Two bullish things to consider after the S&P's 40% surge: Morning Brief

Sam Ro

·Contributor

Wed, Jun 3, 2020, 3:06 AM4 min read

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Wednesday, June 3, 2020

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History suggests unemployment could plummet as stocks keep rising

It’s an understatement to say investors have a lot to think about right now.

But perhaps the two biggest stories facing investors appear to be in direct conflict: the U.S. unemployment rate is at its highest level since the Great Depression, and the stock market (^GSPC) is up about 40% from its recent bear market low.

On Tuesday, analysts offered some interesting perspective on both.

Historically, once the unemployment rate peaks and inflects lower, it tends to trend lower with few major interruptions until it bottoms.

“When the U.S. labor market goes from losing jobs to adding them, there is no looking back,” said Nick Colas, co-founder of Datatrek Research.

Colas shared a chart from a new paper published by Robert Hall of Stanford and Marianna Kudlyak of the San Francisco Fed. It tracks all of the unemployment recoveries since World War II.

“Every one of the lines in the chart above goes pretty much straight down from the peak to something near the trough,” he said. “It might squirrel around late in an economic cycle, but the first few years of recovery always see consistent improvement.”

Unemployment rates tend to keep falling when they begin to fall. (San Francisco Fed)

The researchers found that the average annual improvement in the unemployment rate is 0.55 percentage points. That’s the history.

Moving on to the stock market, the question for so many investors right now is — if you’ve been sitting on the sidelines, have you missed the bull market?

History suggests that the simplest answer is, “No.”

“[P]erspective is always important,” writes Dan Suzuki at Richard Bernstein Advisors. “The average bull market has historically lasted five years, with returns exceeding 200%. The first 48 trading days typically make up just over 10% of the returns for the entire bull market.

“So if this is truly a lasting bull market, then we should have plenty more years of attractive returns ahead of us.”

Stocks could keep rallying. (Richard Bernstein Advisors)

It goes without saying that none of this history guarantees unemployment will start dropping and stocks will continue to rise. The uncertainties facing investors today are different from what investors faced in the past. Everyone mentioned above will tell you as much.

However, most economists have as their baseline scenario that unemployment peaked in May, and it’s not hard to find strategists that’ll tell you the stock market rally isn’t over.

The prospect of a tumbling unemployment rate is surely good news for stocks.

The question then is how much this 40% rally already accounts for an improving economy and a falling unemployment rate.

By Sam Ro, managing editor. Follow him at @SamRo

What to watch today

Economy

7 a.m. ET: MBA Mortgage Applications, week ending May 29 (2.7% prior)
8:15 a.m. ET: ADP Employment Change, May (-9.5 million expected, -20.24 million in April)
9:45 a.m. ET: Markit US Services PMI, May final (36.9 prior)
9:45 a.m. ET: Markit US Composite PMI, May final (36.4 prior)
10 a.m. ET: Factory Orders, April (-15% expected, -10.4% in March)
10 a.m. ET: ISM Non-Manufacturing Index, May (44.0 expected, 41.8 in April)
10 a.m. ET: Durable Goods Orders, April final (-17.2% prior); Durable Goods excluding Transportation, April final (-7.4% prior)

Earnings

Pre-market

7:30 a.m. ET: Campbell’s Soup (CPB) is expected to report adjusted earnings of 76 cents per share on $2.22 billion in revenue
Other notable reports: American Eagle Outfitters (AEO), Canada Goose (GOOS)

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