The stock market could be in for a rude awakening come July as government funding dries up and consumers have to fend for themselves.
The seemingly unsinkable U.S. stock market has been riding high despite worrying economic data and civil unrest across the country.
The Federal Reserve’s massive stimulus program has kept another stock market crash from materializing so far. But investors could be in for a shock come July when pandemic payments start to dry up.
Investors cheered Friday’s jobless data after it showed that the number of people without jobs was lower than expected.
Government data showed that roughly 2.5 million people have been rehired, suggesting labor markets are on the road to recovery.
The report is worth celebrating, but investors may want to be cautious in the wake of the stock market’s rally. Yes, people are being rehired— but tens of millions are still unemployed.
Another unemployment measure that takes into account hourly workers shows a jobless rate of 20%–a figure that is more in line with the actual state of the labor market.
Gregory Daco of Oxford Economics cautioned that one good labor market report doesn’t necessarily translate into a strong recovery. Daco is expecting 13 million people to remain jobless at the start of 2021, and he believes that more layoffs could be on the way.
Many of the rehires were in the leisure and hospitality sector, where pandemic-induced lockdowns were the most detrimental. Daco warned that the stickiness of those jobs is still unknown. If the demand doesn’t recover over the summer, another round of job cuts could come in September and October.
The greater concern for the stock market is whether companies can hold on to workers through the summer. A lot of the post-lockdown success among U.S. businesses can be attributed to the government support they’ve been receiving.
Much of that support will start to dry up in July, offering an accurate picture of how businesses are faring. The answer to that might not be what investors are hoping.
Almost half of America’s workers are employed by small businesses, and those businesses have been the hardest hit by the global pandemic. While the Payroll Protection Program (PPP) has helped many of those companies stay afloat, the consequences of propping them up for a few months are about to become apparent.
The $510 billion in government PPP loans came with a few conditions—namely how and when companies should use the funds.
In the initial legislation, the money was to be spent within eight weeks of receipt. That’s now been extended, but the fact remains that the maximum loan size was just over two months’ worth of payroll. That means for most employers, federal money will be running out come July.
That could spark a new round of layoffs as businesses find ways to operate with more restrictions and less demand.
Consumer spending is the backbone of the U.S. economy. Supporting it has been the government’s aim as it navigates pandemic, but there’s only so much lawmakers can do to spur on demand. Even those who managed to hold on to their jobs have suffered drastic pay cuts that have significantly hurt their discretionary spending ability.
Those who are still claiming unemployment have been supported by added pandemic insurance, another feature of the government’s stimulus that has helped buoy spending. But that too is due to run out in July, creating a perfect storm that will weigh heavily on the U.S. economy heading into the autumn.
So far, the stock market has been trading in a parallel universe to the U.S. economy. Why does this matter? As UCLA Finance Professor Avanidhar Subrahmanyam put it, nothing moves the market like a surprise.
The way investors reacted to the better-than-expected jobs data is an example of that. Downside surprises have the same impact in a negative way. Part of the reason the stock market has been rising despite mass layoffs is that investors were expecting it.
When the eventual outcome is obvious, or easy to anticipate, then when it actually happens, the market doesn’t react, when the eventual outcome is hard to anticipate and comes as a surprise, the market does react.
Now traders are comfortable that the U.S. economy is on the path to recovery. But a sudden downside shock could kick the legs out from under the stock market rally.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.
Last modified: September 23, 2020 1:59 PM