Unemployment Rate Decline – Shockingly Good News

The decline in the unemployment rate surprised or better shocked most economists—but confirmed financial market trends. The rate fell to 13.3% in May from 14.7% the prior month with a gain of 2.5 million jobs. Many economists in their comments this morning questioned the numbers since most looked for the unemployment rate to reach 20% or higher. Part of the answer to this strength may reflect rehiring when businesses obtained their Payroll Protection Loans (PPP.)

EXTRA UNEMPLOYMENT COMPENSATION STILL LIKELY TO BE EXTENDED

State unemployment compensation plus the $600 weekly payment initiated under the CARES Act actually resulted in total incomes increasing despite the decline in labor income. The $600 weekly payment ends at the end of July. Whether Congress enacts legislation to extend or modify that payment remains in question. In our view, some form of extension seems probable.

NEW FISCAL PROGRAMS SMALLER IF POSITIVE ECONOMIC TRENDS CONTINUE

If the balance of future economic results tilts more positively then the $3 plus billion fiscal spending programs passed in the House will face sharp cuts by the Senate. Portending such a gradually improving economy, the average work week increased slightly 1% to 34.7 hours. While average hourly earnings declined 1% reflecting job gains for lower-paid workers, this represents a positive direction in light of our social difficulties.

INVESTMENT CONCLUSIONS

We approach financial markets with cautious optimism. Part of that optimist reflects our faith in the dynamism and ingenuity of American business and workers to overcome hurdles brought by the pandemic. At the same time, our caution reflects the likely unsteady path the economy faces to regain stable growth.  With that balance, our portfolio mix recommendation remains the same—40% equities, 35% alternatives, and 25% fixed income. In the case of fixed income, we tilt to shorter duration credits. While deflation seems more likely in the short-term, the sizeable deficits will likely lead to higher interest rates and inflation. Our expectation that Sino/American friction may limit, at the margin, continued investment in U.S. treasuries by China also influences our view on interest rates.

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6/8/20
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