Can the market hold these current levels or possibly go higher even though we’re seeing negative jobs numbers week after week? That is a question we continue to get, and the answer is yes. In fact, history says the strongest returns were followed by the worst payroll reports. One historical example that we have analyzed is from 2008-2009. The worst payroll report during that cycle was in March 2009, which was released in early April that year and by that time the market was already up 25% off the lows. After that came seven months of job losses following that. December of 1974 payroll was at it’s worst for the 1973-74 cycle. The Market was already at 15% off the lows and then four months of job losses followed. So, looking at all of the historical data, the answer is yes, the market can hold these levels and possibly go higher even though the payroll numbers continuously coming back worse week after week. Caution is needed but the market is historically forward-looking.
As we’ve said before, the consumer makes up 70% of the economy. One thing that we have been watching is the lag in consumer confidence. When you look at the recently reported retail sale numbers for April, they came in at 16.4% which was lower than expected. For the second-quarter GDP, we’re seeing estimates of anywhere from a 25% to 42% drop. When we look at that GDP number, the consumer is playing a huge role in that. We’re seeing companies start to reopen across the country, some are publicly traded companies. We’re also seeing large retailers filing bankruptcy. One important question is, how’s the consumer going to react to the openings and the bankruptcies? It’s kind of a catch 22 where they’re getting pulled in two different ways. Will they go out and make purchases or will they show concern from the closings. This is something to watch over the upcoming weeks.
Last week we pointed out that we were watching to see what the employment data said on Thursday to see if it would be an important tipping point and to see if it started to improve. We now have had two layers of PPP to come out to keep people employed and we have started to see jobs reopening, however, the Thursday employment data came in worse than expected. That was somewhat concerning to all of the programs in the reopening phase because we’re not seeing people go back to work. Of the 20 million people that lost their jobs in April, 17 million expected to get their jobs back. With three large retailers filing bankruptcy, it’s really hard to see how their jobs are going to come back when there’s no company there to rehire. That’s something we’re watching very closely this week because consumer confidence may start to fall a little bit if we continue to see jobs not coming back. A key point to watch is the auto industry because, this week, they are going to attempt to reopen some of the manufacturing plants. Why is the auto industry so important? The auto industry creates 6% of economic output in this country. We should see auto workers going back to work which will hopefully create a drop in this Thursday’s unemployment claims. We really need to start seeing some of these numbers improve before we can expect that the low is here, especially from a job standpoint. As stated before, off of the worst jobs report of a recessionary period, the market does go higher. The trouble is that we don’t know when the worst jobs number is or will be until after the fact. Was April the worst job number of this recession or will it be May? God forbid, will it be June? We don’t want to be too pessimistic, but that’s why we are trying to focus on the weekly data because everything is changing so quickly.
Better Than Expected
Bankrate is a research group that does surveys on the American consumer. One survey that they did last week was asking Americans where they currently are financially. The survey results came back and said that nearly 60% of American households have had no income drop at all. You would rather that number be higher but when you look at all of these terrible unemployment numbers, this survey proves that there is still a large core of the American economy that has not felt the income drop. When we come out of the backside of this, that 60% of people will be the strong core group to sort of lead us. The CARES Act is allowing people to take advantage of mortgage forgiveness. The rule is that you eventually have to repay it, but it’s an option if needed. It’s a legal term called forbearance. Bankrate reported that only about 8% of households in the country are doing that, which is a very normalized rate and less than what you would expect. It’s clear that people’s income and balance sheet post-2008 crisis was really cleaned and tightened up and because of that, those people are able to handle this pandemic a lot better.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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