U.S. added 638,000 jobs as unemployment rate fell to 6.9% in October

U.S. employers brought back more jobs than expected in October and the unemployment rate improved by a greater than anticipated margin.Non-farm payrolls came in at 638,000 versus 580,000 expected and a revised 672,000 figure in September. Wells Fargo senior economist Sarah House and Hercules Investments CEO James McDonald join Yahoo Finance Live to discuss the latest report.

Video Transcript

MYLES UDLAND: We're joined by James McDonald. He is the CEO at Hercules Investments. We are also joined by Sarah House. She is a senior economist over at Wells Fargo. So James, I'll go to you first, just to kind of get your first thoughts on what you saw on the jobs report today. And I guess, if this report changes, how you were thinking about the labor market ahead of the numbers.

JAMES MCDONALD: Well, the jobs report is contextually positive. But if we step back and look at the big picture, the whole pandemic shock to the economy is a returned threat. We have not gotten better. We are getting worse. If we look over the pond, the second wave is spreading. Those economies are considering, in some cases, implementing new lockdowns. I'm talking about the UK, France, and Germany.

And the threat to our economy persists and perhaps may get worse. Still, we're looking at one in 15 people out of work, facing a new round of potential infections all over the country. And so, this is very, very concerning for us, as we thought we would be talking mostly about recovery here in terms of our economy.

And what we're really looking at is a recurrence of the threat. If we have to go back into lockdown mode, these numbers, although we're coming back from the brink, we're slowing down from the comeback. And then, we're looking at a potential revisit of the crisis that brought us here. And so, these numbers are really backward looking. And if we look forward, there's more pain coming, in our opinion.

JULIE HYMAN: Sarah, let's bring you in. What's your take on these numbers? Are you seeing it through the same sort of maybe a little bit cautious or pessimistic ones?

SARAH HOUSE: Well, I think these numbers show that the labor market continues to hold its own, at least through October. But the problem is, of course, we're now about a week into November. And, you know, as James mentioned, we are seeing those COVID cases rise I think a lot faster in terms of that fall or winter wave than many people expected.

And of course, it doesn't look like we're going to get any additional stimulus probably until the first quarter of next year. And so, while today's report shows that the labor market was maybe slightly stronger than expected heading into this period, it's still going to be a rough couple months as we look ahead for the employment situation. And that's going to filter through in terms of overall income and spending picture and the trajectory of the recovery here in the near term.

BRIAN SOZZI: Sarah, what you see in this report, does it raise concerns for you that we are headed for a double dip recession, even if we do get a skinny stimulus bill by the new Congress?

SARAH HOUSE: So I don't see anything in this report that flags that. I think one of the encouraging things that we saw was the permanent job losses was unchanged. So that's encouraging where that number had been going up. Obviously, we saw a big gain in terms of the household employment. And, by and large, we're still adding large number of jobs in the private sector.

And so, I think this shows that that the recovery has been on track in the labor market. And so this doesn't necessarily in and of itself flag a potential double dip coming up. If you step back and you look at the overall position of household income, we think that they have enough ammo to weather the next few months.

But we're certainly going to see a notable slowdown in terms of overall activity. And I think that we are going to see some jitters because of it among analysts and policymakers.

MYLES UDLAND: And then, James, I guess, just bringing this back to what we're seeing in the markets-- and we have futures still lower, but off their lows of the day. Obviously, the action we've seen this week has been enthusiastic, to say the least.

And as you look out over the balance of this year and then into next year with some of these risks we've been discussing, did you kind of see the enthusiasm for US equities remaining against the backdrop that I think we're all talking about here?

JAMES MCDONALD: No, I do not. Enthusiasm is an understatement. The rally that we've seen since September 1 in terms of election weeks, this is unprecedented. You have to go back to 1932 under the Roosevelt administration to find a week where we've had gains anywhere like this.

And that week in 1932 is 11.2%. We're at 8% up on the SPX and 10% up on the NASDAQ. We're going to see a retracement of these gains, particularly in that we're going into a riskier set of data coming in. We still don't have a stimulus package.

If you look at the Fed's comments, Powell highlighted two issues that would slow the recovery or pose a threat to the economy. And that was savings for individuals, which we're not going to be able to bolster without a stimulus package.

And then the spread of the pandemic-- excuse me, the spread of COVID. And the COVID spread is increasing as we speak. And so those two risks from the Fed's purview are persisting. This rally that we've seen since the beginning of September is unprecedented, really, in modern times. And so I think that there's multiple factors that would lead to pressure.

And then this jobs report, some of the highlights, we're talking about sectors that are going to be impacted by potential lockdowns. We're talking about the retail sector. We're talking about hospitality and leisure. If we have to go back into lockdown mode, even incrementally or in some parts of the country, these numbers are going to revert.

And so it's a very, very risky time here and we're really focused on protection and defensive stances in our shop with tech being extremely vulnerable to a major pullback, we're really looking at protecting portfolios going forward here.

And then if we do get a presidential election decision, we've got to get a stimulus package done. And that's looking more doubtful as we-- you know, we may not get a decision based on the president's intent to contest the election results.

JULIE HYMAN: James, what does protection look like for you right now?

JAMES MCDONALD: It's a great question, and so we have to focus on, you know, where is the risk. In the NASDAQ 100's top 10 holdings, we're talking about all the big tech companies we know about. They represent 73% of the gains since March. And so that's where we have to focus our protection.

We love VOLQ. The NASDAQ has come up with a very innovative product. It's like the VIX for tech. If we look at the S&P's trajectory this year, 56% of those gains can be attributed to just 10 companies. And with VOLQ, we're able to position portfolios to be OK if there's a big pullback there.

It's simply a volatility play, but it's volatility targeting the most vulnerable sectors to the losses in portfolios offset from the gains that came. Any portfolio that we look at, almost 70%, 80% of the profits in that portfolio have come from tech. So that's where we gotta focus our protection.

MYLES UDLAND: All right, James McDonald with Hercules Investments, Sarah House with Wells Fargo, thank you both so much for stopping by to chat about the jobs report on this Friday morning.