Weekly market recap: plummeting participation

Global equities have continued their rebound from March lows, while the UK continues to lag behind its developed peers.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 3rd July 2020

For anyone who has really been missing that feeling of flying, an airport in Taiwan is running fake two-hour flights which include the full check-in experience. Passengers are being given itineraries, boarding passes, go through airport security and immigration and then board an aircraft with cabin crew to meet them. And the aircraft never leaves the tarmac!

US equities took off last week as strong employment data stoked bullish attitudes. Asset class returns in sterling and local currency are below; global equities have continued their rebound from March lows while the UK continues to lag behind its developed peers.

Figure 1: GBP total returns

Source: Bloomberg

Figure 2: Local CCY total returns

Source: Bloomberg

Stronger than expected employment data emerging from the US was one of the key market drivers last week as US investors enjoyed a 3-day weekend to commemorate Independence Day. With two consecutive months of employment growth following April’s shocking 21 million job losses and temporary layoffs, markets have used this goods news to stage a rebound.

As we have discussed over the last few weeks, Leisure, Hospitality and Retail have been amongst the most heavily impacted by the coronacrisis. The sheer scale of damage caused by the economic shutdown is more clearly illustrated in Figure 4 which shows that 20 years of progress in job creation was undone in a single month!

Figure 3: Leisure and hospitality, education, and retail have been the industries hit hardest by the coronacrisis

Figure 4: Shockingly, 20 years of job creation has been undone in a month

Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

 

Last week, we got our first glimpse of how this recovery is taking shape. Figure 5 shows job creation in the US for the months of May and June with the Leisure and hospitality industries taking a clear lead. However, there are still some 4 million redundancies here with a further 7 million across the rest of the economy.

Make no mistake that the current environment could be a pivotal point for the US economy going forward. Headlines normally focus on the unemployment rate which measures how many workers are actively seeking full time employment relative to the size of the overall work force. But a lesser talked about metric – the participation rate which simply reflects how many people of working age are currently employed – could indicate to what extent the US economy is set to struggle.

The key difference between the two metrics is that while the participation rate encompasses all workers in an economy, the unemployment rate will exclude anyone who has given up looking for a job, or anyone who has decided they don’t want to continue working (e.g. an early retirement or an injury). As such, while we could see a significant fall in the unemployment rate (back to 2019 levels) as the US economy rebounds, a drop in the participation rate will indicate that there are actually fewer workers than before.

Figure 5: The rebound in jobs has been most intense in industries most damaged by the coronacrisis

Figure 6: The US participation rate, which has been trending down in recent years, has fallen significantly during the coronacrisis

Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

 

STAT OF THE WEEK: 24.62, 18.43, 2.82 and 0.07 – the number of deaths from pollution and accidents per TW/hour of energy produced for Coal, Oil, Gas and Nuclear respectively (Our World in Data).

DATA CORRECT AS AT: 03/07/20

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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