The Dow Jones Industrial Average (NYSE: DIA) closed up more than 800 points as the May jobs report showed a gain of 2.5 million jobs and a drop in the unemployment rate to 13.3%. Most economists were expecting more job losses, and the rate to reach 19.8%.
Market Reaction
As a result, nearly every asset was higher except for risk-off ones like gold, the U.S. dollar (NYSE: UUP), and Treasuries. The Nasdaq (Nasdaq: QQQ) closed at an all-time high, the Russell 2000 (NYSE: IWM) finished more than 4% higher, and the S&P 500 (NYSE: SPY) is now 7% off its all-time high. Stocks and sectors that have been punished the most due to the effects of the coronavirus exhibited the strongest gains including financials (NYSE: XLF), energy (NYSE: XLE), airlines (NYSE: JET), cruise stocks, hotels, and casinos.
Notably, technology stocks and cloud computing which have been the strongest parts of the market for the bulk of the past two and a half months, underperformed. This bears watching, and it could be attributed to a market rotation, or it could be a response to the jump in long-term rates. Higher rates make these stocks less attractive due to their valuations.
Jobs Figure Confusion
There were two interpretations of the jobs report. One is that the economy is recovering faster than expected due to the reopening going on across the country. The other interpretation is that employees who were temporarily laid off or furloughed are simply back on the payrolls, meaning that this isn't a meaningful signal of the economy returning to normal.
Despite these competing narratives, it's clear that the economy has bottomed and begun to improve on a marginal basis. This is evident across a wide range of economic indicators including air travel data, car traffic, gasoline consumption, rail traffic that the economy's nadir was in mid-April.
Of the 21 million jobs lost in March and April, 2.5 million have come back. 1.2 million of the job gains came from the leisure and hospitality sector, while restaurants and foodservice, education, construction, and retail were the other areas showing big gains in employment.
Looking Ahead
The combination of enhanced unemployment benefits and PPP programs seems to be having a positive effect, especially if the economy can quickly recover. Continued gains in the labor market and strength in the stock market do reduce the chances of more monetary and fiscal stimulus. This would be bullish for interest rates and bearish for gold.
The major uncertainty remains the shape of the recovery. Stocks and early economic data are indicating a V-shaped recovery. Some of the uncertainties include the virus flaring up again, whether mask-wearing and social distancing are enough to prevent spread if demand can return to pre-coronavirus levels, and how states and local governments will balance health and economic concerns.