Morning Note

Judging by the pop in U.S. equity futures on this morning's jobs report you'd think we actually experienced a nice bout of job creation. Instead, and incredibly sadly, an estimated 20.5 million Americans found themselves newly out of work last month; based on data compiled during the reference week that included April 12th.

The reason I added the reference-week detail is because we know the numbers got worse during the last two weeks of the month. So, at this point, the prospects for May's number are not looking so good.

So why is the Dow future contract trading +260 points a half-hour before the open? Well, it was up a bunch before the jobs number was released, which was all about optimistic news around U.S./China trade. Ironically it was exactly a week ago today when the Dow gave up over 600 points, presumably on the President's threat that day to slap additional tariffs on China due to the narrative around it and the pandemic. 

In terms of the jobs number and this morning's rally, the media suggests that it has to do with the fact that 22 million job losses were expected, and that 20.5 million turned out to be the count. Another "positive" was wage growth; up 7.9%. While one might, at first blush, think that that would be big and truly spark a rally, let's hope that traders have the insight to know that nobody got a raise last month; that the wage growth reflects the terribly sad reality that low-wage earners lost their jobs to an immensely higher degree than did high-wage earners. The Leisure and Hospitality industry, for example, had to say goodbye to 47% of its workers.

Another factor that I suspect has the market initially celebrating is the categorization of 18 million of the jobs lost as "temporary layoffs". Of course at first blush that's huge, but we have to keep in mind that during the 2008 recession, one that saw the S&P 500 lose 57% of its value, the worst monthly jobs number saw 800,000 lost; which was utterly shocking at the time. Even if all 18 million were called back to work tomorrow, we're still left with a previously unthinkable 2.5 million folks suddenly out of work...

You might say times have changed, but no. Viewing this impressive rally in stocks -- at this juncture -- as anything but your classic bear market retracement rally would be the definition of dangerous, in my humble view...

Therefore, clients, as frustrating as it may be to have your portfolios hedged, and therefore their performance notably muted as implied volatility has plummeted of late (doing a real number on the value of our options hedge), if managing risk is what you rely on us to do, we would be sorely shirking our responsibility were we to approach the present setup in any other way.