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Jobs Bounce In May, Markets Don’t Leave Margin For Error

It’s been a record-breaking year for unemployment numbers in both directions. Unemployment broke records on the way up and is now declining relatively fast too. However, the unemployment rate remains at over 13%. That’s still a very high level. The question from here is what the underlying level of unemployment is once reopening is fully achieved, as that will determine how long the U.S. economy will take to return to normal. The market’s take on this is certainly optimistic.

What The Numbers Say

The data for May saw unemployment turn around. After its recent sharp rise, unemployment declined in May. Specifically the unemployment rate dropped 1.4% to 13.3% for May on government figures. Roughly, 1 in 10 of the jobs that have been lost to the pandemic came back in May. The move was broad based. Leisure and hospitality, the sector which has been hit hardest, saw the greatest rebound, accounting for the about half the unemployment improvement. Most other sectors improved, though government workers continued to see job losses.

The improvement was also relatively unequal. Whites and Hispanics saw unemployment decline, but it continued to rise for Blacks and Asians.

The Path From Here

Though the markets cheered the direction of the data as unemployment moved down not up. There are still many questions from here. A bounce in employment especially in leisure and hospitality is likely to continue to with reopening. Hence the eye popping unemployment numbers likely will not last, assuming reopening continues and broadens from here. However, the question is what the underlying level of unemployment looks like even with full reopening. Yes, retail, hospitality and leisure may drive a major rebound in the numbers. Still, these sectors only represent half of the job losses. It will be several months until the underlying picture is known.

What’s Priced In?

The second question is what is the market pricing in? Valuations, in aggregate, are not cheap, and the market is trading at the same level as last December. We’re basically through any sort of market pullback in the U.S. given current trading levels, though the sector-level picture is more nuanced. We have seen ample stimulus from the government and the Fed. Bond prices are materially lower.

Still the market isn’t pricing in hiccups in any recovery. Either the market is betting the rebound will be rapid from here, or that the government will step in to smooth any bumps should things falter. For example, more stimulus in July is still on the cards.

So the May jobs numbers were encouraging, but there is likely a long path ahead, the market isn’t pricing in much slippage on that journey.

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