US jobs are strong even if global equity markets are not. February payrolls in the US expanded by 273,000. Moreover, the Bureau of Labor Statistics increased previously reported jobs for the months of January and December by a total of 85,000. Wages increased year over year by 3% and the official unemployment rate dipped slightly to 3.5%. Labor force participation held steady month over month at 63.4%, while the U-6 rate ticked higher to 7% in the month of February. Importantly, this data set does not capture much with respect to the future impact of the coronavirus. The significance of this report (and the others that we have been monitoring) is that it gives us a glimpse of where the underlying fundamentals were before the coronavirus began to influence various policies and consumer behaviors. The good news is that the US was stronger than expected coming into this crisis.
Speaking of influencing behavior, this morning President Trump signed a $7.8B spending bill authorized by Congress to combat COVID-19. In a move not seen since the financial crisis, the Federal Reserve surprised markets with an emergency rate cut of 50 bps on Tuesday morning. OPEC+ is considering a production cut to steady the price of oil, though Russia is a holdout at this stage. The actions taken by various countries and companies are too many to list. Japan has closed schools. Carnival was suspended in Italy. Cases are beginning to dot the US landscape and more measures to curtail consumer/ economic activity are in the wind. Manufacturing data out of China was the worst on record, even worse than what was reported in the throes of the financial crisis. The political drama associated with the primary process has not helped market matters.
The good news is that the virus is a transitory trouble. It does not represent a structural economic issue at this stage and the US economy was at least “healthy” before it appeared on our shores. Earnings expectations for 2020 will likely have to come down and there will be much debate regarding the shape of the recovery. That said the second half of this year could prove to be quite strong after a couple of quarters of difficult data. The real question remains: how bad will it get? TWP maintains its fair value estimate for the S&P 500 at 3050, but we are reducing our market outlook for stocks as an asset class to neutral in order to balance out the likelihood of near- term difficulties with a structurally sound longer- term view.
Market Outlook: Bearish USD, Neutral Duration, Neutral Equities