The unemployment rate is a key economic indicator that provides insight into the health of the U.S. economy. Understanding the trends of unemployment, and what comprises the rate, is important to determining the general direction of economic growth.
The unemployment rate measures the percent of the labor force that:
Does not currently have a job
Is actively looking for work within the past four weeks
Is available to work
The rate includes furloughed workers who are temporarily unemployed and waiting to be recalled to work from the employer.
In April, the unemployment rate jumped to 14.7%, which is the highest number we’ve seen in recent history and is equivalent to one out of every seven working persons unemployed. To compare, here is the peak unemployment reached during prior times of crisis:
Financial Crisis: 10.0%
1980 Energy Crisis: 10.8%
1973 Oil Crisis and Stock market Crash: 8.8%
Great Depression: 24.9%1
Furthermore, the spike in unemployment has been much more rapid than in previous recessions. During the Financial Crisis in ’08-’09, the lowest unemployment rate was in March of 2007 at 4.4% and it wasn’t until 31 months later that we saw the peak of 10.0%; the current unemployment rate went from 3.5% to 14.7% within one month and can be seen in the chart below2.
While the unemployment rate is an important indicator, it is also generally a lagging indicator of the economy. An early indicator that provides insight into trends for the unemployment rate is Initial Jobless Claims, which tracks the weekly number of claims for unemployment insurance. These claims do not include past weeks and are inclusive of the claims filed during that specific week. The chart3 below shows the spike in claims that began in the second week of March reaching an all time high of 6.8mln claims during the fourth week of March. Before the impact of the COVID-19 pandemic, the average weekly claims dating back to January of 1970 was 359,000 per week.
Using these two data sets together give us a picture of the health of the job market and a glimpse into the trends of the U.S. economy. No statistical number should be used in isolation, but the direction of employment is a critical element to U.S. consumer spending which drives our economy. It is also important to acknowledge trends in the market rather than the number itself – are they improving and better than expectations (good) or are they deteriorating and worse than expectations (bad). These trends are clearly negative right now and could worsen until social restrictions begin to lift and workers are able to find jobs. How fast these trends change will provide greater insight into how fast the economy is rebounding from this most recent crisis.
To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.
These uncertain times are putting all of us to the test. The coronavirus has temporarily changed our lives and our economy in ways we never thought possible just two months ago. While the pain and anxiety are real, it is important to realize this pandemic is a comma and not a period. This pause in our normal way of life will eventually end and the economy will someday resemble its former self. While the path to prosperity is unknown, the recent actions of the stock market are providing some signs of hope.
The stock market is a discounting mechanism that essentially takes into consideration all available information regarding present and future events. As unexpected news happens, the stock market incorporates this new information very rapidly into current market prices. Over the past three months, this has played out in dramatic fashion. The 34% decline in the S&P 500 from the Feb 19th closing high to the March 23rd closing low was the result of the market discounting the future economic impact of the coronavirus. The 31% rebound in stock prices from the March low to the April 29th high was the collective wisdom of the market handicapping an expected stronger economy in the next three to six months.
While the future may be brighter, the current hit to the economy has been devastating and is reflected in the dreadful economic numbers being reported. Thirty million workers have lost their jobs in recent months, which is more than all of the jobs created in the eleven year economic expansion. The unemployment rate is fast approaching 10% after spending much of 2019 and early 2020 hovering around 3.5%. U.S. GDP contracted at a 4.8% rate in the first quarter, worse than the -4.0% expected. U.S. first quarter imports fell 15.3% while exports declined 8.7% and consumer spending was also down 7.6%. Despite record low mortgage interest rates, the housing market is declining rapidly. Manufacturing and retail sales have been hit especially hard with consumers on lockdown. The world needs to return to school and work while simultaneously keeping the virus under control. Businesses need to reopen and consumers must spend again so the economy can heal.
The Federal Reserve Bank in collaboration with the U.S. Department of Treasury have directed trillions of dollars to be funneled to individuals, small businesses, large corporations, banks, states and municipalities. The Federal Reserve and Congress injected funds and fiscal stimulus equal to 20% of U.S. gross domestic product. This is threefold the size of the stimulus injected during the 2007-2009 financial crisis. All these aggressive actions were done to help mitigate the economic damage from the pandemic:
Reduced the fed funds rate to zero
Provided forward guidance suggesting rates will remain low for the foreseeable future
Resumed massive amounts of security purchases (Quantitative Easing – QE)
Revived a lending program to securities firms to keep credit markets functioning
Initiated a lending operation to banks to backstop money market mutual funds
Expanded the scope of repurchase agreements to offer an unlimited amount of money to money markets
Offered direct lending to major corporate employers and municipal governments
Supported loans to small and mid-sized businesses offered through banks
The U.S Department of Treasury in conjunction with Congress and the administration has guided multiple fiscal relief programs to help support the economy:
President Trump declared a national emergency making $50 billion available for states
The Families First Coronavirus Aid Package was signed into law
An $8.3 billion emergency coronavirus aid package was signed
Phase three of the Coronavirus, Aid, Relief and Economic Security (CARES) Act provides an estimated $2 trillion economic package
The Paycheck Protection Program (PPP), a new loan initiative aimed at helping small businesses and their employees
An additional $484 billion made available for small business
Preliminary work on a nationwide infrastructure bill
The government has pulled out all of the stops to keep the country on life support until the economy can be reopened for business once again. Some states are beginning to relax guidelines allowing businesses to gradually reopen. While this is an encouraging sign, there are legitimate concerns about re-acceleration of the virus in a post lockdown world. Also, consumer sentiment has been decimated, plunging to a nine-year low in the pandemic’s wake. A return to economic normalcy will require the population to feel safe, workers to return to work and consumers confident to spend once again.
The virus-induced bear market received some much needed relief in April. Rebounding from huge losses in March, the S&P 500, Dow Jones Industrial Average and NASDAQ returned 12.8%, 11.2% and 15.5% respectively last month. International stock markets followed suit with international developed stocks rising 6.5% and emerging markets gaining 9.2%.
The story beneath the numbers is a tale of both sector and individual company winners and losers. The airline, hospitality and energy industries have been hit especially hard as demand for those services and products evaporated in the wake of the stay at home orders. Other companies like Amazon, Costco, Netflix, Abbott Labs, Johnson & Johnson, and Domino’s Pizza are thriving in this locked down economy. Commodity prices are also all over the map. The price of gold is approaching its high price from eight years ago. At the same time, oil is suffering as supply and demand imbalances drove the price May futures contracts for a barrel of oil into negative territory briefly in April. Gasoline prices are now approaching $1.50 per gallon in many parts of the country.
The most asked question is, “Have we seen the market low?” If the virus delivered its one-punch, the worst is likely behind us. If this is a one-two punch, we still need to brace for the second punch. For the glass half full crowd, one can find solace in the measured reopening of businesses, the stabilization of oil prices, the ebbing of market volatility, the flattening of the coronavirus curve and stocks bouncing hard off the March lows. A true game changer would be the development of an effective therapeutic to the coronavirus and ultimately a vaccine. Shortening the economic downtime will accelerate the rebound.
Interest rates were little changed this month remaining near their all-time low yields. The U.S. Treasury yield curve has maintained its positive slope with the 3-month Treasury bill yielding just 0.09% and the 30-year Treasury bond generating a 1.28% yield at month end. The 10-year note traded in a fairly tight range in April and closed the month with a 0.64% yield. The bounce back in the stock market gave the corporate credit markets a much needed boost. Credit spreads on both high yield bonds and investment grade corporate bond recovered about one-third of the damage done from the previous month selloff. This is evident in the monthly return numbers as high yield and investment grade corporate bonds outperformed U.S. Government bonds by 388 and 395 basis points respectively.
Every generation has been forced to deal with several periods of market volatility during their investment lifetimes. For the baby boomers, it has been stagflation in the 70’s, Black Monday in October of 1987, the internet bubble bursting in spring of 2000, the financial crisis of 2007-2009 and now – from out of the blue – the coronavirus crash. Millennials endured the past two crises, and they will likely see four more major corrections in their lifetime.
These periods of extreme volatility are emotionally unsettling and may cause you to rethink your entire investment approach. Resist the temptation to make hasty decisions that will have long-term implications. It is best to take a step back from the daily panic, and allow yourself to let the big picture come into focus, and appreciate the positives in your financial plan. Everyone’s silver lining may be somewhat different, but allow yourself to see it. It could be a solid income plan, a bond ladder covering the next five years of cash needs, great diversification, a suitable asset allocation, or the realization that your monies invested in long-term growth are not needed within the next five to ten years. Keep a long-term focus and stay positive. This too shall pass.
MARKETS BY THE NUMBERS:
To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222
This quarter is one we will likely never forget. The coronavirus’ impact on our healthcare system, our financial health and our way of life has been severe. The speed and magnitude of this fallout has left everyone in a state of shock. Never in history has the U.S. stock markets fallen so far, so fast. This includes the Great Depression, the 1987 crash, 9/11 and the financial crisis of 2008. This bull market ended in violent fashion nearly eleven years to the date after it began.
Historically, stock market collapses are usually caused by economic factors such as rising unemployment or inflation, a slowdown in economic growth, consumer spending or consumer confidence. This quarter began with our economy in great shape on multiple fronts. The virus and the extensive effort to limit its spread instantaneously turned off almost all economic activity across the country. The financial impact to the stay at home policies implemented to flatten the virus curve has caused a rush to an event-driven economic recession. The short-term economic impact will be devastating as business and personal revenues have been seriously downsized.
The stock market is a discounting mechanism as it constantly processes the likelihood of future economic outcomes to arrive at today’s current price. Currently, the market has an expected time frame for a return to economic normalcy. We know if the economy rebounds quicker than the collective expectations, the markets will bounce back rapidly. If the virus keeps the economy shut down longer than expected, the markets will endure more pain. The government has initiated massive fiscal and monetary measures to cushion the damage to workers and companies both large and small.
The quarter began like many of the previous 43 quarters with stock markets moving higher and the economy strengthening. February 12, 2020 seems like a lifetime ago when the major U.S. stock indices (Dow Jones Industrial Average, S&P 500 and the NASDAQ) closed at 29,551, 3,379 and 9,726, respectively. By quarter-end these indices fell 26%, 24% and 20% from the mid-February peak levels. The market volatility in stocks, bonds and oil in the second half of this quarter has been unprecedented. Daily asset price swings greater than five percent have become commonplace. This virus knows no borders and international markets have experienced similar pain. For the quarter, international developed stock markets were down 22.8% and emerging markets fell 23.6%.
The bond market reaction to this economic shock was quite predicable. The flight to quality trade was in full force. In these situations, investors sell risk assets like stocks, preferred stocks, high yield bonds and corporate bonds to buy U.S. Treasury notes. This causes treasury interest rates to drop, causing their prices to rise. Interest rates differentials for riskier bonds like corporate bonds and junk bonds rise, driving their prices lower. This phenomena was evident in the first quarter returns as Barclays Long Term U.S. Treasury Index was up 20.9%, while the Barclays High Yield Bond Index was down 12.7%.
The Federal Reserve board took immediate action, prior to their scheduled March meeting, to return the fed funds rates to zero as they did in the ’08-’09 recession. In addition to these fed rate cuts, the Federal Reverse said they will do whatever it takes to provide massive amounts of liquidity to the financial system. At quarter end, the treasury yield curve settled in at these yields: 2-year 0.23%, 5-year 0.37%, 10-year 0.70% and 30-year maturities at 1.35%. We even saw negative yields momentarily for the first time at the very front end of the yield curve.
Investors, advisers and money managers alike are put to the test during times of market crisis. This is certainly one of those times. It’s imperative not to panic during times of market stress. The anxiety and pain are real, but it is essential to look beyond today’s turmoil and focus on tomorrow’s opportunities.
The virus will end, the markets will rebound and life will return to normal. Hang in there, be patient and together we will get through this crisis. Lean on your carefully constructed financial plan for support and as the basis for any subsequent actions. Focus on all the positives in your plan including income generation sources through social security, pensions, fixed indexed annuities, and bonds. Remind yourself of the long-term benefits of stock ownership and view your allocation to stocks with the long-term time frame that it deserves. Take a deep breath, stay calm and remain confident in your financial plan.
To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222