June 5, 2020

Protests And Markets

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent

These improvements in the labor market reflected a limited resumption of economic activity
that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic
and efforts to contain it. In May, employment rose sharply in leisure and hospitality,
construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply.
U.S. Bureau of Labor

The data above created an upheaval in optimism, although I have to question where that optimism is coming from. First, I’ve often pointed out that the appearance of disconnect of the broad indexes has less to do with the surrounding culture, including politics, and more to do with the future predictions of economic activity. My analysis moves in this direction simply because everyone from idealists to cynics still need sources of revenue and are certain to spend it on necessary consumption. And should there be some distraction to the manageability of those predictions, that’s why corporations advertise. So today’s employment data, in my opinion, is one big advertisement and not much else.

And it should be assumed that the markets disagree with me. The strong move higher of all the indexes led by the 30 stocks in the Dow Jones Index saw further movement out of pandemic sectors, such as Healthcare, into cyclical sectors such as Industrial and Financial, and of course Consumer Discretionary. The strength of the indexes however have the added push from companies in industries that I see having more dubious futures. Companies such as Boeing (BA), straddled by previous issues with its 737 MAX, in addition to substantially increased debt issuance and increased competition for buyers less friendly with the US. Or Exxon Mobil (XOM), hurt by the pandemic drop in gasoline and oil usage in the face of increasing drives to reduce fossil fuel investment, increased optimism for a future of electric automobiles (helped by the success of Space X), and solar and geothermal alternatives. And United Airlines (UAL) stretched with substantial new debt, and the challenge of creating more comfortably distanced passengers. All three are especially sensitive to near term changes in consumer habits, such as saving money from typically larger expenses for the near and possible medium term. I’m not suggesting theses companies won’t return to their previous greatness, I’m only suggesting there’s no current reason why it should happen soon. Let’s see how Disney’s (DIS) reopening works out and I’ll revisit the bigger picture.

The biggest surprise of today’s unemployment data came from the historically underestimated forecast by the economist community who were looking for a loss in Non-Farm Payroll of 8 million. And while much will be reviewed to the extent of a rebound, much will be talked about when constructive economic activity actually began. In the meantime much distraction has been coming from Europe where as recently as yesterday a €600 billion Euro stimulus package was injected into the Union and that sent the European indexes much higher and with considerably more vigor than has been shown recently. This could help both the Euro markets and the US markets as the US dollar has recently seen a pause in its strength. Since much of that strength came from the US market being the best option for international investors, it also led us to the largest Trade Deficit in goods and services including autos, auto parts and air travel.  A pause in dollar strength could relieve some of those deficit pressures, a plus for the economy. For now most interest will also be in any remarks from Fed Chairman Powell who is expected to weigh in when the FOMC makes their monthly policy statement next Wednesday. For now, the sharp jump in treasury interest rates is reflecting movement out of Treasuries and into equities, rather than other Credit markets. Rising Treasury rates can signal a rising economy.

External Events
The impact of the pandemic was the culprit in a government mandated lockdown. Now as political infighting over further stimulus and constructive economic news enters the picture, so to will political rhetoric. Now we have the national protests in memory of the tragic death of George Floyd at the hands of a Minneapolis Police officer. Speaking for myself, as a baby boomer I grew up with protests, and some introduced change and some didn’t. Those that didn’t were the ones that went violent. Not because the public lost interest, but because it can be seen to undermine the purpose of the initial protest. In keeping with that event, in my opinion, it has a better chance of being a positive for the economy than a negative, that is unless you feel the future for this county is hopeless. One reason I feel this way is because the pandemic brought about an enormous change in the perceived responsibilities of many companies in corporate America. Namely, less interest in Buy Backs and shareholder expectations and greater focus on employee and community financial soundness that those same companies are equally dependent on. Change has already been brewing, I see little reason for it to stop now.

That said, it is not surprising the recovery in the broad indexes ensued. But I’m also surprised at how economists got the forecast for job growth so wrong. And while I’ve always been an impact focused analyst, any positive growth in jobs is worthy of a positive market response, and I still believe in managing a cash holding to manage volatility. And if I’m constructive, I can take it from Fixed income, and for now I’m looking for reason to increase it with equity. I also believe recent investments have resulted in ample exposure to infrastructure and financial sectors that are still comparatively underinvested in and therefore also create a good buffer for volatility should markets find a reason to correct. In the meantime, we are all participating, but that doesn’t keep me from looking for opportunities, even if that means a sale. Just being the good little skeptic I am.

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