to be a 10% drop. However, according to a Bank of America Global Fund Manager Survey, 24% of these respondents are overweight in U.S. stocks.

This does not sound like mania to me. Investors are trying to determine if the glass is half-full or half empty.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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