With most US states forcing non-essential businesses to close their doors, the US lost the greatest number of jobs in a single month in history in April. The US reported 20.5 million job losses in the month, or 13.5% of total non-farm employment. A separate survey of unemployment showed a record one month rise to 14.7%, the highest level since 1939. More than 60% of the job losses were in leisure and hospitality jobs which fell nearly 50% in a month. Citi analysts expect further large scale job losses in the coming month, but the reopening of economies could result in the recall of millions of workers during 3Q 2020.
What are markets expecting from the pandemic?
Stock markets in the US, Asia and Europe have largely avoided a COVID-19 catastrophe. Investors are anticipating a fairly swift recovery because of the rapid and anticipatory actions taken by governments with unprecedented speed to “fill the holes” in personal income and corporate balance sheets before the collapse could wreck permanent damage. The total amount of global fiscal support planned for 2020 exceeds $6 trillion, not counting central bank asset purchases and loans which could exceed that amount.
However as various economies “reopen”, there are concerns in regard to the potential further spread of the virus and the ability of the global recovery to sustain itself in the face of it. Citi analysts believe COVID-19 could remain active in every country, aside from a few that have taken drastic actions, for a year or longer.
Nevertheless, to the extent that government, corporate and business actions are coordinated, the ability to manage the disease and the economic reopening are likely to result in better outcomes for both: a faster economic recovery and fewer cases and fatality.
Citi analysts believe the 31% rally in just almost 2 months, since the 23 March lows may limit future return opportunities for the S&P 500. Looking out into the next economic cycle, Citi analysts see potentially more attractive opportunities outside of US large caps in areas which have not participated as strongly in the rebound. As highlighted previously, US small caps tend to outperform large caps in the first year of a bull market, and look poised to rebound after several years of late-cycle underperformance.
Outside the US, Citi analysts prefer a “barbell” approach with overweights to EM Asia, a long-term high conviction area, as well as Latin America, which appear oversold and is a high-beta way to play the post COVID-19 global rebound.