More Uncertainty to Rattle Markets

There were two big items of news to hit the headlines this morning. The first—that President Trump has tested positive for the novel coronavirus—generated the most interest and the most fear. It has been credited with knocking down markets. The second—that job growth continues to slow—has generated much less attention but will have much more impact over time. This reaction is a classic example of what makes the headlines versus what really matters. So, let’s take a closer look.

Presidential Matters

Let’s start with the president. This news could obviously be serious, for both President Trump and the First Lady. On a personal level and as a citizen, I wish them both well. But as an investor? This news really doesn’t mean much, despite the immediate market reaction.

To illustrate what I mean, let’s game this situation out. President Trump is infected, and the worst case is that he dies. If that were to happen, Vice President Pence would take over and governance would continue. The next worst case is that the president becomes incapacitated. In that case, the vice president would take over and governance would continue. From a governance perspective, the president is important but not irreplaceable, and there are mechanisms in place. When Ronald Reagan was shot, for example, governance continued. What’s happening now is much less sudden, and extreme, than that.

I wrote the other day how politics, at the highest level, has little effect on the economy or the markets over time. This is just a special case. We are seeing a market reaction, but it is likely to be short-lived as investors think through the possible outcomes. Over time, it will not matter.

Weak Jobs Report

The second piece of news is getting much less attention but will have a much bigger effect over time: the jobs report this morning came in weaker than expected, showing the recovery is indeed slowing down. So far, we have had a V-shaped recovery. But this report is the most recent—and certainly not the only—sign that it will be slowing down over the next several months.

The headline job number (i.e., the change in nonfarm payrolls) dropped from 1.371 million last month to 661,000 this month, or by more than half. It was also well below the expected 859,000. Clearly, this is not a great headline number.

Looking under the covers, the news is somewhat better, but not all that much. The headline number was significantly pulled down by declines in government hiring, specifically local education as schools opened in lockdown mode. This is a problem, but it doesn’t necessarily signal a slowdown in the rest of the job market. What does confirm that slowdown was that the new private jobs number came in at 877,000. This result is better than the headline number but still down from the prior month of 1.027 million. We are seeing the same decline in private jobs than we are overall.

This was a weak report, but not an awful one. A slowdown was expected, and overall job growth still remains healthy, especially in the private sector. One positive data point was that average weekly hours worked went up slightly, which may not seem like much but in fact represents a significant increase in total labor demand. The recovery in labor markets is still happening, just at a slowing rate.

And that is the real message here: despite everything that has been thrown at it in the form of fiscal and monetary stimulus, as well as the rapid recovery thus far, the economy is now slowing, and future gains are likely to be much slower across the board. For a political class that needs to get everyone back to work, this is bad news. For markets that have been pricing in a continued V-shaped recovery, this is another warning sign. The jobs report is a news story that could have effects over weeks and months.

Look Beyond the Headlines

Which brings us back to what hits the headlines versus what matters. Best wishes to President Trump and the First Lady, but I have confidence that governance will continue despite the headlines. The jobs news, on the other hand, will matter more over a longer time period. That is what I am watching.