Unemployment Numbers Are A Game Changer

Summary

• The question remains as to whether parts of the stock market are ahead of themselves.
• Right now, there appears to be a disconnect between many sectors of the stock market and fundamentals, even looking out six to twelve months.
• The May jobs report was an apparent game-changer supporting the view that the solid recovery has begun may be sustainable.

There is not a week that passes without additional trillions pumped into the global economy by monetary authorities and governments to offset the impact of COID-19 on demand.

Since the creation of money is dwarfing the demand for funds, it is moving investors into risk assets, pushing up stock prices, bond yields, and commodity prices. But the question remains as to whether parts of the stock market are ahead of themselves. Right now, there appears to be a disconnect between many sectors of the stock market and fundamentals, even looking out six to twelve months. As expected, there has been a mild increase in the number of coronavirus cases as states opened but clearly the market is not worried about a large outbreak in the fall.

While our portfolios are over-weighted in the new paradigm stocks, we continued to shift to more economically sensitive areas last week. We have the luxury of remaining cautious until there are proven therapeutics and vaccines on the market as our funds are up for the year, outperforming all averages. Notwithstanding, the May jobs report was an apparent game-changer supporting the view that the solid recovery has begun may be sustainable. It is a mistake to think that the new paradigm stocks are not leveraged to an economic recovery as they certainly are.

There is no question that the economy is improving as all states have opened: time spent at home has fallen from 16 hours in mid- April to 12 hours now: 65% of the population is going out; foot traffic at malls is now 60% of normal; restaurants, including fast food and take out, are up to 65% of normal; fitness centers are 60% of norm; airlines and hotels are less than 25% of norm; new car dealers are 90% of norm; convenience stores are 75% of norm; driving are 80% of the norm: movie theaters, casinos, amusement parks, race tracks, sports activities are all in the process of opening. All of this is good news and reason to be more optimistic, as no one knows for sure what will happen in the fall.

We were pleasantly surprised, even shocked, with the May jobs report: total non-payroll employment rose, yes rose, by 2.5 million, after falling 20.7 million in April, as workers were recalled: the number of unemployed stands at 15.3 million; the unemployment rate fell to 13.3%; the labor participation rate rose 0.6 to 60.8%; and hours worked declined 1%. It is interesting to note that leisure and hospitality were half the gain in employment.

The economy is well ahead of our expectations. The recovery has begun sooner and appears more sustainable than we thought. The $64,000 question is whether there will be an outbreak in the fall causing the economy to throttle back. People want to go out, spend, and return to a normal life. But, corporations have also learned to do more with less which may limit hiring down the road.

The financial markets have been and will continue to be flooded by huge amounts of liquidity not all needed by the global economy. Our first rule for investing deals with capital flows. If more liquidity is provided than needed, that is good for financial assets and the reverse is true too, which would give us a warning signal to begin reducing our investment exposure. Just last week, we had ECB ramp up stimulus by $1.5 trillion; Germany and other nations announcing nearly a trillion-dollar program; Japan approving a fresh $1.1 trillion plan; our government working on an additional $1 trillion program and U.S money supply has increased at an 80% annual growth rate over the last three months. And the Fed has more room to go too. Wow!

We remain confident that there will be by the fall enough testing and broad-based contact tracing; several therapeutics, and late stage Phase 3 testing for several vaccines. Many of the companies developing vaccines are already ramping up production to be able to supply several hundred million doses by early 2021. In addition, health care workers have learned to deal more effectively with patients who have the virus. All of this is good news.

Finally, we firmly believe that Trump will do all in his power to get re-elected which will include supporting efforts to develop therapeutics/vaccines; support additional stimulus plans to boost the economy from bottom and top including a payroll tax cut; and would not risk raising tensions with China to a level that would jeopardize the trade deal.

The bottom line is that the unemployment numbers were a game-changer. We expect stock markets to continue to advance supported by the surge in global liquidity and prospects for an improving economy which would lead to higher sequential earnings. On the other hand, we expect the yield curve to continue steepening so we would avoid bonds. While we remain focused on the winners in the new normal which are leveraged to the economy, we added financials, retail, and an entertainment company who recently entered streaming.

Our weekly Investment Committee webinar will be held on Monday, June 8th at 8:30 am EST. Remember to review all the facts; pause, reflect, and consider mindset shifts; turn off cable news; do independent research, and… Invest Accordingly!

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.