May 8, 2020

Axios Markets

By Dion Rabouin
Dion Rabouin

☀️ Morning! Courtenay Brown here, filling in for Dion who's enjoying one of the mental health days Axios is giving each of its employees.

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1 big thing: Bad news hasn’t stopped the stock market comeback

Illustration: Eniola Odetunde/Axios

Today's jobs report will be horrific. It will catch the eye of even the most casual economic data watcher, but don’t be surprised if the stock market shrugs.

Why it matters: Grim economic news hasn't derailed the market's comeback. The stark difference between what's happening in the coronavirus-hit economy vs. the stock market has never been more on display.

Driving the news: The tech-heavy Nasdaq erased all its losses for the year. It's rallied 30% since late March, while the S&P 500 has risen 23% since then (though it's still lower on the year).

  • Within that same timeframe, more than 33 million Americans have filed for unemployment. And the current quarter's economic contraction is set to be one for the record books while the country is struggling to beat back the coronavirus outbreak.

What's going on: There are a slew of reasons for the cheery stock market in some of the most depressing times — my colleague Felix Salmon lists them here.

  • Among them: Investors are looking ahead and wagering the snapback will be quick and corporate profits will jump back to pre-pandemic levels.

Yes, but: A slew of Fed officials did rounds of interviews yesterday, and their message was near universal — the months ahead will be bleak and a rebound is a long way off.

  • “I think it’s becoming clear that we’re in for a long, gradual recovery, which is unfortunate. I wish we had a quick bounce back," Minneapolis Fed president Neel Kashkari told NBC's "Today" show.

What they're saying: "The market has too quickly celebrated 'success' on the health care front, without fully appreciating how hard it is to turn the economy back on," Scott Clemons, who's been a strategist at investment firm Brown Brothers Harriman for the past 30 years, tells Axios.

  • Lately, the single question Clemons gets most — from clients, as well as people outside of work — is about the economy-stock market disconnect.

Between the lines: This disconnect is common. Take the last recession, when "the labor market didn't start to show signs of improvement until the end of 2009, at which point the market was already up 44%," Clemons notes.

  • Then, per Clemons, the average person may have said: "I'm out of work, I can't find the job. And on the evening news I see Wall Street traders popping open bottles of champagne."
  • Now, as joblessness is expected to have hit nearly every industry — plus the threat of a second coronavirus wave when states open up their economies — the divide between the stock market's optimism and economic forecasts is even more clear.

The bottom line: The worst may be over for the stock market (for now). The economic bloodletting will be here for a while longer.

Bonus chart: Grim expectations
Data: U.S. Bureau of Labor Statistics via FRED, April projection via FactSet; Chart: Andrew Witherspoon/Axios

The unemployment rate was 3.5% in February — a 50-year low — before the pandemic hit the U.S. labor market.

  • Just two months later, economists predict it more than quadrupled to the highest level since the Great Depression. (The current rate is even higher than April’s.)
  • 22 million net jobs are expected to have been lost during the Labor Department's survey period, which ended in mid-April.

What to watch: You're only counted as unemployed if you're actively looking for work. But many Americans aren't looking for work because of state-imposed lockdowns. That dynamic may warp the unemployment rate.

  • Broader measures of joblessness — like the U6 — may paint a more useful, and even bleaker, picture.
2. Catch up quick

Fed funds futures for the first time priced in the possibility of the Fed moving interest rates below zero by year-end — something Fed chair Jerome Powell has resisted. (Reuters)

Neiman Marcus is the latest major retailer to file for bankruptcy this week, following J. Crew on Monday. (WSJ)

Bankrupt small hospitals want access to PPP loans. They are suing the Small Business Administration and courts are starting to take their side. (Axios)

Early numbers show how the coronavirus is devastating states' revenue streams. See the chart. (Axios)

3. Study: Shareholder backlash on exec pay is red flag

Illustration: Aïda Amer/Axios

Axios business managing editor Jennifer A. Kingson writes: Companies that fail their "say-on-pay" votes — in which shareholders give a thumbs-up or thumbs-down on the compensation of the C-suite — tend to perform worse than the market and their peers, research from Morgan Stanley finds.

Why it matters: "Say-on-pay failures should be taken as a meaningful red flag for investors," the firm says, noting that there's increased scrutiny of CEO pay this year as COVID-19 forces mass layoffs and furloughs.

Where it stands: Public companies are required to hold say-on-pay votes at least once every three years, per rules ushered in by the Dodd-Frank Act and approved by the SEC in 2011.

  • The vast majority of companies get approval from their shareholders in these referendums, which are non-binding.
  • But among the approximately 2.5% that get less than 50% of shareholder buy-in, there are often bigger problems at work.
  • "Companies in our U.S. coverage that failed their say-on-pay votes in 2019 have underperformed the market by 20%, on average," according to Morgan Stanley (where Jennifer once worked).

Details: Among companies that failed their say-on-pay votes in 2019 — like Netflix and Williams Sonoma — many haven't yet had their 2020 annual meetings, where such votes are taken.

  • Two companies that failed say-on-pay votes both in 2019 and 2020 are Qualcomm (which saw only 17% of shareholders support its say-on-pay vote in April) and Iqvia Holdings (which saw 46% support).

Go deeper. Beware of bloated executive pay

4. 1 stunning chart: Consumer borrowing plummets
Data: FRED; Note: Chart shows flow of revolving consumer credit owned and securitized; Chart: Axios Visuals

Americans pulled back on revolving credit — namely their credit card use — as states began to impose shelter-in-place orders, new data from the Fed shows.

Why it matters: It’s the latest indication of how the coronavirus is changing consumer behavior.

This data is closely watched. How much consumers borrow is an indication of how much they'll spend — a key driver of economic growth.

  • "We expect further declines in revolving credit in the months ahead as consumer spending continues to decline," Nancy Vanden Houten, senior economist at Oxford Economics, wrote in a note.
Dion Rabouin

Thanks for reading. Dion will be back here to greet you on Monday morning! 👋