‘The stock market had it right’

An astonishing pickup in payrolls during May has rekindled hopes that the economic slump may not be nearly as bad as it looked and could soon give way to an exodus of workers back to their jobs and a sharp broader recovery.

Where Wall Street economists were looking for a nonfarm payrolls loss of around 8 million, the month actually saw a gain of 2.5 million. The estimated unemployment rate was 19.5%, which would have been the nation’s worst since the Great Depression era. Instead, the number came in at 13.3% which is still well clear of anything the U.S. has seen since World War II, but far better than the worst doom-and-gloom estimates.

Friday’s “report marks the beginning of the labor market recovery in our view, and we expect the unemployment rate to fall further in June,” Jan Hatzius, chief economist at Goldman Sachs, said in a note. Hatzius added that Goldman is reviewing its projections for unemployment, which it had anticipated topping out at 15% this year.

Hatzius had been looking for a decline of 7.25 million from May, but he was far from alone in whiffing on the jobs picture. Now, economists are looking at a completely different picture and starting to see an entirely different jobs market from the one eviscerated by the coronavirus.

The data now “suggests May job gains are only the beginning here,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “The recovery path there suggests a June payroll print at north of 10 million is a reasonable starting point for the conversation.”

If that number is anywhere accurate, it would suggest a staggering turnaround and get economists talking again about a possible V-shaped recovery off what is potentially the shortest recession in U.S. history. Ryan Detrick, senior market strategist at LPL Financial, wondered in a tweet whether “the recession [lasted] only two months.”

If that’s the case, and the jobs market and perhaps the broader economy see a V recovery, a three-headed bull is likely the cause and will help justify the stock market’s stubborn resolve.

First, government funding helped mitigate a wave of layoffs that otherwise would have come with stay-at-home orders related to the coronavirus. Then, states and cities reopened more quickly than anticipated. Finally, the U.S. economy, which seemed to wobble even before the shutdown, showed an uncanny sense of resilience that gave still another boost to an uncanny Wall Street rally that seemed to defy fundamentals.

“The stock market had it right the whole time,” said Mitchell Goldberg, head of ClientFirst Strategy. “The stock market had a record plunge from a peak into a bear market and it had a record exit, which just reinforced the V-shaped narrative.” 

Friday’s nonfarm payrolls report is quite likely the biggest surprise relative to…