Jobs and Coronavirus: What Investors Should Be Watching Going Forward

Real Money readers know I usually write a reaction to the monthly payroll report, which most times is one of the biggest volatility moments of the month. February is a clear exception. On its face it was a great jobs report: 273,000 jobs added, 85,000 of upward revisions, higher weekly hours, lower unemployment, etc. However, because these numbers don't reflect any Covid-19 impact, the strength of the February report is almost meaningless. So, I thought it would be most useful for readers to hear how we should be watching future employment reports as the coronavirus impact starts to seep in. Plus, there's one important takeaway from the report itself. Are job gains about to plummet? The Labor Department will conduct their March survey next week. Given that we haven't seen any increase in Initial Jobless Claims, it seems unlikely that the March jobs report will include a bunch of layoffs. It is also very unlikely that hiring has plummeted this quickly. Concern over Covid-19 only became really acute in the last couple weeks. If someone was going to start a new job the week of March 9, it is likely they agreed to take the job two to four weeks earlier. Few firms are going to rescind a job offer under those circumstances. Therefore, I expect the March report to almost entirely reflect pre-coronavirus conditions. That might catch people by surprise, because I'm not sure the whole market is aware of the mechanics of the surveys. Average hours might tell us a little something, but we'll need to wait until the April jobs report (which isn't released until May) to see if emplyment growth actually declines. Fiscal support will probably be easier to come by than usual During the 2008-2009 recession, Congress struggled to pass bills providing fiscal stimulus. Some smaller things were easier, such as payroll tax holidays, but support for spending that addressed the core of the problem (mortgage relief, bank capital, etc.) were difficult to pass. They were either branded as bailouts for the profligate or were decried as adding too much to the deficit. I don't think either issue will be as difficult to overcome this time. When banks were getting bailed out, we were helping the culprits of the crisis. It was necessary to keep the economy from spiraling, but at best we'd call it a necessary evil. When there would be discussion of buying up vacant homes or helping to lower borrowers' mortgage debt, it seemed like we were bailing people out from bad decisions. In this case, no one got coronavirus because they made foolish financial decisions. Any business that runs into a revenue problem because of the virus is a clear-cut victim. I would expect governmental support to come in at least two obvious forms. One is that the Fed will reduce any regulatory/funding hurdles from banks allowing loan deferrals. In other words, if your restaurant sees zero business for a month because your city got hit with a Covid-19 outbreak, it is in no one's interest for the bank to foreclose on your business. The second is for Congress to create some kind of relief to people who see their paid hours decline. Getting back to the restaurant example, you wouldn't be paying all your hourly employees while the business is shut down. So, either the government will create incentive/relief for the business to keep paying people, or else the government will create some kind of special unemployment-type payment for people who see their hours decline. Lastly all concern over deficits has completely disappeared. Maybe some people in Congress will rail against the spending, but it will be few. Republicans have a political incentive to avoid a deep recession and Democrats can't credibly claim to be the party of working people while denying these kinds of stimulus. During the Financial Crisis, the bailouts were politically toxic. I think today NOT providing this kind of stimulus will be politically toxic. So, thinking in terms of the monthly employment report, whether or not we see a decline in job growth may depend greatly on the timing and type of stimulus that is supplied. If the government creates a way for firms to keep people on the payroll even as revenue plummets, jobs might not decline much. This jobs report shows that the economy was booming before the coronavirus hit The impact of coronavirus is already large enough that a recession is probably inevitable. It could be short and shallow if the outbreaks are contained, if the death toll is minor, and if the right kind of stimulus is provided. The recession could be much longer and deeper if any of those aren't true. I don't have any insight about how bad Covid-19 will get. However, I do think the strength of this jobs report shouldn't be completely ignored. It tells us that if, magically, the coronavirus were no longer an issue, the economy would be booming. While I would not bet on a V-shaped recovery, I also wouldn't be against a V-shaped recovery. It would take a lot of ifs to come to fruition, but it is possible. Municipals have gotten incredibly cheap As one last point, the yield on AAA-rated tax-free bonds is now considerably higher than Treasury bonds. I'm seeing most trades 30-50 basis points higher than comparable Treasuries in the 10-year range. If you have been long bonds based on this column over the last year, switching some of your risk over to municipals should be a very low risk trade.

Jobs and Coronavirus: What Investors Should Be Watching Going Forward

During the Financial Crisis, the bailouts were politically toxic. Today, not providing this kind of stimulus will be politically toxic.

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