From an email sent May 13, 2020:
Good morning, IIM investors.
Given the nature of this COVID crisis, recent unemployment numbers are particularly important to understand. Below is some context for how we’re thinking about them.
On this recent spike in unemployment…
Last Friday’s jobs report contained eye-popping, historic numbers and is further evidence that the economy is in recession. However, that sudden rise in unemployment due to the nationwide lockdown is not only well understood, it is the defining characteristic of this economic crisis. Non-essential businesses have closed, demand has temporarily dried up, and many individuals have been laid off or furloughed as a result, creating financial hardship across the economy. What matters now for long-term investors is when and how the economy begins to reopen in the coming months.
The specific numbers in the Friday jobs report show that changes in the labor market were extremely abrupt in April. While it’s important to maintain perspective around these numbers – as they are backward-looking – it’s useful to understand their scale and context, too.
Specifically, the data show that the unemployment rate jumped to 14.7% in April. It had risen to 4.4% in March from a 50-year-low of 3.5% in February.
To put this in perspective, unemployment reached a high of 10% during the last recession, before steadily falling over the next decade.
The so-called under-employment rate, which better accounts for those who have dropped out of the labor force, jumped to 22.8%.
As recently as February, 192,000 new jobs were being created per month on average. In April alone, 20.5 million jobs were lost. When combined with March, payrolls have shrunk by 21.4 million, consistent with recent weekly jobless claims numbers. Compare this to the global financial crisis when 9 million jobs were destroyed during the entire period from 2008 to 2010. So these recent job losses nearly offset the 22.7 million net jobs that were created during the most recent economic expansion.
It should be noted that there are some blips in the data due to the way it is defined and calculated. The labor force participation rate, which measures the percentage of the population engaged in the labor force – i.e. those that are either working or actively looking for work – plummeted. This is the result of being physically unable to pursue work, and for some, expecting to be recalled back to their jobs. So this number should quickly recover, as individuals begin to look for work again. A similar blip is present in the wage growth data, just due to the nature of recent layoffs.
With that in mind, it’s important to focus on the bigger picture. First, many workers are still only temporarily unemployed – either officially furloughed or expected to return to work once businesses reopen. These workers are currently counted as unemployed, and their jobs are considered lost, in the data above. In theory, though, many of these workers are in a position to return to work quickly, which would reverse some of the April numbers. With only a couple months having passed, both worker skills and capital equipment can still be competitive.
Whether this happens will depend entirely on the manner and timing in which the economy is reopened. With each passing week, the likelihood that temporary layoffs become permanent increases. Additionally, if the economy is reopened in haste, the risk to public health could bring further shutdowns and other economic consequences down the road. That is obviously a fine line that both the government and business owners and operators are going to have to walk here.
While there are reasons for optimism, it’s unfortunately also the case that some jobs may be either permanently lost or slow to return – especially in industries such as restaurants, hospitality, and travel…all of which those of you here in the Keys know all too well.
There will no doubt be scars from this crisis that change both consumer and business behaviors. And while it’s no consolation at the moment to hear this, that sorta thing is, historically speaking, always true of recessions and economic crises. The economy, as a dynamic system, will evolve by re-allocating resources and creating jobs in other areas.
Second, and more importantly for long-term investors, the stock market’s immediate reaction to those brutal Friday numbers was a positive one, actually. And that’s because investors and economists had been expecting exactly these types of numbers or worse over the past couple of weeks. Not only are the root causes clearly understood, but data such as weekly jobless claims and last Thursday’s ADP payrolls report provided hints of what was to come on Friday.
Which is one reason the stock market has risen by over 30% since late March, when focus shifted toward reopening the economy. Markets, again, are forward-looking…even as we are still adjusting to being stuck at home. It has always been the case that trying to time the bottom of a market is a difficult – if not impossible – exercise. Trying to do so in the middle of a rapidly changing, global public health and economic crisis is no exception.
Luckily, for long-term investors who are focused on achieving financial goals over years and decades, it’s not only unnecessary to try to time the market perfectly – but it’s likely be counter-productive. While the jobs data above is historic in nature and may come to define this period, it is also more likely than not, statistically speaking, that the situation will improve in the coming months. And we continue to believe that investors should focus not just on the immediate future, but on how the economy will evolve over the coming quarters and years.
Below are three charts that help to put recent jobs reports into perspective:
Unemployment spiked to historic levels in April. The unemployment rate of 14.7% eclipses the peak of 10% experienced during the height of the prior global financial crisis.
Many of these workers may be only temporarily unemployed. If this is the case, then there could be a recovery in these numbers as the economy slowly reopens.
20.5 million jobs were lost in April, nearly matching the 22.7 million jobs created since 2010. Prior to this crisis, the economy had been creating an average of 192,000 jobs per month.
One blip in the numbers is the labor force participation rate. Due to the way this number is defined, it most likely didn’t include temporarily laid-off workers and those who were physically unable to search for work in April. It’s reasonable to expect this number to rebound in the coming months.
As historic and ugly as recent jobs numbers have been, they are not unexpected by the market, either. We continue to be adamant that it’s more important to focus on the light at the end of the tunnel, especially for those planning toward long-term financial goals.
Please let me know if you have any questions.
Islamorada Investment Management