by Jason Norris, CFA
Executive Vice President
Thursday’s unemployment claims continued to paint a dismal picture in the jobs market, where roughly 2.1 million people filed for initial claims last week, which brings the total over the last two months to roughly 40 million. However, when looking under the hood of a recent jobs data report for April that showed 20 million Americans losing their job, the picture is “less” bleak. While we have not seen numbers like that since the Great Depression, the majority of the 20 million are viewed as “temporary.” The chart below shows that the April jobs report estimates that 2 million of the job losses are permanent.
Source: Bureau of Labor Statistics
While this number is the highest in four years, the expectations are the majority of the 20 million job losses are furloughs and those workers will be re-hired over the next several months as the U.S. economy regains growth. We will get another unemployment report next week which will allow us to see if there are any meaningful changes in the number of permanently unemployed.
The key to getting out of the hole COVID-19 has dug for the U.S. economy is the pace at which businesses can open, coupled with the speed at which consumers will spend. The wild card is if/when we see a second wave of infections later this year, and if the healthcare system (hospitals, vaccines, equipment) are better prepared.
Back in Business?
With less than 10 percent of the U.S. population still under stay-at-home orders (see chart), we have started to see nice boosts in credit card activity as well as store traffic. The stores that have reopened this month have seen stronger traffic and sales than what was originally expected.
Source: Evercore ISI
Investors took this data as a glass half-full and continued to bid up stocks. However, rather than buying just the large-cap growth names, the market has start to broaden out with small caps performing relatively well. The chart below compares the S&P 500 relative to the Russell 2000. Over the last several years, small cap stocks have lagged meaningfully; however, over the last several weeks we have seen a reversal (see chart below).
Source: FactSet
This culminated with over 12 percent of under-performance for small cap stocks from February 24 to March 18. We thought that this presented an opportunity and began adding to small cap equities in early April. We had been underweight for several years and used that opportunity to sell bonds and get closer to our long-term target.
Historically, small cap stocks do well during the early stages of a recovery. While we believe that the economy will improve meaningfully in the second half of the year, we still believe there is a lot of uncertainty down that path. Therefore, we maintain our bias to large cap stocks.
Week in Review and Our Takeaways for the Week
Stocks continued their May rally this week with the S&P 500 rising just under 3 percent and Russell 2000 rallying close to 4 percent
While economic data continues to be poor, investors are focusing on the future and viewing it as a glass half-full