Employment Down – Market Up – Monday Morning Market Memo – May 11, 2020

Employment Down – Market Up – Monday Morning Market Memo – May 11, 2020

Good morning,

The U.S. Department of Labor reported 20.5 million jobs were lost last month, and the unemployment rate rose to 14.7% (the highest rate on record). Employment levels fell in all major industry sectors, with leisure and hospitality especially hard hit as the coronavirus pandemic takes a heavy toll on the economy. Despite this ugly macroeconomic news, the major stock market averages posted solid gains last week, their first positive week in three. The Dow Jones Industrial Average rose 2.6%, the Standard & Poor’s 500 Index added 3.5%, and the NASDAQ Composite soared 6%.

For starters, the employment data was actually better (meaning less bad) than the market had been expecting. Big picture though – investors are simply looking past the current shutdown and counting on the economy reopening, believing the worst has passed. Additionally, fiscal and monetary stimulus out of Washington have provided a strong tailwind to the stock market.

Investor sentiment was also supported last week after a conference call between Treasury Secretary Mnuchin, Ambassador Robert Lighthizer and his Chinese counterpart, where the two sides discussed the ongoing process of implementing the Phase One trade agreement. Both sides reportedly agreed to meet their obligations contained in the deal in a timely manner. Tensions between the U.S. and China have generally been rising since the start of the pandemic, and the market is hoping this represents some sort of de-escalation.

The combined force of the above variables has offset the drop in corporate earnings caused by the economic shutdown due to the coronavirus. For the first quarter of this year, with 86% of the companies in the Standard & Poor’s 500 Index having already reported actual results, the blended earnings decline for the S&P 500 is 13.6%. If this is the actual decline for the quarter, it will mark the largest year-over-year decline in earnings since 2009, according to data from FactSet. In short, the stock market is not looking at prior or current earnings, but is looking forward, hoping the gradual reopening of the economy is successful and that we return to more normal economic conditions.

All the best – Southport Station Financial Management, LLC