Stocks jump as U.S. adds 2.5M jobs in May

Yahoo Finance's Alexis Christoforous and Brian Sozzi speak to Frances Donald, Global Chief Economist and Head of Macro Strategy at Manulife Investment Management and James McDonald, Hercules Investments CEO about the May jobs report from the U.S. Labor Department.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to bring in Frances Donald now, Global Chief Economist and Head of Macro Strategy at Manulife Investment Management. We also have with us this morning James McDonald, CEO of Hercules Investments. Good morning to you both.

I saw the looks on your faces when all of this came over, a look of shock, I think, from all of us. The economy adding 2 and 1/2 million jobs when we were expecting a loss of about 8 million. The unemployment rate was expected to come in at 19 and 1/2% percent. Instead, it dropped to 13.3%.

Frances, I'm going to start with you. Is this report reason for the market to rally here, or should we still just be cautiously optimistic?

FRANCES DONALD: Well, coming into this report, my team and I said, you know what? It's not really going to matter for markets unless it's a big surprise one way or the other. This is absolutely a big surprise.

What's so critical here is that that unemployment rate-- which maybe there's some technical reasons it's still a little bit too low, now only at 13.3%. That means we have much less of a stock of unemployment that we have to erode into the second half of the year.

Now, you could say that the stock market probably already knew this. They were expecting a rebound as economists were saying June would be the month when we added back. Clearly we're bringing that in May.

What worries me, though, from a market perspective is I'm watching that rates market which is saying, well, it's the all clear, and we can see rates rise. That 10-year now up 10 basis points. That might actually end up being the problem for equities in the next couple of days. They knew the economy was going to rebound. What we weren't anticipating is that we'd have to deal with much higher interest rates.

I'll be curious to see how the Fed responds to this report. They're probably both relieved but also now in a-- needing to think, do I need to add more stimulus, or can I pull back?

ALEXIS CHRISTOFOROUS: Yeah, we're going to talk more in depth about the Fed and what this report means to them in a moment, but I want to get James McDonald's initial reaction to this report. So, James, does this report show us the economy is actually recovering or can recover faster from the lockdowns induced by the pandemic than first thought?

JAMES MCDONALD: I have to be honest. I'm skeptical of the numbers. I think that data that's been reported on several levels is questionable. If you look at personal income, you'll see it rose double digits. And if take that statistic and you look at things and say, OK, well, personal income is growing, well, that was because of stimulus checks and unemployment, right?

It's difficult to get a handle on what the true employment situation is. If you drive through-- I've been through three major cities in the last four days, Miami, Los Angeles, and Washington, DC. And if you drive through any city, you see businesses have been shut down, by and large. And the small-business level, the medium-sized business level, and then large corporations are having people work from home. There's layoffs. It's very, very dubious. And while I'm not saying the print is inaccurate, I'm saying it doesn't give us a true picture of what recovery looks like.

And so call me a contrarian. I'm still looking at where pressure is in the market and going to play fundamentals and technicals from here.

BRIAN SOZZI: And, Frances, let me get back to you here. Do you think, just based on what James said and even in light of this jobs report, that we need a new round of stimulus from the government? I think a lot of speculation on why this market has rallied is this estimate or expectation we get another $1 trillion in stimulus from the federal government before year end.

FRANCES DONALD: To me, it is the most important market question is do we get more unemployment-insurance top-up? How do we make sure that we actually propel this economy into the fourth quarter?

A lot of people ask me, what shape is the recovery going to be? Stop thinking about shapes. Start thinking about phases. We are in phase one of the recovery, which is going to seem really aggressive, a lot of pent-up demand. That's going to last through the third quarter.

What I worry about is the fourth quarter when we have all those companies that have gone bankrupt-- Gold's Gym, JCPenney, Hertz-- that are not rehiring their employees. And that segment of the economy that's not going to come back online, we're going to start to feel that in the fourth quarter. If we don't have fiscal stimulus to sustain us, we're going to see another round of difficult economic numbers.

So I completely agree. We need more. And if we don't get it, it's something the market is going to have to deal with in a way that I don't think they like.

ALEXIS CHRISTOFOROUS: You know, James, we talk about it every month, right? This unemployment report is a backward-looking report. When you look at fresher data, what does it tell you about the labor market? Because this week we found out that weekly jobless claims did not rise by as much as expected. 1.8 million were added. But when you look at continuing claims, they rose sharply, hitting 21 and 1/2 million.

So what does that tell you? Are workers being called back to work but much more slowly than we had expected or than we'd like to see?

JAMES MCDONALD: If you take a trained lens and examine what is actually happening, these are artificial numbers. People have been handed money by the government, both in terms of unemployment benefits and in terms of stimulus checks. These individuals-- if you talk to small-business owners, these individuals have a low incentive to return to work because their income for working has been replaced because of the emergency and the catastrophe the Fed was trying to avert.

If we look at this with a trained lens and understand where are the jobs that were under pressure going to come back? and who is going to go back to work? And what will the state of those businesses be? I think we're looking at a much more difficult time than in the macro sense people are expecting.

The concept of a recovery implies that the damage is over, and I think that concept is a false assumption. I think that we are just going to start seeing the true nature of the impact of the virus on the economy as people try to return to normal. Most people just started leaving their homes last week, and so it's too early to tell what the actual state of the economy is. These backward-looking data and these inferences about what recovery might look like, I think they're still a little early.

ALEXIS CHRISTOFOROUS: I want to bring to everyone's attention a tweet from our president just moments ago, seconds ago. President Trump tweeting, "Really Big Jobs Report. Great going President Trump-- kidding but true. These numbers are incredible." Frances, should President Trump be taking credit at all here for this report we're seeing today?

FRANCES DONALD: Well, there is a lot of good government stimulus that has probably helped these numbers, but I'm looking under the hood here at a couple of the data points related to this, and there's still some problems. The employment-to-population ratio in the United States is 52.8. Basically for every American working, there is an American that isn't working. And there's a lot of reasons for that, but that's a structural problem that's going to slow your ability of the economy to grow.

I'm looking at things like the share of the unemployed who have been unemployed between 5 and 14 weeks has jumped from 30% to 71%. So those who have been unemployed have started to be unemployed for a longer period of time. Now the Fed really worries about this. The longer you're out of a job, the harder it is to jump back in, and the more it weighs on your finances.

And we know that people who lose their job, about 73% have still told us we think our job loss is temporary. For a segment of these job losers though, there is going to be a lot of them that are permanently unemployed. So even though this is a good number on the surface, there are still a lot of problems under the surface here. Or it looks good on headline. There a lot of problems under the surface, and we need to be mindful of some of the structural problems that are developing under here.

BRIAN SOZZI: James, I feel you on the need to be skeptical of any data coming off a health pandemic and that we are still in. But in terms of just the market dynamics, this data does suggest that as the economy, as states are reopening, people are returning to work. And from a market standpoint, isn't that the only thing that matters, at least at this point, that will keep-- and it will keep the market rally continuing that another data point has come in significantly better than expectations?

JAMES MCDONALD: That's true, and I agree with what Frances is saying, to take a further closer examination of what's happening under the hood. And so on the surface, yes, the concept that this crisis is coming to an end and perhaps turning around, it sounds good. But if we look at stock-market valuations, we're really, really close to where we were before there was even a pandemic. And what that tells me is that we are literally ignoring what's happening on the ground.

As I said, I traveled through three cities, stayed in hotel rooms. They have a policy now that they will not let a room be rented for 24 hours because they have to go in and clean it. If you look on the surface and say people are going back to work, that's a 16% reduction in occupancy potential on the weekends right off the bat in the entire hospitality space.

And so if I take a look at a valuation on the surface of hospitality and look at a, quote, unquote, recovery, it doesn't factor in the little details that's the reality of recovery and a restoration of life as we know it before, it's going to be incremental. It's going to take time. And this concept that a print of unemployment that isn't as disastrous as we thought it was going to be should justify a market going higher is questionable.

And so I'm going to label myself a contrarian. I'm not going to fight the tape, but I'm going to continue to look to buy puts as we get to more resistance levels here on the major indexes.

ALEXIS CHRISTOFOROUS: You know, Frances, we've got now unemployment at 13.3%. Moody's Analytics came out before this report and said that we could see unemployment at 8 and 1/2% by the end of the year. A lot of folks have been saying double-digit unemployment into 2021. What are your predictions for how we end the year?

FRANCES DONALD: Yeah, so I think high single digits is reasonable. But, I mean, should we be making new market highs if we still have an 8%, 9% unemployment rate by the year end and one that might turn out to be sticky?

This is what really worries me is, yes, I understand why the market is rallying. Huge amounts of stimulus, tech and health care driving this, the economic rebound coming back online, vaccine hopes. It does make sense. But we're still going back to an environment where we're going to have restaurants, airlines, services operating at reduced capacity. So the idea that we're going to come back to the same level we were at before is just not accurate here, and even the most bullish of bulls is going to have to concede that we're not going back to 100% capacity.

So where do we get by year end? High single digits, but even in high single digits, there will be a hit to consumption. There will be a hit to general activity. And this is just simply, you know, a massive disconnect here.

What I will say is that while that's a disconnect in the equity market, I do think the rates markets and the FX markets are coming to grips a little bit better with this. So maybe we are seeing some significant distortions between fundamentals and prices, and I worry that that persists.

BRIAN SOZZI: Well another worry too I think, Frances, this data-- I know you want to label it. You want to put a letter on it, and I get it. But to me, it suggests the early innings of some form of V-shaped recovery.

And we're on the heels of a Fed meeting. Do you think next week when we have that Fed meeting Jay Powell comes out here and signals just a little bit some of this extraordinary stimulus has, in fact, worked, but we may not need it forever like I think a lot of people in the market thinks it will be-- think it'll be around?

FRANCES DONALD: Yeah, you'll have to forgive me. I'm multitasking. I'm talking with you. I'm also talking in our internal chat rooms, and the first comment I put in was are you guys watching the big rise in rates that we're getting right now? This is a problem.

How does the Fed come into this and say we're going to ease more when we have an economy coming back online? So here I'm concerned that you might actually see a Federal Reserve that takes their foot off of the gas a little bit here. I don't know that equities are going to love that when one of the main drivers has been these base bottom rates.

So, you know, we're seeing the 10-year coming up on 1% here. I'm not sure the Fed is going to be comfortable with it heading too much beyond there, but they might not have no choice but to say now is the time for us to continue to taper. We've passed the worst of it.