This week the official unemployment numbers for April came out. Unemployment hit 14.7%. That’s the highest unemployment rate for the series going back to 1948 and also the biggest jump with the unemployment rate tripling in a month since March.
The Market’s Reaction
It is surprising to some why the stock market isn’t phased by this. For example the S&P 500 saw strong gains this week, including a rise on the day of the announcement and that’s on the back of an incredibly strong April too. So what’s going on?
The first thing to note is that the stock market is a prediction machine. The market’s abrupt decline earlier in the year was a recognition that unemployment was coming. While the S&P 500 may still not be down as much as many expect, part due to its composition. It is still down for the year. The market did see this coming. Terrible jobless claims numbers had been coming in for weeks and it’s often possible to know what the monthly unemployment release is before it happens. No one was surprised that unemployment shot up.
The second piece to note is that the market appears quite confident in a V-shaped recovery currently. The market expects reopening to progress steadily and a broadly upward trajectory in the real economy from here. The market may be wrong in that assessment of course, but that is the view that the market is taking. Nothing in the unemployment data changes that assessment. However, if future unemployment does trend worse than expected or the path to reopening is disrupted then the markets could well fall back.
Don’t Fight The Fed
The other aspect to the market’s assessment is not merely the unemployment rate, but policy-makers ’reaction to it. Famed investor Warren Buffett recent praised the Fed’s actions in managing the crisis and ensuring big businesses get the funding they need to avoid shutting down in late March. The government too has taken actions including stimulus checks to help Americans. While the unemployment numbers are grim, the policy reaction has been fast and significant in comparison with other crises. These rapid actions may have eased the economic disruption considerably.
The second piece of the Fed’s reaction has been to dramatically cut interest rates. 10-year U.S. government bonds now yield well under 1% a year. That has knock-on effects for relative pricing of other assets, including stocks. If bonds are yielding much lower rates, then potentially stocks with dividend yields of around 2% on average look a lot more attractive in comparison to bonds. That may be helping the stock market too.
History Is Still Being Written
Now, it’s also important to note that the crisis is still playing out globally. The market is assessing news and forecasts in real time. The VIX as a measure of the market’s volatility remains elevated. So just because the market is not too worried about high unemployment, doesn’t mean stocks won’t fall if the trajectory of the economy changes, or perhaps more specifically, the market’s faith in a V-shaped recovery is shaken. Thursday’s unemployment news was widely known in advance to the markets, but there is plenty of data to come in over the coming months. That information will continue to move the markets both up and down.