July 2, 2020
June payroll adds of +4.8MM far exceeds consensus for a second consecutive month and clearly a positive development. However, the BLS statement pointed out the largest gains came in leisure and hospitality businesses with employment in food services and drinking establishments increasing by ~1.5 million. Of course, these businesses would be some of the most vulnerable to recent roll backs in reopening plans. And the improvement in weekly jobless claims data since March/April has also flattened out, so the usual negative feedback loop during a recession will have to run its course. Timing, the impact of stimulus to date and the stimulus that is yet to come (current expectations for a fifth fiscal stimulus bill are ~2-2.5T when Congress returns from recess) are major factors and impossible to measure, so don’t try. Remember, investors typically apply normalized cash flow over a ten-year period, and with the discount rate at its lowest level in history (yesterday’s release of June FOMC minutes should only give you confidence about the sustainability of low interest rates and bond yields) it doesn’t really matter if cash flows snap back to 2019 levels in 2021 or 2023 for that matter. All you need to know is they will normalized at some point over the next several years based on unprecedented amounts of monetary and fiscal stimulus. The equity sectors that would benefit the most would be cyclically sensitive, and many of these companies pay a sustainable dividend yield north of 3%. And with ten-year bonds yielding ~0.70%, we should also expect some migration away from the classic 60/40 asset allocation that is still used by the vast majority of pension plans across the globe.