Good News Stateside for Independence Day – But With a Hint of Caution

Now we know the Markets are not the economy and vice versa. And, in recent weeks, the U.S. Stock Market has been going up and down faster than a piston on a steam engine heading West during the Gold Rush.

Just this week the Dow Jones Industrial Average plunged. At times like this, I fear the worst. The Crash of 1929 may be history but it is one that is engraved in the minds and hearts of all of us involved in the US economy. It took a world war and then some to get out from underneath that rubble. Covid-19 has wrecked so much havoc and undermined confidence in financial institutions and investors that many of us just don’t know which way to turn.

And yet, today, a few days on, things have changed again. Just in time for the Independence Day holidays, reports on the number of US jobless claims and June employment data seemed to show a recovery in the American labor market. Basically, the US economy gained more jobs than expected last month, adding 4.8 million jobs. With that the unemployment rate improved to 11.1%. This is the second month in a row that employers added jobs since those massive waves of layoffs gripped the country when the coronavirus pandemic first reared its ugly head.

In response to this latest employment data, President Trump, during a pre-holiday press briefing at the White House, declared: “Our economy is roaring back … These are historic numbers.”

A survey carried out by The Wall Street Journal (WSJ) seemed to confirm this. Contrast the June figures with those of May’s payroll gain of 2.5 million and jobless rate of 13.3%. Now this is still a long way off a 50-year low of 3.5% unemployment rate just prior to the pandemic but anyone can see that things are heading the right direction and – crucially – quicker than many expected.

And as a result of this piece of good news, U.S. stocks jumped. Shortly after the opening bell on July 2, the Dow Jones added almost 450 points, rising 1.7%. The S&P 500 jumped 1.5% – the fourth day of gains for that index. The tech-heavy Nasdaq Composite rallied as well, adding 1.4%. The Markets steadied and fell a little thereafter, but still it has been a good day for traders.

Although the unemployment rate is still high investors think that they are seeing signs of progress.  The WSJ reported one analyst, Jamie Cox, managing partner for Harris Financial Group, as saying: “These [jobs] numbers are quite large and represent basically the opposite of the closing of the economy. If we can get the unemployment rate under 10%, then we’ll be able to say this is a full-on recovery.”

Now these signs of the U.S. economy’s revival have allowed some investors to start to think and even hope, possibly believe, that the damage done by the coronavirus pandemic could be more quickly erased than they imagined even just a handful of days ago. Now, add in the fact that there is speculation that the Federal Reserve and the government will continue pumping large amounts of cash to American businesses and households, and that combination of money and optimism is making stocks move higher and higher.

Patrick Spencer, managing director of U.S. investment firm Baird told the WSJ, “In my mind, this is the beginning of a new bull market.  Aggressive fiscal and monetary stimulus is going to continue and that’s going to support the market, and recent economic data suggests a recovery is starting to emerge.”

There you have it: one quote about a “full on revival” and another one about “a new bull market”. Who would have thought this even a week ago?

A note of caution for what may simply turn out to be wishful thinking, however.

The latest figures do not reflect recent government-mandated business closures and related layoffs over the past two weeks as some states in the South and West pressed pause on the reopening plans for business.  Nor do they reflect this week’s surge in coronavirus-related cases in some states, which forced Apple to close 16 of its stores across Florida, Mississippi, Texas and Utah, with plans to shut down a further 30 more locations. Also because of the surge, McDonald’s is delaying the reopening of dine-in service at its chain of 40,000 outlets across the US by three weeks. These two bits of news about two different sectors go to the heart of matters. Will the US population continue to avoid restaurants and entertainment and shopping venues? And, is that population’s concern about job security such that it is holding onto paychecks rather than spending them in any event?

The key to the future is business consumer lack of confidence allied to the ongoing restrictions on social and economic activity. These two factors will determine whether the American economy makes a swift and full recovery, and how rapid that progress is to be.

In short, as regards the US economy and a revival for jobs and businesses, we’re not there yet. Again, this only shows that the US Markets are very different from the US economy.