Smart thought of the week: Joblessness

If the astonishing rebound of stock markets is anything to go by, then it probably means that we are well on our way to a recovery. It is almost as though the pandemic had never happened.

But we know only too well that the coronavirus is still amongst us.

I have yet to hear anyone of authority signal the “all clear”. What Donald Trump says doesn’t count. In fact, some health experts are even predicting that a second wave could hit us before the year is out.

But that has not stopped share prices from climbing since they hit a nadir on March 23.

So, what could stock-market investors know that doctors, medical professionals, and people in white lab coats, don’t?

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The answer might be found in many of those backward-looking economic numbers.

It goes without saying that many global economies are contracting.

The US economy slumped at an annualised rate of 4.8 per cent in the first quarter. In the same period, China’s economy shrunk 9.8 per cent, while the Eurozone is 3.8 per cent smaller.

Those numbers should not fill us with confidence.

But here is the “but” ….

…. But the rate of unemployment in the US jumped 14.7 per cent. In the Eurozone it is 7.4 per cent, while China’s rate of joblessness is 6 per cent. That last statistic should be taken with a huge pinch of salt.

In other words, despite the best efforts of governments to keep people in work, many companies are still laying off their workforce. That is because for many businesses, labour is the easiest cost to cut if profits are to recover.

And as we all know, there are only three ways to make more profit….

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…. The first is to increase sales, which will be hard in the current climate. The second is to raise prices, which is also a tall order. The third is to cut costs. Axing workers is a quick way to recover profits.

The upshot is that the market is not expecting an economic recovery any time soon. It could take months, if not years, for global economies to get back to where they were before Covid-19.

However, investors are buying into a profits-led recovery. Put another way, many of the jobs that existed before the pandemic might never return. So, we could see a jobless recovery.

But that does not mean that we should stop investing. It just means that we need to look in a different place.

So, look for things that people either cannot do without or that they can easily afford. Those companies should be better placed to weather a long, drawn-out economic recovery.

This article was first published in The Smart Investor.