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Airlines, Casino Stocks Getting A Lift In Pre-Market Trading as Surprising Jobs Report Gets Digested

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Airlines, Casino Stocks Getting A Lift In Pre-Market Trading as Surprising Jobs Report Gets Digested

(Friday Market Open) Could the worst already be over? Today's monthly payrolls report suggests maybe it is, though one data point isn't necessarily the last word on the matter.

Investors received a surprising curveball from the government Friday as the Labor Department reported that employment rose 2.5 million in May and the unemployment rate fell slightly to 13.3%. This went against almost everything analysts had been saying about the chance for eight million job losses and unemployment heading up toward 20%.

Looking at the numbers today, it reminds us once again how the stock market is often a forward indicator. There was a sense things were getting better around the economy and stocks rallied sharply in April and May. Here in June, we just received a very positive piece of news that might seem to justify at least some of the huge run-up in the market since the March lows. The market isn't always right, but it sometimes turns out to be a pretty good forecaster.

The Payroll Number Slice-and-Dice

What's really shocking is that many of the job gains came in leisure and hospitality, a sector of the economy that got slammed in March and April as the economy shut down. Employment in this category rose 2.5 million in May after falling 7.5 million in April.

"Improvements in the labor market reflected a limited resumption of economic activitythat had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it," the Labor Department said in its press release.

Food services and drinking places led the May hiring spree in leisure and hospitality, but hotels kept losing jobs. Maybe this sends a signal that restaurants began bringing workers back a bit earlier than people had expected as reopenings started by mid-month.

It's also great to see that construction employment rose 464,000 in May, a sign that the housing market might be strong and that maybe some businesses and local governments are adding infrastructure. Even retail employment rose 368,000 in May despite many stores still being shut down that month.

When you look at where jobs declined in May, the biggest factor was government. It shed more than 500,000 positions, and that could continue to be a drag (see more below).

While the jobs appear to be coming back in some industries, wages are falling. Average hourly pay dropped 29 cents in May, which could reflect the kind of jobs being added in leisure and hospitality where pay tends to be low. Still, manufacturing added 225,000 jobs and those tend to be higher-paying.

The government revised March and April job losses down by a combined 642,000, which sounds like a lot until you consider it in the context of more than 20 million jobs lost in those two months.

As we mentioned above, one month's data point is just that: A snapshot in time. Next month's payrolls report might have major revisions, as some have shown in the past. The government is trying to count up to numbers it hasn't faced in decades when it comes to how many people are out of work. So even though the market is initially rallying on this data, it's important not to get carried away and think the crisis is completely behind us. It isn't. More pain could be ahead, and many Americans are suffering.

While there's some hope that May could end up being the turning point in the unemployment situation, there's still a chance things could slide from here. For instance, a lot of state and local governments are running low on funds, meaning they might have to lay off workers in the coming months.

Things could get tougher in August for people who are out of work, because expanded unemployment benefits are set to expire July 31. That's potentially a problem on two levels. First for the people who won't be getting benefits and second for the businesses that won't be getting paid by those unemployed workers. As the Washington Post points out, it could mean a wave of defaults on credit card balances, car payments, and mortgages. We'll have to see if Congress comes up with something before then.

All that is possible future pain, and the market is focusing instead on today's positive news. Some of the stocks making gains in pre-market trading include airlines and casinos. This is the kind of report that probably would favor the "going back outside" type of companies instead of the "stay at home" ones.

Volatility, Crude Oil Normalization

Moving beyond today's payrolls report, one thing to consider watching is the Cboe Volatility Index (VIX), which this morning moved south of 24 for the first time since February. The 20 level is often seen as the dividing line between "normal" and "elevated" risk, so we're still elevated in a historical sense. But considering the VIX topped out in the 80s in March, we've come a long way toward normal these past couple months.

Lately, Fridays have defied their old reputation of being the day when many sold early and left for the weekend. That was the case back in the worst part of this year's bear market. Lately, however, Fridays have reversed that course. With a Fed meeting ahead next week, however, there's a chance for declining volume later today as well as on Monday and Tuesday, which can sometimes exaggerate moves.

Crude is up sharply this morning, rising above $38 a barrel. Something to keep an eye on this weekend is OPEC's meeting tomorrow. After almost a week of wrangling, Saudi Arabia and Russia clinched a deal with Iraq over its compliance. Now it looks likely that the group's production cuts will get extended into July.

A Few Nuggets from Thursday

Arguably, much of the minutiae from Thursday's action is irrelevant after this morning's payrolls "shot heard around the world." But there are a few nuggets worth mentioning.

Information Technology, which obviously has been driving the rally from the pandemic lows, is kind of taking a back seat late this week. The semiconductors continued to climb the ladder Thursday but some of the other behemoths, including Apple Inc (NASDAQ: AAPL) and Microsoft Corporation (NASDAQ: MSFT), stepped back. Both of these $1 trillion stocks are approaching the all-time highs they hit earlier this year. It remains to be seen if investors want to take them up above where they were in mid-February.

That could be a challenge for the sectors that helped get us here, with investors maybe getting a bit reticent about buying AAPL and MSFT at these levels when so much about the economy remains a question mark. That could be one reason you see people piling into Financials and even transportation stocks, which have been slammed more than anyone by this unprecedented situation (see more below).

From a technical perspective, it might be notable that the SPX failed both Wednesday and Thursday to push past resistance at around 3130, which was Wednesday's high and the high from March 4, research firm Briefing.com said. With futures having blown through that level this morning, however, that 3130 level might be a spot to watch on any pullback. When a resistance level fails, many chart watchers use that point as a possible support point on the way down.

Middle Seat, Any Seat

Airline stocks had an incredible day yesterday, with United Airlines Inc (NASDAQ: UAL) soaring more than 16% and American Airlines (NASDAQ: AAL) posting an eye-popping 41% gain as investors got optimistic about passenger traffic starting to rise and more domestic flights taking to the skies. For the first time since the pandemic, more than half of AAL's domestic capacity will be in service again next month, Investor's Business Daily reported.

This gets us back to the old "middle seat" question we raised a few weeks ago. If AAL and other airlines are seeing enough demand to get more capacity into the air, that likely indicates that people are less nervous about not only getting out in public but also sitting for hours in enclosed spaces with others. People might not be ready to sit in the middle seat of planes, but the fact they want to fly at all tells us something about the return of some kind of normalcy.

Still, the rubber hits the road when we see the actual results. That could be evident as soon as the middle of July when some of the major airlines start reporting earnings. Those earnings calls could be some of the most anticipated of next quarter.


CHART OF THE DAY: DRIVING THROUGH PEAKS AND VALLEYS. Though the broad market S&P 500 (SPX—purple line) has seen its share of volatility this year, the pavement beneath the Dow Jones U.S. Automobiles Index ($DJUSAU—candlestick) has been even more mountainous, with several variables on both sides of the supply/demand equation (see below). Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

An Auto Story That Isn't About Tesla Motors Inc (NASDAQ: TSLA): On Wednesday, Cox Automotive Group released its monthly report on the state of the industry, and though May's auto sales total of 1.1 million is down 30% from last May, it's still well above April's total, leading some analysts to suggest the auto sales recovery is on track. But as has been the case in many industries this year, there's more to the story. On the one hand, many dealerships have been shuttered since March, with inventory languishing on the lot. And with millions of newly unemployed—plus millions more working from home—the demand for automotive mobility has been greatly diminished.

And then there's the double whammy from Hertz Global Holdings Inc (NYSE: HTZ), which filed for bankruptcy on May 23. Rental fleets have historically been a significant source of new car demand, so having HTZ out of the buyer pool could be a headwind. Plus, there have been reports of a coming wave of used rental vehicles about to come to market, which could have today's budget-conscious consumers eyeing cheaper alternatives. But there's a potentially saving grace—new car inventory has also been disrupted by shutdowns in recent months. Perhaps that's why, after cratering in March, the Dow Jones U.S. Automobiles Index ($DJUSAU) is now higher than it was at the start of the year (see chart above).

Up Next: The Fed, which meets next week, has pledged to keep benchmark rates at current levels near zero until it sees full employment emerging again. The question is, will that still be the case if the economy starts to boom over the next year even when it's likely to take far longer—judging from history—for unemployment to edge back down to the 4% level where it once was? Maybe that's a question for Fed Chairman Jerome Powell next Wednesday at his press conference.

Obviously, that's a best-case scenario. Right now, it seems pretty clear that the stock market is forecasting things to be better in six months than they are now, and bond yields could be beginning to point in the same direction. Still, there's probably a long road before economic data begin to catch up with the market, and that could potentially pose a real barrier for this rally at some point or other.

Deeper Dive into the Oil Well: Crude's breathless rally over the last two months from below zero to $36 a barrel reflects not just near-term demand, but potentially hopes for future economic growth. Here's one possible reason to think that: Heavy crude users like airlines and trucking companies historically tend to use times of low prices to lock those prices in by purchasing futures contracts. That can raise crude prices, especially in contracts out later in the year. While it's hard to peg whether airline hedging is actually going on, the CME Group (CME) crude futures complex shows December and January's contracts holding a premium to the heaviest-traded July contract. If industry hedgers feel that $38 a barrel might be a good price as of, say, December, that could indicate they expect stronger demand by then that might lift cash prices above that level by that time. Crude was trading in the $50s before the pandemic struck.

One airline, Southwest Airlines Co (NYSE: LUV) made headlines during the big crude rally of 2007-2008 by locking in crude at $51 a barrel before prices exploded above $100. No one necessarily thinks they're going that high this time, but if airlines are actually hedging—possible but not certain—that could mean those companies feel more optimistic about the future, a good sign for the economy. That said, The Wall Street Journal reports that some airlines have scaled back their use of hedging in recent years after getting burned in the past.

 

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