20.5M jobs lost in April, unemployment rate soars to 14.7%

Yahoo Finance’s Brian Sozzi, Alexis Christoforous, and Jared Blikre discuss the April jobs report with Former JP Morgan Chase Chief Economist Anthony Chan, and Hercules Investments CEO James McDonald.

Video Transcript

ALEXIS CHRISTOFOROUS: Jared Blikre, we've got stock futures here in the US higher, stocks globally higher as well. What gives?

JARED BLIKRE: Yeah. If we look at the world map here on the Wi-Fi interactive, we were already sitting on some gains. We had come off the highs, and we just added to them on a better than expected, or a not as bad as feared, payrolls report. Let's just take a look at the S&P 500 futures overnight, and hard to see here, but we did get a little spike up on that report and probably testing these highs up to 2,920. That is a target that short term traders had going into the close yesterday.

We can also take a look at some of the market leaders in the Dow. We have tech outperforming early, along with energy and financials, and you can see on the heat map here, we have Microsoft up 0.9% in the premarket. Apple's up 0.7%. We do have some pharmaceutical names to the downside, but let's take a look at our sectors here.

So we have energy and financials were leading yesterday. They're leading today. Tech outperforming, once again, and we can also take a look at some of the other markets.

Gold took a little bit of a leg down here, but I want to check out crude oil, because that's been in focus lately. Not necessarily reacting to this report, but we are seeing it below $25 again, but it is up about 2% overnight. We can see that it's basically maintaining the gains from the close yesterday. Over the last five days, we can see it's still in a solid uptrend here, Alexis.

ALEXIS CHRISTOFOROUS: All right. Jared, thanks. And I want to put some of these numbers in perspective for all of you. The unemployment rate of 14.7% for April is the highest level we have seen since the Great Depression, not the Great Recession but the Great Depression. The high for unemployment during the Great Recession was 10%, and post-1940, the highest unemployment we saw was back in 1982 at 10.8%. [AUDIO OUT] payroll shed 20.5 million jobs, which now means we have lost more jobs than we created since the end of the Great Recession, in June of 2009.

I want to bring in two familiar faces to the show now to help break this all down for us. We've got James McDonald, CEO of Hercules Investments, and Anthony Chan, former chief economist at JPMorgan Chase, and of course, I've got my sidekick Brian Sozzi here with me as well. Good morning to you all. James, I'm going to start with you. This number, as dismal and atrocious as it is, do you think that it signals we have seen a peak in unemployment, at least during this pandemic?

JAMES MCDONALD: It's important to understand these are unprecedented times, and we don't know the full extent of what the pandemic will do. The indications so far are horrible, and as we digest these numbers, we have to consider that the implications are just beginning. We've never seen a complete suspension during non-wartime, during peacetime, of commerce as we have, and these numbers are just a pre-indicator of the damage that's coming. And so I think it's important to look at these numbers in context of the sequence of events when you stop an economy. The implications of what we've seen over the past month, not just in terms of unemployment, but social distancing, business disruption, small business dislocation, tightening credit, these are all going to have an extraordinary impact for some time.

BRIAN SOZZI: Anthony, in your estimation, how much of this is going to be permanent job loss?

ANTHONY CHAN: Well, I think that we're probably going to see something in the neighborhood of about 30% or so that is going to last a little bit longer. Permanent is a strong word, Brian, but certainly, when we turn the lights back on, we're not going to see everybody getting back to work. In fact, right now, the consensus view out there is that, when we turn the lights back on, we're probably going to see somewhere between 30% and 40% of those jobs not coming back online immediately.

But certainly over time, as we start to diversify our global supply chains and do other things, those employees will, in fact, find other jobs. And that will also happen as we create new jobs in this new world, where we're a lot more sensitive to germs. We're a lot more sensitive to health security. New types of jobs will be created, undoubtedly.

ALEXIS CHRISTOFOROUS: I'm so glad you brought that up, Anthony, because that was one of my questions to you both this morning, and Anthony, I'll ask you first. Where might we see opportunities in the labor market in a post-COVID-19 world? Where might those new jobs come from?

ANTHONY CHAN: I think that there is no doubt that the health care sector is going to be leading the way, because now we're a lot more sensitive to health security type of risk. We're more focused on building our health infrastructure. So a lot of jobs will be created in that area, and of course, health will be partnering with technology.

So I'm very bullish on the technology sector, because I think that this whole pandemic, how terrible it is, is going to create opportunities for technology in that area. And of course, we're going to see some areas that are going to be lagging, those areas that involved less social distancing and more focused on concentration of individuals. Those sectors will come back, but they'll come back a lot slower.

BRIAN SOZZI: James, what do you think the market hasn't fallen out of bed off of this number?

JAMES MCDONALD: It's important understand, the market has been driven by sentiment recently, and per Anthony's comments, tech and health care have been adding a tremendous lift, obviously. Not just talking about Netflix, not just talking about Vertex, not talking about the vaccine, and/or the entertainment company streaming from us all being at home, we're talking about the overall sentiment in trends. If you look at three month, six month, year to date, 12 month charts, the last remaining soldiers sector-wise in this market are tech and health care. So we've seen tremendous outflows from SPY, the largest ETF, billions and billions of dollars coming out of SPY going into QQQ which is the tech sector.

People are chasing where those gains are possibly going to remain, if any remain. Although, I'm doubtful we'll have any gains going forward for the rest of the year, but it's important to understand that people are still optimistic in those sectors to the extent that they're surviving this crisis. And what I believe will happen is we're going to see a rotation out of those sectors and into cash. We're seeing a tremendous amount of de-risking in portfolios, and the rally that is happened, it always happens after big crises.

But going back to the beginning of time, we've never seen a bottom in a stock market within six months after a 30% sell-off leading into a recession, and so it would be unprecedented for the market not to reach a new lower bottom. And if you look at the valuations in the market right now, irrespective of tech and health care, if you look at the valuations right now, we're at double the price earnings growth metric in terms of what the stock market is valued versus forward-looking earnings, and so that's never been the case before. Right now, the market is 50% more overvalued than it was at the peak of the dot-com crisis, and so I think what we see right now is very temporary, and the best investment right now are put options.

ALEXIS CHRISTOFOROUS: Wow. So that's pretty incredible, that we're overvalued by that much, James. Does that mean that we're going to go down hard and perhaps retest the lows we saw back on March 23rd?

JAMES MCDONALD: I think we're a resilient people. I think we're a resilient country. I think we're a resilient world. We may not have a disruptive crash, but there should be a pricing-- how should I say-- a pricing adjustment coming from this high up.

I think as data comes in, obviously, the forecasted time weren't hit, in terms of worst case scenarios, but the reality is that this was the worst that's ever happened. Right? And so I think that the expectations have caught up to the level of crisis that we have, but if you look at what these metrics say, for the valuation ratios to be true, we're going to come down at least 50% from here. And so that does not have to happen overnight.

I think, as information comes out about us going back to work and re-entering society, if there are no infections, if vaccine opportunities come about, I think that we can maintain positive sentiment, but valuations must come down. If we've got half of small businesses closing, if we've got a third of the population unemployed, earnings are going to come down, and those ratios have to come down. We can't have artificial stock market valuations.

ALEXIS CHRISTOFOROUS: Makes sense, James. All right. Jared, I want to get to you for a little historical context here, because we know more than 20 million Americans lost their jobs, in April. Yet, we've got the Dow industrials up more than 250 points.

JARED BLIKRE: Yes, we do, and just kind of continuing on James' theme here, we do have a lot of tail-- we've had a lot of tail winds, especially from the Fed, with respect to this rally. But they are tapering their bond purchases, and a lot of the programs that they've announced are just beginning to get underway. And we have no idea how effective the PPP is going to be, and the news flow could easily turn south pretty easily, as if this weren't bad enough. But you know, 14.7% is the unemployment rate, and this is the worst going back to 1939, when it was 17.2%. And just for some historical context here, it reached its peak in the Great Depression in 1933, when it was at 24.9%, but of course, we don't have the raw numbers of unemployed persons back then.

But just looking at some of the markets here, you know, we have the S&P 500 kind of just edging towards that 3,000 level. A lot of traders have their eyes set on that, and it gets back to the news flow. We've had a lot of positive news with respect to COVID-19 not necessarily being as infective, as the death rate not necessarily being as high as people thought.

We have openings in Germany and New York state that people are looking forward to over the next couple of weeks, and I think there's going to be some sentiment change here. There is a lot of sentiment to the negative side by bears here. If you look at the latest AAII bulls-bears survey, it's never been this-- there's never been such a discrepancy between the bears and the bulls. So that could push things bit higher, but you have to think that there's going to be another downturn within the next month or so.

BRIAN SOZZI: Anthony, even when workers start to go back to work, are we just looking at a prolonged period of the US economy being far less productive than we've become used to? And I'll use GM as an example here. GM will start to bring back its workers to its North America plants May 18th. They're spacing out shifts. I suspect there'll be lines out the door to get into these facilities, as they check for temperatures. That's a less productive business in my mind.

ANTHONY CHAN: Well, Brian, you already saw a big drop in productivity in the first quarter, and that's just a dress rehearsal for what we should expect in the future quarters. Because as we turn the light switches back on, and all these extra measures are going to have to be taken, that will have a real big negative impact on productivity. One of the things that I think also needs to be mentioned with these numbers is that we saw a big jump in the unemployment rate, but that's understated by the fact that there was a huge number of workers that actually dropped out of the labor force.

Now, remember that when you lose your job, in order to be counted as unemployed, you have to be looking for a job. And if you basically see that there were 318 million people that were basically sheltered in place, why would you be looking for a job? Because you know the odds of finding one in that kind of an environment are pretty small.

Additionally, there are a lot of people out there that don't want to be looking for a job, if you think that there is a danger that you will catch COVID-19. So that understated the unemployment rate. That means that the unemployment rate will continue to go up.

These numbers will continue to get uglier, and why do I know that? Just look at the flow of unemployment claims and continuing claims. They're telling us that this is just the beginning. In future months, we'll see these numbers getting ugly.

ALEXIS CHRISTOFOROUS: Anthony, how long, I mean, when you take a look at the jobs we lost during the Great Recession compared to now, how long might it take us to gain these jobs back? Because the root cause of the problems we're seeing with the economy and the labor market are very, very different than what we had during the Great Recession.

ANTHONY CHAN: Well, I think that this time we'll actually get jobs back quicker, but because there are so many more jobs that are going to be losing, we won't see the unemployment rate come down. In fact, by the end of this year, I still think we're going to have double digit unemployment rates, and that, of course, comes on the back of the Great Recession, where we had a peak in unemployment rate of only 10%. I think 10% would be a good place to get to by the end of the year, but much more than that, or much more improvement than that, I think is unrealistic.

It'll be a gradual process. There'll be a re-shifting of the types of jobs that are created, those that are destroyed. So that transition is going to be messy.

Now, one of the things that I think is impressive, Alexis, is that this time around, we saw a lot more stimulus and a lot quicker. It took a lot longer in the great financial crisis, and by the way, it took a lot longer during the depression. It took almost four years to actually get a new deal, and this time around, we basically got it in less than four weeks. So everything is being fast forwarded, so the process moves a lot quicker, but because there's a deeper hole, it will appear to be a longer process.

ALEXIS CHRISTOFOROUS: The quickness of it all is just mind-numbing. Anthony Chan, former chief economist at JPMorgan Chase, James McDonald, CEO of Hercules Investments, thank you. Stick around. We're going to have much more with you both in just a moment. Before we go to break, though, I want to bring you a word from our president.

President Trump speaking this morning on another network about the jobs report. He's saying, quote, it's totally expected. There is no surprise. Even the Democrats aren't blaming me for that. What I can do is I can bring it back-- from our president.