• Despite depression-like unemployment statistics, financial markets have rebounded strongly from the March lows
  • Fed policies are having an extraordinary impact on market functionality, but Fed Chair Powell recently called for more fiscal aid to avert a deeper economic malaise
  • Easing of shelter-in-place orders in the U.S., Europe, and Japan have fueled some investor optimism, but renewed tensions between the U.S. and China have dampened sentiment

Shelter-in-place efforts have sent unemployment to levels not seen since the Great Depression. Exhibit 1 provides visual support to just how swift and severe the economic carnage has been due to COVID-19 mitigation. Nonfarm payrolls shed 20.5mm jobs in April, which dramatically exceeds any previous period since records began in 1939. Despite this grim picture of the U.S. labor market, the S&P 500 has risen more than 30% since the March low point. This dilemma has left many casual observers perplexed, but for veteran market participants, the power of the Fed is well known, particularly when asset purchases and lending facilities are utilized in concert with a whatever-it-takes attitude. The Fed’s liquidity onslaught effectively sucks volatility out of the market and reduces the supply of investable assets. Market functionality is smoothed, and asset valuations rise.

We’ve seen this play out before in the Great Recession more than a decade ago, and the current level of monetary support is on pace to be much greater than ever before. To be clear, there are still pockets of financial markets struggling to recover, particularly more credit-sensitive fixed income sectors not being directly supported by the Fed. While broad market functionality has greatly improved thanks to the Fed’s efforts, the economy still has a long way to go. As we noted in previous commentaries, it appears to be much easier to shut an economy down than to turn it back on. The weekly jobs data reveal that the May unemployment report will continue to show a historically high jobless rate, and it’s entirely possible that the unemployment rate could remain in double digits well into 2021.

To this end, Fed Chair Powell provided a sobering assessment of the current environment during a May 13 appearance on a Peterson Institute webinar. He specifically addressed the risks of “long stretches of unemployment” as it relates to career derailment and skill erosion, as well as noting that the loss of thousands of small and medium sized businesses “would limit the recovery when it comes.” Powell acknowledged the many uncertainties we face, responding with a series of questions regarding the current economic outlook:

“Can new outbreaks be avoided as social-distancing measures lapse? How long will it take for confidence to return and normal spending to resume? And what will be the scope and timing of new therapies, testing, or a vaccine? The answers to these questions will go a long way toward setting the timing and pace of the economic recovery. Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.”

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