The May Jobs Report – Impressively Incorrect!!!

Monday, June 8th, 2020

By: Jim Callahan, CFA®, CFP®

May Jobs Report

As 2020 moves into June, we continue to shatter records and create new superlatives to describe the year to date.  The latest brouhaha: The May jobs report released last Friday.

To recap, the coronavirus pandemic and resulting economic shutdown has turned the global economy on its head, including ours.  Through April, the U.S. labor market lost over 22 million jobs while the unemployment rate skyrocketed from 3.5% to 14.7% … in just 8 weeks!  The promise of our economy getting back online is encouraging, but the pace by industry and geography varies widely, tempering our expectations like a dark cloud staring at you on the first tee.

What happened?

The Labor Department reported the biggest upside jobs surprise in the history of jobs, surprises, and reports.  Economists were expecting to show that we lost another 7.5 million more jobs.  Instead, the U.S. economy gained 2.5 million jobs.  In doing so, we booked the biggest gap in monthly labor market predictions versus actual data ever recorded.  Instead of the unemployment rate breaching 20%, it fell to 13.3%.

Jobs Added per Month - Nonfarm Payrolls

But don’t just take it from us.  Here’s how the financial media discussed Friday’s milestone:

“No one saw it coming. The stock market rightfully celebrated what was the biggest labor-market surprise in history and, more importantly, evidence that rehiring the more than 22 million people who have become unemployed since March is under way.” – Barron’s

“Job growth was concentrated in industries hit hardest early in the crisis, like leisure, hospitality and retail work. But manufacturing, health care and professional services added jobs as well, possibly signaling that the damage did not spread as deeply into the economy as many feared.” – The New York Times

“Looking at the numbers, it reminds us once again how the stock market is often a forward indicator. There was a sense things were getting better around the economy and stocks rallied sharply in April and May. Here in June, we just received a very positive piece of news that might seem to justify at least some of the huge run-up in the market since the March lows.” – Forbes

What does this mean?

We’ve always known our economy would re-open, but the debate has centered on how quickly we’d get back to work.  As we’ve written before, the longer the recovery takes, the more that temporary economic deferrals become permanent losses.

This latest jobs report, and the extreme gap with what the consensus expected, forces everyone to re-think the narrative.  Perhaps the V-shaped economy is still on the table.  Perhaps the 40% gain in the stock markets are justified.  Perhaps we all fell victim, once again, to allowing our emotional brains to cloud our financial brains.  So, would this be our prediction going forward?

We’ve always concentrated our efforts towards answering a different question.  We don’t focus on trying to predict the future.  Instead, we ask, “what happens if…?”  We create solutions for a variety of possible futures, and we adjust our advice as the information changes.  In doing so, we remove the emotional and reactionary decision-making, and we increase the odds of your financial success along the way.

S&P 500 Returns and Unemployment

What are we doing now?

Having already built a diversified portfolio, these volatile markets offer opportunities for rebalancing.  While big moves in U.S. stocks dominate the headlines, our non-equity positions serve as a counterbalance.  And when one asset class becomes too over- or under-weighted compared with our target, we add to what’s shrunk by trimming what’s grown.

Rebalancing is not a marketing timing method, but rather a risk reduction technique.  Think of this: left untouched, a portfolio of stocks and bonds, over time, will approach 100% stocks.  Why?  Because stocks grow more than bonds over time.  Rebalancing maintains that desired stock/bonds mix, hence, its risk/reward tradeoff.

Most importantly, we are managing risk and increasing returns without relying on predictions.  Essentially, we use the market as an indicator to signal when we should be adding or trimming, regardless of how optimistic or pessimistic the mood may be.  Over time, studies show that we can add 1-2% to annual returns.

So, until the next record-breaking, earth-shattering event, rest assured you’ve got our best thinking in place today and going forward.  Otherwise, sit back, grab some popcorn, and enjoy the “experts” on TV roll out their latest predictions.