‘Bullish’ takeaways from US jobs data

Very briefly here

The jobs numbers coming out the US today are emblematic of the re-opening recovery that has fuelled the rally in US equity markets. Payrolls rose by 4.8 million in June, adding to the upwardly revised 2.7 million on May. That lowers the unemployment level to 11.1% (12.1% if you include misclassified workers in the report’s footnotes). All of that is above expectations. And equity markets are higher on the back of it.

The narrow takeaway: in a world in which the US Federal Reserve and federal government are providing tremendous policy report, we can see a V-shaped rebound. And to the degree that support remains in place and the virus remains contained, that V-shape can continue for a longer time than is priced in by economists.

But the caveats in that last paragraph are what make the narrow takeaway problematic. COVID-19 infections in the US are rising to new highs above 50,000 per day, states are rolling back economic re-opening and federal support is questionable even as state governments face massive layoffs and budget cuts. My own state, Maryland, is a perfect example.

The below consensus ADP data released yesterday and the over 1.4 million jobless claims filed last week and revealed today tell you that the re-opening rollback puts a dent in the V and lowers the slope of the upward move. I think the curve bends back toward a W shape. How far the bend is depends upon the combination of viral spread, consumer and business reaction and federal fiscal support. Those are the key variables.

Two other variables are known. The Fed stands at the ready and will always be available for support. That buoys financial assets more than the real economy though. On the other side are the states, which are going to cut spending. They have to in order to prevent bankruptcy. And so, for the real economy, the other variables must overcome this drag.

For me, the thing to remember is that we are still over 14.6 million jobs short of the levels we had before the coronavirus hit. So, a true V-shaped recovery has to recoup all of that and more to get the US back to square one. There’s no chance of that in the short term. And I doubt we will get there for many years to come.

My hope is that the uptick in virus counts in the US can be arrested. And because of the skew toward younger people and our experience with the virus, we can mitigate loss of life. And that would mean the W-shape is less downward-tilting. But I still believe the US is in a worse position than Europe in terms of recovery now.

On the markets front, as I predicted yesterday, the re-opening rollback was not baked into the numbers. Plus, markets want to rally. Yesterday, I spoke to technical and momentum trader Mark Ritchie who confirmed this for me. He told me the market internals in terms of trend above moving averages, breadth, and new leadership all pointed to positive 3-, 6-, and 12-month outcomes. While I am more fundamentally-based – and, therefore, question the 6- and 12-month time frames, I am more persuaded he is right about the near term.

Markets are liking this report. They want to rally, even if they are technically overbought. The trend for now seems higher. The rollback and stimulus data throughout the summer and early fall are where the rubber hits the road. I still see September and October as the bogey for when that data ultimately matter.

Have a great weekend.