The US economy lost a staggering 20.5 million jobs in April, in the worst plunge in payrolls since the Great Depression, according to data released by the US Bureau of Labor Statistics this morning. The job losses, which were slightly better than the consensus expectation of 21.7 million losses, sent the unemployment rate to 14.7% from 4.4% in the prior month. The tally adds to a bleak pile of global economic data that has accumulated in recent days, including the worst-ever contraction in euro area retail sales, highlighting the economic damage of the virus and efforts to contain its spread.
The poor underlying economic data stand in contrast to equity markets of late. Since global equities hit their drawdown low on March 23, they have returned 24.5%, according to the MSCI All Country World Index, in local currency terms. The jarring difference in recent equity market performance and underlying economic data highlights the role that expectations play in determining asset prices. Said differently, investors care more about how economic data evolve relative to what is priced into markets than the absolute level of that data. This fact has helped market data “lead” economic data in past cycles.
Still, we remain neutral on equity risk. While equity markets do typically generate higher-than-average returns following a downturn, the dramatic decline in business and consumer activity could worsen if the current efforts to reopen economies lead to a significant uptick in virus cases. It’s also possible that the pace of economic recovery could be slower than what markets expect. As we wrote in April, markets will likely require that two main conditions be satisfied to enter a sustainable recovery: (1) investors will need to believe that fiscal and monetary policy support will be adequate for the duration of the economic lull, and (2) countries have enough capacity to contain the virus’ spread. For us, the jury is still out on both of these conditions.
Kevin Rosenbaum, Deputy Head of Cambridge Associates’ Capital Markets Research Team