An hour before Friday’s opening bell, stock market bulls watched the worst U.S. jobs data since the Great Depression flash across their screens, and they didn’t so much as blink. In fact, the Dow Jones Industrial Average (DJIA) sprang toward a gain of more than 300 points to close the week.
According to the Labor Department, U.S. unemployment crashed by 20.5 million jobs in April, causing the unemployment rate to swell to 14.7%.
It only took Credit Suisse Chief Economist James Sweeney one sentence to explicate what this says about the U.S. economy:
This might be the worst macroeconomic data report in U.S. history.
And yet the stock market reacted with nothing more than a half-hearted shrug.
That’s not going to do much for the reputation of the “most-hated Dow Jones rally ever,” but with all due respect to the perma-bears, it’s entirely rational behavior.
We’ll dig into the reasons why in a moment, but first, here’s how the stock market is moving ahead of the opening bell.
Dow Jones Industrial Average futures had pointed to strong gains throughout the overnight session, and the index opened to a triple-digit rally when the markets opened.
By 10:02 am ET, the Dow had jumped 342.71 points or 1.44% to 24,218.60.
That outperformed the S&P 500 and Nasdaq, which rose 1.18% and 0.89%, respectively.
Treasury bond yields reversed earlier losses as the stock market accelerated its risk-on move. At last check, the yield on the 10-year benchmark was 0.666%.
Gold held firm above $1,720 after the jobs report release. Bitcoin – which poked past $10,000 on Thursday thanks to a surprise boost from hedge funder Paul Tudor Jones – edged about 1% lower to $9,890.
So why is the Dow moving higher in the face of the biggest-ever monthly unemployment spike? Because the stock market is a discounting mechanism.
This means that it constantly evaluates – or discounts – all available information at its disposal about past, present, and potential future events.
As portfolio manager David Bahnsen wrote on Thursday evening ahead of the jobs report release:
It will be awful, and tragic, and will leave a percentage unemployment number higher than anything we have seen perhaps since the Depression. The jobs number tomorrow will not tell us anything we do not know right now: (a) Way, way too many people are currently out of work (the jobs data will reinforce that); (b) We do not know how quickly the economy will re-open and re-hiring can commence (the jobs data tomorrow will not tell us that, either).
In other words, there are two crucial reasons Wall Street shrugged off this jobs report.
First, it didn’t surprise anyone. Investors knew this was coming. They knew it was coming yesterday, when jobless claims exceeded estimates (again) and yet the Dow rose 211.25 points anyway.
They knew it was coming a month ago, when the March report brought an abrupt end to 113 straight months of labor market growth. And they knew it was coming weeks earlier, when the U.S. economy first started going on lockdown.
Second, today’s jobs report didn’t give investors any new information. The stock market has already priced in employment losses.
What it’s struggling to discount now is when the economy will reopen, when unemployed workers will reenter the job force, and what the labor market will look like when the dust settles.
That’s why, as ugly as the jobs report looks, this chart might be even more frightening. It shows that new postings fell approximately 50% between February 1 and May 1 on job listing search engine Indeed.
The employment report is a lagging indicator of what’s happening in the labor market. This is a leading one.
Last modified: May 8, 2020 2:04 PM UTC