For how long can stockmarkets ignore rising unemployment?
US unemployment figures are looking terrible – up to 20 million people have lost their jobs. But markets don’t seem to care. John Stepek explains what’s going on.
Last month, the US unemployment rate rose to close to 20%. Roughly 20.5 million people lost their jobs, according to the latest non-farm payrolls report.
It’s only got worse since then. These sorts of employment losses are unheard of. It makes 2008 look like a blip. And these are the sorts of reports we’re seeing in developed economies across the globe.
Can this level of unemployment really co-exist with such an apparently exuberant stockmarket?
The unemployment figures are truly awful
The non-farm payrolls report comes out every month in the US. It’s usually a really important data point. It tells us what’s going on with employment and wages in the world’s biggest economy, after all.
This month it’s a bit more of an afterthought. The sheer scale of the damage wrought by the coronavirus means the numbers themselves are hard to comprehend (how do you price in the difference between 20 million and 19 million, say?). The weekly jobless claims figures are more timely, and looking at those, Capital Economics reckons that official unemployment is heading closer to 30%.
The damage is broad-based too. Leisure and hospitality was hardest hit, as you’d expect. Employment in that sector has almost halved since February. But education and health took a hit too (perhaps a bit surprising), as did retail (not at all surprising), and public sector employment (because of school closures).
The good news – inasmuch as there is any – is that most of this unemployment rise is still classified as temporary. And many states are now trying to re-open for business. So it’s possible that many of these people will be able to return to work in the relatively near future.
The key question at that point is: how much work will there be to return to? And that’s probably the main risk from an investment point of view.
There’s only so long that you can keep an economy in deep freeze before parts of it start to die off, regardless of how careful you are in conducting the initial cryogenics. Government help can go a long way, but even though we’re edging towards unlimited money printing, there’s still some wariness of going all-out for broke.
For example, returning to the UK, there are reports that the chancellor, Rishi Sunak, is looking at extending the government’s plan to pay for part of the wages of “furloughed” employees from the end of July until September (apparently we might get confirmation today). But from that point the government would only cover 60% of the wage bill.
It’s understandable that the government is looking to cut back. Something like a quarter of Britain’s private sector workforce is currently on furlough, which is costing the government a fortune. But it means that some tough choices are coming.
Being laid off temporarily with 80% of your wages being paid is a situation most people can cope with. It will be tougher for some than for others, but some might even welcome it, particularly if their spending has fallen during lockdown in any case.
However, getting that cut to 60% becomes significantly tougher, particularly as it follows hard on the heels of three months with an already-diminished wage. It also starts to raise some tough questions for the companies involved: are these employees ever coming back? Or has the firm simply taken too big a hit?
We’ve already seen the airlines making redundancies and I’d expect to start seeing that spread through other sectors over the coming months. This is when we start moving from the storyline that “the economy has been put into deep freeze” to realising that some of this damage is permanent (or at least, we can’t go straight back to “normal” after a few months).
Markets are not the economy – but still…
What does all of this mean from an investment point of view?
Rising unemployment is bad news for an economy, particularly one that depends on consumer spending (not to mention buoyant house prices).
If people don’t have jobs then they don’t have as much (if any) disposable income. If they don’t have disposable income, they don’t buy stuff. If they don’t buy stuff, companies don’t make profits or hire people – which in turn entrenches unemployment.
So it’s a vicious cycle. Obviously at some point that turns around when the economy hits rock bottom. But in the meantime it’s ugly. And it creates an environment in which more and more of the loans made to support companies now will end up going bad in the longer run, because there simply isn’t the demand to keep them afloat.
That said, like it or not, as we’ve often pointed out, stockmarkets are not the economy. And whatever else happens, it’s clear that central banks have acted more rapidly than ever before to underwrite the banking sector, and they have also made it clear that they will continue to print money if things don’t go their way.
For example, it's pretty clear that the Bank of England is keen to do even more quantitative easing (QE) at its next meeting.
The liquidity has to go somewhere. And with “tail risks” (the risk that a bank or some other systemically important institution goes bust and takes the entire market with it) being eliminated across the board by central banks, that does point to markets remaining propped up, even if those highs seem artificial or almost offensively oblivious to you as an individual investor.
Bear in mind that in 2009, markets bottomed well before the economic carnage of the recession had ended.
In any case, for now, there’s not much I can say except to stick to your investment plan (or get one if you haven’t got one). And do own some gold in your portfolio – the flip side of all this money printing is that it becomes politically harder to stop doing it when and if it becomes feasible to do so.
(We write a lot more about this in the current issue of MoneyWeek magazine – subscribe now to get your first six issues free, plus a free ebook on previous booms and busts).