by Shawn Narancich, CFA
Executive Vice President,
Equity Research and Portfolio Management
Easing Into Summer
A quiet week on Wall Street feels like just what the doctor ordered ahead of the long Memorial Day weekend. Stocks remain well bid and within striking distance of new highs ahead of what will be a busier next week of economic data. Amid the continuing back-and-forth debate in Washington D.C. about the proper level of additional stimulus and funding for that new stimulus, investors appear increasingly assured that worst-case tax increases – i.e., an approximate 40 percent capital gains tax rate, taxing unrealized capital gains at death, and a 30 percent corporate tax rate – are unlikely to be enacted. Meanwhile, the Fed is beginning to talk about signaling to investors the wind-down of quantitative easing as the economic recovery stands to transition into expansion later this year.
Details, Details
Last month’s payroll report was disappointing, undershooting estimates for as many as a million new jobs to be created in April. Potential reasons why net new jobs totaled just 266,000 have been topical in recent weeks. One issue at play is supplemental federal unemployment compensation, which at the margin is disincentivizing the unemployed to return to work. Another obstacle is parents with kids still schooling remotely who cannot yet return to work away from home. Finally, statistical anomalies could have impacted the jobs number as the seasonal adjustment process may have missed the mark amid upheaval of labor markets over the past year.
You’re Hired!
Whatever the reason, we see next week’s May jobs report more than doubling the April jobs tally and would not be surprised to see the government revise the April jobs tally higher. The most recent current job opening report supplied by the Job Openings and Labor Turnover Survey shows that there are over eight million positions yet to be filled. Also, what gives us the confidence that job creation will remain robust in the months to come is the weekly tally of first-time unemployment claims, which once again this week undershot expectations and fell to a new pandemic low of 406,000. As the chart below shows, initial jobless claims have steadily fallen over the past year, reflecting an increasingly robust economy.
Source: FactSet
A Dynamic Labor Market
In the early stages of lockdown last summer, U.S. consumers adjusted by shifting spending away from services to the online purchase of goods, which in turn created new jobs in distribution and logistics, helping offset the lack of spending on travel and leisure. Now, with 50 percent of Americans fully vaccinated, consumers are beginning to eat out again, buy plane tickets and stay in hotels, boosting demand for labor at restaurants, the airlines, and lodging establishments. While “bonus” unemployment compensation may complicate the month-to-month progression of employment recovery, with consumers flush with cash to spend thanks in part to generous government stimulus payments, the aggregate demand necessary to incentivize the return of these jobs remains firmly in place. We remain bullish on the U.S. recovery and expect unemployment to continue falling in the months to come.
We wish everyone an enjoyable and safe Memorial Day weekend and ask all to remember those who have made the ultimate sacrifice to help ensure our freedom and prosperity.
Week in Review and Our Takeaways:
Stocks rebounded from shallow losses the week before to trade within 1 percent of new all-time highs on the S&P 500
The economic calendar is more active next week with release of the May jobs report and ISM manufacturing and services data