Worst Labor Market In American History

Q1 Earnings Update

As predicted a few weeks ago, Q1 earnings season has been bad, guidance has been nonexistent, and stocks haven’t sold off. Obviously, a few individual names have declined on weak earnings, but overall, the market has done fine. That’s because the large tech companies are outperforming and the companies hit the worst by the shutdown had weakness already priced in. Unless a stock rallied when it was doing poorly or sold off when it was doing well, there weren’t many surprises.

Q1 earnings season is almost over. Q2 will be much worse, but guidance will probably improve. Investors love to see the light at the end of the tunnel. By the time firms report in July, they will have a positive story to tell. As you can see from the chart below, with 353 firms reporting results, EPS growth was -9.32% and sales growth was 1.03%. There was a massive decline in margins. 

We just had the longest margin compression outside of a recession since WWII. Now we are getting compression in a recession. In the next expansion, there will be a lot of room for margin improvement. Q2 2020 will be a disaster, but firms will be more likely to issue guidance. Investors crave certainty.

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As you can see, EPS estimates call for a 37.14% decline in earnings in Q2. We can put to bed the notion that we would see outright EPS losses a long time ago. Companies like Apple, Amazon, Costco, and Wal-Mart will be profitable. There won’t be EPS losses. Sales are expected to fall 11.91%. Interestingly, in Q1 2020 EPS growth is expected to be stronger than sales growth. We will get the much hoped for margin expansion.

As of Wednesday evening, 77% of S&P 500 firms had reported results. 66% beat EPS estimates on -9.71% non-GAAP growth. As you can see, the recent results lowered the growth total a smidge. 59% of firms beat sales estimates in 1.08% growth. 42 more firms report on Thursday including Raytheon Technologies. 

That’s the combination of Raytheon and United Technologies. This is their first report together. United Technologies is doing terribly because no one is flying and Boeing is having problems with its 737 Max.

Worst ADP Report Ever By Far

The stock market pretty much ignored the April ADP report even though it was the worst ever. Investors are already focused on the recovery. That being said, the underlying market is a tale of two cities. The market excluding technology actually sold off, but the tech stocks rallied. If tech did poorly, we’d actually be very close to the March low.

As you can see from the chart below, there were 20.236 million job losses in April which makes every recession since the mid-1940s look very small. This is the worst jobs market ever. It’s being masked by the giant increase in unemployment insurance. There would be a complete societal breakdown worse than the Great Depression if we didn’t have the social safety net and the fiscal and monetary stimuli.

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Small firms lost 6.005 million jobs. Within that category, very small firms lost 3.361 million jobs and other small firms lost 2.644 million jobs. Smallest firms are in the deepest trouble because they don’t have access to capital. That’s why government help is so important. Weakness was mostly in services in the small business category which is obvious because that sector employs the most people. There were 4.538 million lost in services and 1.467 million in goods production.

Medium-sized firms lost 5.269 million jobs and large firms lost 8.963 million jobs. Every company is being hurt because no company plans for a complete loss of revenues for a few months. Think about it this way. Say a normal recession causes sales to fall 33.33% on average per month. 

Assume the weakness lasts 1 year. With 100% of sales lost, that means this total hit gets worst after just 4 months. Plus, add in the fact it came out of nowhere and immediately made liquidity tough to come by. Many firms drew from their line of credit.

In total, the service-providing sector lost 16.007 million jobs which would be on its own the worst decline by far. Goods-producing sector hemorrhaged 4.229 million jobs. Every industry lost jobs. The manufacturing and construction industry lost 1.674 million and 2.477 million jobs. 

The leisure & hospitality industry lost 8.607 million jobs and the professional & business industry lost 1.167 million jobs. Trade, transportation, and utilities lost 3.44 million jobs. Even healthcare and education lost 971,000 jobs.

Labor Market On Life Support

The ADP report doesn’t always perfectly predict the BLS report, but we know for sure the April BLS report will be a doozy. We are about to see the worst report ever by a landslide. Even if the numbers all went back to the Great Depression, this would be the worst report ever. The unemployment rate is expected to rise from 4.4% to 16.4% which is an unprecedented increase. Our economy is expected to lose 20.938 million jobs.

The only good news is we can only see improvement from here. There simply aren’t enough jobs for this rate of firing to continue. May report will show the highest unemployment rate ever, but the number of job losses will be much lower than April similar to how jobless claims have dropped. 

With that being said, jobless claims are expected to fall to 3.041 million from 3.839 million. Whatever the number ends up being, we can expect it to be lower than the prior week.

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As you can see from the chart above, indeed job postings are cratering as you’d expect. This trend in job postings growth as of May 1st is down 39%. New postings are down 45% which is so bad it would be tough to imagine just 10 weeks ago. 

The only good thing is it’s not falling further. However, it likely can't fall much further, as yearly growth can't get much worse.