The surge in the unemployment rate to 14.7% probably understates true joblessness by some five percentage points.
Photograph by Johannes Eisele/AFP via Getty ImagesAccentuate the positive, the old song goes, but futures markets seem intent upon taking the opposite tack. The message from their seemingly puzzling and unprecedented moves, moreover, is more consistent with the horrific employment numbers released Friday than the sanguine one from the rebound in the stock market.
A couple of weeks ago, crude oil futures fell to nearly minus $40 a barrel when buyers of expiring contracts couldn’t take delivery because of the lack of storage space for what once was called black gold. It was fool’s gold because they had to pay somebody to take the oil off their hands.
Late last week, federal-funds futures began to indicate that the Federal Reserve’s key policy interest rate would fall below 0% by late this year. While negative interest rates have been imposed by other central banks, notably the European Central Bank and the Bank of Japan, Fed officials have indicated on several occasions that they don’t favor emulating their counterparts abroad.
There might have been some technical factors affecting fed-funds futures, but yields on short-to-intermediate-term Treasury notes—the most liquid securities extant—fell to historic lows. In particular, the two-year, the maturity most sensitive to expectations for future Fed policy, traded Friday below 10 basis points (0.10%).
Negative crude futures and fed-funds rates may be anomalies, but they are consistent with an economy in a deep recession, as indicated by a stunning 20.5 million job losses in April, the result of coronavirus shutdowns. The surge in the unemployment rate to 14.7% probably understates true joblessness by some five percentage points, owing to the plunge in labor-force participation, notes TLR on the Economy.
The apparent contradiction of Depression-type job losses and stocks’ robust performance since their late-March low to a large extent reflects the market’s reaction to the equally unprecedented strong and prompt policy response to the economic effects of Covid-19, notably the outpouring of liquidity from the Fed. As of Wednesday, the central bank’s balance sheet had increased by more than $2.4 trillion, or 56%, to $6.68 trillion, in eight weeks. Since the March 23 low, the S&P 500 is up 31% while the Nasdaq Composite has gained 33%, erasing its losses for the year.
Markets are supposed to anticipate what’s ahead, so the rebound in equities would appear to be consistent with a recovery in the economy and corporate earnings. And given Treasury yields under 1% for all but longer bonds, the 2.07% dividend yield on the S&P 500 looks absolutely lush.
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But another derivatives market appears to be pointing in the negative direction.
S&P 500 dividend futures seem to be pricing in large reductions in payouts in 2020 and 2021, in contrast to more optimistic bottoms-up forecasts from analysts, according to Barclays equity strategist Maneesh Deshpande. “However, we think the pessimism in dividend futures is justified,” he writes in a research note. While various projections for payouts have been revised down by 6% in 2020 and 12% in 2021, Barclays’ models point to declines of 17.5% to 22% this year. That would be consistent with what happened in past recessions, during which S&P dividends declined by 10% to 20%, he adds.
This leaves aside the issue of the reopening of various states’ economies and the resulting bullishness apparent in the stock market, despite the continued rise in coronavirus cases, especially outside the New York metro area, the pandemic’s U.S. epicenter. Record low short-term Treasury yields imply the opposite, however: Further weakness lies ahead.
Read More Up & Down Wall Street: While Buffett Waits, Other Value Investors Are Buying. Here Are 9 of Their Picks.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
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The Stock Market Is Rallying Now, but Dark Rumblings Signal a Downturn - Barron's
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