Bitter Pill

Bitter pill.  Investor sentiment soured on Friday after the monthly unemployment numbers came in far worse than expected. It wasn’t all bad news as crude oil enjoyed a healthy rally on hopes that the Saudis and Russians would meet up and end their costly spat.

 

N O T E W O R T H Y

 

Give it to me straight, please.  I wrote quite a bit about employment last week and for good reason.  I think that by now many investors are expecting most, if not all companies, to suffer financial repercussions from the onslaught of the pandemic.  At this, sad to say, pre-peak stage it is still too early to really understand what is actually going on within companies, behind closed doors, amongst the planners and business leaders.  What we can get a true handle on is the country’s employment situation… at least with some degree of reality.  First, let’s just remember that every time in the past few years that I would write about the good news in the economy, the words “lowest unemployment level in so many years” usually topped the list.  That fact is really much more than just a political success story, but rather a real economy-driving fact.  When people work, they are paid wages, which they then spend on goods, which drives the entire economic ecosystem… CONSUMPTION. Think about it for just a second… the manufacturers, the logistics transporters, the roadside rest stops for truckers, the retailers, the sales people at the retailers, the last mile shippers (FEDEX, USPS, UPS, emerging gig-economy delivery services), gas stations for re-fueling… the list can go on and on but you get the picture.  Every dollar that is not spent by a person who may become unemployed can have significant effects that go far deeper than diminished sales at a retailer.  While that may be obvious and even, at some point, somewhat quantifiable, there is something that is more difficult to model that can also have a negative impact on corporate profits.  The factor to which I am referring is: confidence. Unemployment in and of itself is a factor, yes indeed, but so is fear of unemployment.  When people are worried about the stability of their jobs and their wages, they naturally pull back on their unnecessary purchases, which has the same effects as I detailed in the above example.  On Friday, the Bureau of Labor Statistics released its employment situation for the month of March and it told a sobering story.  Non-farm Payrolls decreased by -701,000 jobs, which was far worse than the -100,000 expected, though many analysts were braced for a surprise.  The Unemployment Rate rose from 3.5% to 4.4%, also worse than the expected 3.8%.  It is worth noting that those numbers, though they are supposed to represent the month of March, only reflect unemployment through the second week of the month.  We know that since then, based on weekly Initial Jobless Claims, an additional 10 million or so Americans filed for unemployment insurance, so the actual number for the month is far greater. Those will show up in the numbers for April, which will come out on the first Friday of next month.  Technicalities aside, we know that sadly, many Americans have lost jobs and had their wages diminished, and that the trend will continue until the virus is contained.  Investors know this too and to some extent that cold fact is slowly being baked into stock valuations.  Unfortunately, we are still wanting of some real facts which can be modeled into some sort of forecast.  At this stage we can only watch the valiant, and heartening efforts being mounted to save lives and contain the virus and hope that those efforts will sooner rather than later bring us, and our ailing economy, back to its feet.  Be confident.

 

Patience is a virtue.  It is difficult to watch stocks go down knowing that it will affect our savings and retirement account.  Thankfully, many investors have learned to be patient and remain focused on the long run and stick to their core investment strategies.  We know, from statistics, that our patience will pay off.  We know that this dark chapter in our history will pass and that things will look up again.  The US has weathered 2 recessions in the past 20 years (one of them including a collapse of the financial system), and through that, the S&P500 grew by around 70% (not including dividends reinvested) even through last Friday’s close.  Some more fun facts: the index grew by +205% and +238% from the lows hit during the 2001 and 2008 recessions respectively.  Knowing these facts should give us some solace, if not a bit of hope.  It is also difficult to watch stocks experience extreme up-days, wondering if those rallies might be the beginning of the climb back to the top.  Unfortunately, we just do not have enough information yet to know if we are at the bottom.  We do know that unemployment is bad and will likely get worse, which will have obvious negative effects on the economy.  Additionally, we still don’t know how long the virus will take to peak and then retreat to the point where we can all get back to business as usual.  Finally, it is too early to predict how the market might react to what is expected by many analysts to be a significant drop in earnings, which is further compounded by little or no corporate earnings guidance.  There are some positive signs that some hard hit areas in the US may be approaching their peaks while Spain and Italy appear to have leveled off.  Additionally, the $2+ trillion in government aid is just starting to be released which should help, at least temporarily, individuals and small businesses limp forward, while Capitol Hill is already negotiating further aid packages.  The VIX has retreated and sits around 44 this morning, down by -4.7% from Friday’s close, but stocks remain in a speculative environment and will remain so until more real information can be had.  Stay patient.

 

THE MARKETS

 

Stocks sold off on Friday as unemployment numbers dwarfed economist expectations.

Investors struggled to stay positive as confirmed Coronavirus cases and related deaths mount. The Energy sector got a bit of good news as it appears that OPEC+ may meet today to discuss badly needed supply cuts.  The S&P500 fell by -1.51%, the Dow Jones industrial average dropped by -1.69%, the Russell 2000 sold off by -3.11%, and the NASDAQ Composite Index slipped by -1.53%.  Bonds climbed on Friday and 10-year treasury yields remained unchanged at 0.59%.

 

NXT UP

 

– This week will be an abridged trading week as stock and bond markets will be closed Friday in observance of Good Friday.

– OPEC+ may have a virtual meeting to discuss supply cuts today.  There is a possibility that the US may participate in negotiations making it, I guess, OPEC++.  Traders are hopeful for a resolution.

– Later this week we will get JOTS Job Openings, PPI, CPI, Weekly Initial Jobless Claims, FOMC meeting minutes, and University of Michigan Confidence.  See the attached weekly economic release calendar for details.

daily chartbook 2020-04-06

econ numbers 4_06