US employers shed 701,000 jobs in the month of March as the unemployment rate ratcheted up to 4.4% from February’s reading of 3.5%. Perhaps more troubling is the increase in U6 as it jumped 1.7% to 8.7% month over month. Hourly earnings increased 0.4% even as the average workweek declined slightly by 0.2 hours relative to February. The fact that average earnings increased as payrolls dropped precipitously indicates where the novel coronavirus has had the greatest impact on the labor spectrum: low- income paying jobs, an area the Fed and administration have touted substantial improvement in recent years.
We knew the number was going to be bad as it serves up our first “official” dose of the economic impact of lockdowns, shut- ins, quarantines, social-distancing, etc… It is the ugliest report we have seen in a decade and disrupts the string of consecutive monthly employment gains we have enjoyed during the longest bull market on record. Not surprisingly, March marked the end of the bull market in US equities in dramatic fashion as recession is all but certain. However, the response from the Fed has been breathtaking, expanding its balance sheet rapidly in order to abate financial market stresses. Other central banks have responded in kind to provide emergency liquidity as business activity grinds to a halt. The US government and other governing bodies around the world have unleashed a barrage of fiscal stimulus to counter the impact of COVID-19. To be sure, it is all warranted under the current circumstances.
Being that the investment community, as a whole, is in the early stages of quantifying the impact of this global shock, it is difficult to calibrate estimates for the ultimate duration and severity of this crisis. Our numbers suggest that financial market volatility stemming from the virus itself will likely last six months. Unfortunately, that places us in the throes of what was already expected to be a volatile fall before the virus began shutting down the global economy. Compounding issues, Russia and Saudi Arabia have engaged in a price war, roiling commodity markets and sending crude oil to ~$20/bbl. In short, it justifies our current defensive posture. However, our view is more sanguine as we zoom out a bit and assess the likely path of future events.
After all, markets are forward- looking mechanisms and prone to overshooting in either direction, especially during highly volatile periods. The financial world is reeling from the sudden impact of the virus on the lives of the global populace, but both fiscal and monetary responses on a global scale are simultaneously unprecedented. Therefore, we maintain our fair value estimate for US equities, as measured by the S&P 500, at 3050, and will be actively seeking opportunities at a substantial discount to fair value on a risk- adjusted basis. However, if our criteria are not met on the basis of both value and risk, then we will continue to maintain our defensive posture buttressed by elevated cash levels across Total Wealth portfolios. Certainly, we live in the present and in the present cash is king.
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities