April’s U.S. jobs report was horrific. So why did markets rise?
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Julie Zhang, director, North America sales enablement, discussed the discrepancy between the labor market and the stock market, the state of the European economy and the impact of global stimulus measures on sovereign debt.
Explaining the discrepancy between the labor market and the stock market
As expected, the U.S. jobs report for April was absolutely horrific, Ristuben said. 20.5 million Americans lost their jobs last month, while the unemployment rate spiked to what he called an unimaginable 14.7%. Yet, major U.S. benchmarks closed up over 1% on May 8. Why did markets rise in the face of such historically awful employment numbers?
The answer, Ristuben said, lies largely in the fact that these numbers were widely anticipated. “With 33 million jobless claims filed over the last seven weeks in the U.S., markets already knew that the April employment report was going to be terrible. So they expected this. And, simply put, news isn’t news if you expect it to happen—no matter how horrible it may be,” he explained.
If there is a silver lining to the report, Ristuben noted, it’s that the majority of jobs lost were temporary—not permanent. Most workers indicated being furloughed from their jobs, he said, explaining that this is consistent with the intent behind the stimulus package passed by the U.S. Congress and the unprecedented actions taken by the U.S. Federal Reserve. “All these moves have been made in a collective effort to prevent companies from going out of business as a result of coronavirus-induced lockdowns,” he stated.
Ristuben said that, assuming the spread of the virus continues to slow, the U.S. economy should slowly start to recover as more businesses reopen and individuals return to work. “This is what markets are expecting in the months ahead—and remember, markets are primarily forward-looking vehicles,” he stated.
Lockdown hits eurozone services sector hard
Turning beyond the U.S., Ristuben noted that Europe is also facing a recession, with the European Commission now predicting GDP (gross domestic product) to shrink by 7.4% this year. PMI (purchasing managers’ index) surveys from the services sector have now cratered to levels in the low teens across most of the eurozone, he said. A reading below 50 indicates contraction, while a reading above 50 indicates expansion. In February, IHS Markit’s eurozone services PMI stood at 52.6. April’s reading, by contrast, stands at just 12.0.
Relatively speaking, manufacturing in the region has fared somewhat better, with IHS Markit’s eurozone manufacturing PMI registering a reading of 33.4 in April—down from 49.2 just two months earlier. This is a reversal of the second half of 2019, Ristuben said, when the services sector was the strongest part of the economy, both in Europe and in the U.S.
Equity markets in Europe, meanwhile, lagged their American counterparts the week of May 4, with the STOXX® Europe 600 Index up less than 1%. The S&P 500, by contrast, ended the week up over 3%. Some of the weakness in Europe stemmed from a court ruling in Germany that found parts of the European Central Bank (ECB)’s asset-purchase program illegal, Ristuben said. However, he thinks the ECB’s program to purchase government debt will ultimately be approved by Germany.
“All things considered, Europe remains largely in the same pattern as the U.S. when it comes to navigating this crisis. We’re all in the soup together,” Ristuben concluded.
How coronavirus relief packages are affecting sovereign debt
The relief packages passed by governments around the world to combat the crisis have led to sovereign debt concerns, Ristuben said. “These policy responses amount to roughly 9% of global GDP in 2020—and in the U.S., it’s closer to 13%,” he stated. Because of this, the U.S. debt-to-GDP ratio, which was already at 107% in 2019, is projected to rise to 120% this year, Ristuben noted.
While this isn’t as extreme as places like Japan, where the ratio is over 200%, America’s debt is reaching a point where it’s becoming troubling, he said. However, given the more immediate and drastic near-term challenges, U.S. national debt should be viewed as more of a long-term problem, Ristuben stated. “Ultimately, the government is probably going to have to do a better job of keeping the nation’s fiscal house in order, but right now, the goal for U.S. policymakers is simply to keep the economy alive,” he concluded.