Current Risks to the Market

Author: Nikki-Lee Birdsey

Estimated read time: 3 minutes

Publication date: 8th Jun 2020 11:43 GMT+1


The jobs report on Friday secured a market rally in the United States as the Bureau of Labor Statistics (BLS) reported a surprise surge in hiring, adding 2.5 million nonfarm payroll jobs in May. This ticked the unemployment rate down from 14.1% to 13.3%, which is far lower than some forecasts predicting an unemployment rate of 20%.

U.S. unemployment claims have totalled more than 40 million since March, but the market began a steady assent on March 23 despite the unprecedented unemployment levels due to Covid-19 and the resulting lockdowns in countries across the globe. On Friday U.S. stock markets leaped higher on the surprise jobs report news, with the S&P 500, the Dow Jones Industrial Average and Nasdaq surging 2% to 3%.

 

Is the Market Optimism Misguided?

While last week’s jobs report was undoubtedly good news, some analysts have called for more caution. The rally is driven by well-performing tech stocks, the reopening of the U.S. economy, and investors chasing gains from previous market losers, among other factors. Gains in airlines, cruises, industrial stocks and financials have steadily increased as investors look to the Fed stimulus measures and the hope that the worst economic news has already passed. Just three months ago February’s unemployment rate was 3.5%. Last month the unemployment rate of 14.7% was the worst since the Great Depression.

In short, there are still many risks to the market. Over the past two weeks the United States has seen mass protests sparked by the death of George Floyd in police custody in Minneapolis. The widespread support of reform measures through mass protest has uncovered a divided nation, as well as actively demonstrating opposition to its political leadership. As tensions in the U.S. continue to rise, the market so far seems to be ignoring the disconnect between U.S. political leadership and the civil unrest amid calls for reform.

Unsettling images of policing tactics, the use of the U.S. military in cities, along with reports of looting, have flooded the public eye. Additionally, the protests have sparked a wider discourse that points to racial economic disparity. Friday’s jobs report clearly stated that the unemployment rate declined for white and Latino workers, but didn’t decrease for black and Asian American workers, and workers under 20 years old. Deutsche Bank (NYSE: DB) noted that the unemployment rate for those without a high school diploma was at 20%, far higher than May’s national average of 13.3%. Deutsche Bank also found that Millennial unemployment is at Great Recession-era levels.

 

Further Market Risks

Other risks to the U.S. market include a spike in coronavirus cases which could force cities to resume lockdown measures. The death toll due to Covid-19 in the United States is among the highest in the world, soaring over 112,000. Additionally, jobs could return at a slower pace next month, indicating the economy isn’t picking up where it left off with long-term, enduring economic loss. Analysts have pointed out that federal stimulus measures to families and individuals has not been enough and is reaching affected Americans too slowly. Further political risks such as the U.S. general election in November and escalating tensions between the U.S. and China also point to risks currently not being heeded by market activity.


Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.com. The observations he makes are his own and are not intended as investment or trading advice.