The month of April brought on some historically terrible economic statistics, but market sentiment is indicating the worst may be behind us
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Supported by trillions of dollars in fiscal aid from the U.S. government and additional monetary accommodation from the Fed, the S&P 500 recorded its largest monthly gain since 1987 of 12.88%. Additionally, the narrative around COVID-19 continued to improve as model statistics show that social distancing policies are indeed having a positive effect. With trends moving in a positive direction, government officials have been contemplating how and when to ease shutdown measures and social distancing policies, and we expect investors will be astutely focused on this topic throughout the month of May as they gauge economic demand going forward.
The COVID-19 pandemic has taken quite a toll on the labor market in a short period of time, but investors remain focused on how quickly the recovery will take shape
Outside of fiscal and monetary support, most market participants have been keenly focused on the labor market and the damage social distancing policies have inflicted upon it. For the weeks running up to the monthly non-farm payroll report for April, many investors got a glimpse of the destruction done to the labor market as job separations and unemployment claims continued to pile up on a weekly basis. Through the week of April 24, continuing jobless claims reached 22.6 million, which was almost 3.5 times more than the peak reached during the financial crisis.
The non-farm payroll report summed it up with job losses of 20.5 million for the month of April. However, we see several signs within the underlying data that indicate the potential for a quicker recovery in the labor market is plausible. The number of unemployed that are on temporary layoff spiked above 18 million, meaning those jobs could come back quicker as the economy begins to open up. Additionally, the average hourly earnings figure jumped to 4.7% for the month, which indicates that most of the jobs lost were on the lower end of the pay scale. Lastly, the composition of job losses was higher in the industries that have been affected the most, including the hospitality and leisure sectors. Overall, the number of job losses is astounding, but we’re looking through the headline figure to better understand the lasting effects on the economy, and the details in the April employment report signal that the labor market isn’t as dire as the headlines might suggest.
First quarter GDP was worse than expected at negative 4.8% and April GDP is likely going to look worse
With an initial reading of negative 4.8% GDP for the first quarter, we can see the destruction from the COVID-19 pandemic was worse than expected. Given the data points we have seen throughout the month of April, we already know that second quarter GDP readings are going to be even uglier, so what matters most going forward is the speed and velocity of the recovery. At this point, businesses are just beginning to make plans to open back up, and there is some uncertainty around how quickly demand will pick back up. Overall, we still subscribe to the U-shaped recovery, but consumer confidence and the willingness to spend will be key in the coming months as we analyze the speed of the recovery.
The views expressed above reflect the views of Allianz Investment Management LLC, as of 05/2020. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.