On Friday, the US government will release its non-farm payroll report which will likely show record job reduction for the second straight month. The consensus estimate at this point is between 3.5M and 11M jobs lost through the month of May, pushing the unemployment rate to around 18.5%.
These estimates are staggering to see consider the strength of the labor market just three months ago. Even at the height of the great recession the US never saw job losses anywhere near this scale. The consensus estimate of 7.725M newly unemployed is comparable to the entire Chicago metro area losing its jobs in a single month.
The situation is truly unprecedented, but does the stock market care?
One of the first things you will hear when learning about markets is “the stock market is not the economy.” Looking at a Nasdaq futures chart over the past 4 months, you can see the divergence between individual stocks and the overall economy. The “V” shape indicates clear optimism surrounding the market’s riskiest assets, all while the economy remains in dire straits.
As more and more people become unemployed, the economy shrinks as less money is earned and spent. With less spending money available to consumers, businesses begin to slow and potentially close. Historically as this cycle progresses, markets will ultimately follow since earnings are tied to the revenue they can generate from consumers.
With nearly 40 million Americans unemployed since the beginning of March, S&P 500 futures are only down 10-15% from February’s all-time highs. One reason markets have recovered is investor optimism surrounding the reopening of the economy. Many believe rapid rehiring is possible as businesses get back on their feet and consumers reemerge. The issue is that it might not work that fast.
Hiring and rehiring employees will take time, even more so with new safety regulations for many businesses. To expect a return to pre-Covid life within a few months is simply unrealistic.
Another factor buoying markets is the safety net created by the Federal Reserve’s reassurance. Chairman Jerome Powell often speaks after down days in the market and has stated the Fed is not out of ammo “by a longshot” – implying that if things do get worse the Fed will issue more stimulus in one way or another.
The stock market is within view of all-time highs while the underlying economy grapples with record unemployment and the resulting financial troubles. The question is, when will markets start taking economic data seriously?
Tomorrow’s jobs report will likely spur some initial volatility as the market assesses the new information. It is imperative traders have a plan in place to protect themselves in the event of unexpected or surprising news.
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