Shocking jobs report sends Dow soaring
Employment saw an incredible increase of 2.5 million jobs in May as Friday’s jobs report from the Labor Department shows the United States is at 13.3% unemployment. That is down from the 14.7% rate in April and significantly lower than the 19.5% expected by economists. That is the largest one-month jobs gain since 1939. The data shows that leisure and hospitality workers make up the bulk of the employment gains with around 1.2 million people.
Dow futures were up by 300 points before the release of the report and skyrocketed up more than 700 points right after the data was published. The 10-year Treasury note yield also increased to 0.909% as the markets opened Friday morning.
The survey for the jobs report data was sent out the week of May 12, one week after continuing unemployment claims reached an all-time high of 24.9 million. That might help explain the stark difference between prediction and reality.
Private payrolls showed almost the exact opposite performance. May’s data released on Wednesday by ADP shows private payrolls lost 2.76 million jobs in the month. That is on top of the more than 19 million jobs lost in April, which was the worst month in the report’s history.
Another round of dreadful unemployment numbers snapped a Wall Street winning streak this week. Thursday’s initial unemployment claims numbers from the Bureau of Labor Statistics showed that another 1.87 million Americans filed initial unemployment claims this past week.
The more concerning data point is the number of Americans filing continuous claims. That has now hit more than 21.5 million people. These are people who have filed for unemployment for two straight weeks or more. That means, despite the reopening of some states, workers are slow to return to the labor force.
The S&P 500 and Nasdaq Composite lost 0.3% and 0.7% on Thursday, respectively, which was also the first decline in five sessions for both indices. It is interesting to note that it took until Thursday’s unemployment report, along with a late tech selloff, to knock equities off their hot streak. Before Thursday, the S&P returned 37.7% over the previous 50 trading days, making it the greatest 50-day rally in the history of the index.
The U.S. is embroiled in tense protests and riots as people voice their frustration and anger about racism in America. And yet, Wall Street is winning. In short, the stock market does not have empathy. In an interview with CNBC, the chief market strategist for Prudential Financial, Quincy Krosby, said, “The market always seems heartless, without any emotion, without caring, without empathy. But that’s the nature of the market. The algorithms almost certainly have no shred of empathy. They’re not supposed to.”
It’s an incredibly similar socio-political landscape to what America went through in 1968. President Kennedy and Dr. Martin Luther King Jr. were both assassinated, there were protests and race riots, North Vietnam launched the Tet Offensive and there was also the H3N2 virus which was responsible for more than 100,000 deaths in the U.S. What happened? The economy tanked in the first part of the year, only to hit a 24% rally with a price gain of 7.6%. This year seems to be following suit, with a 36% rally off the March low.
The chart below from CNBC shows the trajectory of the S&P 500 before, during and after the height of the COVID-19 pandemic.
Adding to the tumultuous time is a prediction from the Atlanta Federal Reserve that the gross domestic product in the United States will fall by 52.8% for Q2. A recent report from the Institute for Supply Manufacturing showed that well below half (43.1%) of firms saw expansion in May. Manufacturing was also one of the hardest-hit industries noted in ADP’s private payroll report. Large payrolls saw a loss of 1.6 million jobs with manufacturing making up more than 700,000 of the losses.
Personal consumption expenditures (PCE) make up around 60-70% of the American economy, and the Atlanta Fed also predicts that number will take a tumble of about 58.1% for Q2’s reading.
If this data sounds daunting, it’s because it is. While the silver lining of a steep decline followed by a sharp upward swing is in play, researchers expect that it will be 2022 before America’s real GDP gets back to its Q4 2019 numbers. Earlier this week, the Congressional Budget Office estimated the coronavirus’ impact could set normal economic activity back by a full decade. The CBO says the virus will likely drain about $7.9 trillion from the GDP over the next ten years.
Did COVID-19 Spur Demand for Homes?
Record-low mortgage rates, coupled with saving money by staying home, are two major factors for folks who say they’re ready to buy a home. The data comes from a recent survey by LendingTree. The report shows that, out of 1,000 prospective buyers surveyed, more than 50% are more likely to buy a home within the next year because of the coronavirus outbreak. About 60% of the respondents say they have toured a home virtually within the last two months. One of the main concerns for the group was ability to qualify to buy a home due to tighter credit score requirements as a result of the pandemic and job loss.
Anyone who wants to buy or refinance a home right now is being treated with incredibly low interest rates. This week’s Freddie Mac 30-year fixed-rate mortgage average is 3.18%. Freddie Mac’s economists also expect homebuyers to come out in droves for summer 2020, increasing demand for what was already a scarce commodity. “The gap between supply and demand has widened even further than the large gap that existed prior to the pandemic,” according to Freddie Mac’s economists.
That pent up demand with a lack of inventory has pushed home prices higher. According to Realtor.com, the median listing price for a home hit $330,000 in May, a new all-time high. It’s expected that home prices will hit all-time highs in about 35 of 50 metros studied. Conversely, inventory is down about 20% year-over-year, according to Realtor.com, which will only serve to drive prices higher as more buyers get out into the market.
Contributed by Greg Richardson, MAXEX Managing Director
Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized contract.