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Ugly Employment Report Underscores Virus' Impact

Key takeaways:

  • Much like other recent economic data, April’s employment report set terrible new records, with 20.5 million people losing their jobs, the unemployment rate rising to a post-Depression high of 14.7%, and the labor force participation rate falling by three percentage points to 60.2%.
  • Despite that horrific data, the S&P 500 is currently up 1.7% today, reinforcing the seeming disconnect between the economy and the stock market.
  • While discontinuity may be a fair conclusion, it’s more nuanced than that. Rather than focusing on the past, the market is pricing in an eventual return to normal, which is supported by the five-point bridge in our note yesterday: Why Is the Market Rising?

How bad is the labor market?

Today’s employment report once again shed a light on the historically unprecedented impact of the coronavirus shock. The economy lost 20.5 million jobs, equivalent to all the jobs created since 2011. The headline unemployment rate rose to 14.7%, the highest level since the Great Depression.

It’s hard to believe, but those statistics understate the damage to the labor market. Millions more people have lost their jobs and filed for unemployment since the end of that survey. And because many of the newly unemployed are not actively looking for new jobs (either because they don’t see any opportunities or because they plan to return to their prior jobs), they appear as not being in the labor force as opposed to being unemployed. As a signal of how many people are in that category, the labor force fell by over 20 million people. That brought the labor force participation rate down by three full percentage points, to 60.2%, and the labor force itself to 133 million people, its lowest level since the early 2000s. Looking ahead, it will be critical for these people to return to the labor force in order for the economy to rebound.

The job losses themselves have been spread across a range of industries, however, as you might expect, they were the worst in leisure and hospitality. But even employment in the health care sector has suffered during this virus-created downturn.

Why doesn't that seem to matter to the market?

The economic data continues to deteriorate and yet, stocks are still up close to 30% from their March lows, including another 1.7% today, despite the onslaught of bad news. How can that be?

As we discussed in our blog post this week, the market is looking forward and beginning to build a bridge to a more normalized 2021. As a result, these economic data releases are providing little incremental information. The market knows that the economy is in a crisis—now it’s looking to see how long and deep that crisis persists and what the world might look like on the other side.

That bridge has a few key pillars. The first pillars are the health policies that we’ve seen put in place (with the question remaining as to how long they’ll be necessary) and the most aggressive monetary and fiscal policy response in history, to mitigate the economic damage of the shutdown. Based on the actions on those fronts to date, the market is now looking ahead to a gradual reopening of the economy, which will need to be supported by a massive ramp-up in testing.

Ultimately, the economy will not return to normal until we have a vaccine, which will not happen until 2021 at the earliest. As a result, uncertainty is likely to persist for an extended period of time, which we expect to mean stock market volatility will also remain elevated.

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