Article08 May 2019

Impact of the Worst U.S. Jobs Backdrop in Nearly a Century

May 8, 2020 – The number of job losses in the U.S. to date as a result of the coronavirus is nothing short of staggering, both in terms of the sheer size and the speed at which the losses accumulated. The pressing goal of government is to get people back to work quickly, but this could be optimistic given the other set of complications the virus has created — bankruptcies, small business closures and depressed consumer spending that will restrain the economy. A recovery in consumer spending looks likely in the second half of the year as we bounce back from the current lockdowns, but we need to get people back to work before we can be confident of a sustained increase in consumption trends. We need to be aware of the changed backdrop, the “new normal”, we are operating in, which is extremely different from the environment we’ve encountered over the last 30+ years.

Before anyone was talking about pandemics or lockdowns, the world was already seeing a notable rise in populism globally.  A less capitalist society could mean lower profit margins for corporates while funding required for government programs could spur changes to corporate and individual tax policy. Given the surge in unemployment, we expect more populist stances to gain traction in western economies. Increasing infrastructure spending and boosting consumer spending could help propel hiring programs and job creation, but could also increase inflation as governments raise trade barriers to protect their local workforce and industry.

From an equity market standpoint, refocusing on domestic-focused industries vs. globally-oriented businesses could prove an opportunity for value stocks as the anti-globalization drive negatively affects global industries and promotes domestic ‘national’ champions. Pressure on stock buybacks could mean the end of a ‘just buy the market’ mentality and usher in a new period emphasizing the importance of stock selection and dividends in the search for positive returns.

Currently, U.S. equity markets are pricing in an earnings rebound but with concerns over falling profit margins as a result of the downturn, expectations for medium-term earnings growth might be optimistic. And rising geopolitical pressure could also dampen earnings growth prospects. Getting 30 million new jobs created quickly enough to generate powerful consumption trends could also take longer than expected.

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