The Vantagepoint Market Perspective: The Jobs Report, the Market, and the Real Economy

06/09/2020

 

After months of seemingly non-stop negative headlines, Friday’s jobs report brought a much-needed dose of good news. The Bureau of Labor Statistics’ widely watched monthly payroll report  showed the economy added an impressive 2.5 million jobs in May after shedding -20.7 million jobs in April.

The leisure and hospitality fields, which shouldered a large slice of the job losses due to the COVID-19-inspired shutdowns, led the rebound as some of those employees returned to work with the partial easing of closures in many areas. 

Meanwhile, the unemployment rate — which is based on a separate survey — dropped to 13.3% from 14.7% in April. And the labor force participation rate climbed 0.6% in May to 60.8%.

The report was much better than expected and the market cheered the numbers. The Nasdaq notched a new high on Friday and continued to add to its winnings on Monday. The S&P 500 moved within striking distance of its previous peak and the Dow Jones Industrial Average followed a similar trajectory.

Another positive is that the breadth of the market’s gains has widened in recent weeks, as more and more stocks trade above their longer-term moving average lines. Indeed, many market participants seem to be betting on a speedy, full recovery and even pricing in better times ahead in terms of further economic growth. From the market’s viewpoint, it’s as if the pandemic and the business stoppages it prompted never happened and will not have any major lasting repercussions.

As we noted previously in Trust, but Verify, the market seems to have a habit lately of latching onto positive news and looking past any clouds that might be on the horizon. Friday’s market action followed that same well-trodden path.

Still, a closer look at the payroll report does reveal a few glitches — although whether they turn out to be a major or minor concern remains to be seen. For one thing, the response rates for the surveys the data is derived from were lower than they had been prior to the pandemic. That’s not surprising, given the large-scale nature of the surveys that comprise the report, which are likely challenging to compile even without the recent shutdowns and other disruptions.

In addition, as with the April report, there may have also been a misclassification error for some workers who were counted as employed, but absent from work due to the COVID-19 closures. “If the workers who were recorded as employed but absent from work due to ‘other reasons’ (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis),” Bureau officials said.

It’s also worth noting that earlier this month a separate report from the Congressional Budget Office (CBO) predicted the fallout from the COVID-19 pandemic may have a long-lasting economic impact. They estimated it will shave approximately 3% a year off the nation’s GDP over the next decade, which pencils out to roughly $7.9 trillion. The CBO attributed the projected losses to the widespread business closures and social distancing measures that were a response to the pandemic, combined with the recent sharp drop in energy prices, which they say will reduce investments in that sector.

As we’ve mentioned in earlier pieces, the market seems to be counting on a V-shaped economic recovery — a sharp downturn followed by a quick upturn that recaptures all of the lost territory and allows businesses to quickly get back to normal and continue to grow.  

However, others are predicting a so-called square root recovery — a steep falloff, followed by a brief upturn, that ultimately flatlines for a period of time. The CBO’s report bolsters the argument for a square root recovery, while Friday’s payroll report fosters the hope — a sentiment evidently shared by many in the market — for a V-shaped recovery.

Which camp is right remains to be seen and will be evidenced by the economic data in the weeks and months ahead. In the meantime, Friday’s data marked a very promising start to what will hopefully be a full economic rebound.

Disclosures:

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Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Past performance is no guarantee of future results.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.                                                                                                                                    

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.