The S&P 500 has gained around 40% since hitting bottom on March 23. It may reach all-time highs soon. | Image: Johannes EISELE / AFP

  • The last ADP report shows an employment drop of just 2.8 million in May, against 9 million expected.
  • This encouraging reading will fuel further the stock market rally.
  • Investors’ optimism might fade if the economic recovery isn’t as strong as expected.

The stock market may have just found its rocket fuel.

According to the May ADP National Employment Report released Wednesday, private sector employment decreased by 2.76 million from April to May, a much smaller drop than feared. The consensus was 8.75 million.

Michael McKee, Chief International Economist for Bloomberg TV and Radio, explained why that forecast was off. But the stock market will just focus on the numbers.

The forecast for private sector employment was off due to methodological differences between ADP and BLS surveys. | Source: Twitter

The drop in private payrolls last month followed a record plunge of 19.557 million in April.

ADP figures come ahead of the Labor Department’s nonfarm payrolls report Friday, which includes both public and private sector employment.

The official report should show that the unemployment rate hit 20% last month, with employers forecast to have cut 8.25 million jobs, compared to the record of 20.5 million jobs lost in April.

Optimism Is Fueling The Stock Market Rally

This job market’s encouraging reading adds fuel to an already bullish stock market. The S&P 500 has gained around 40% since hitting bottom on March 23. It may reach all-time highs soon.

After plunging 34% from its February peak, the S&P 500 is just within 8% from its record high. | Source: CNBC

Nothing can seem to stop the rally. Investors’ optimism grows over the reopening of the economy, overshadowing concerns over the global pandemic, trade tensions between the United States and China, and nationwide protests.

Investors look past bad news. Instead, they focus on anything that may indicate the economy is recovering, like lower job numbers.

Jim Paulsen, chief investment strategist at the Leuthold Group, said:

Despite several issues of importance — national riots, Chinese relations, an ongoing pandemic — the stock market is primarily focused on a single thing: the restart of U.S. and global economic activities.

While the U.S. reopening is positive, the job market is still seeing the effects of the pandemic. ADP’s report uses data through the 12th of the month, so the May report does not reflect the pandemic’s full impact on the overall employment situation.

Ahu Yildirmaz, co-head of the ADP Research Institute, said:

The impact of the COVID-19 crisis continues to weigh on businesses of all sizes. While the labor market is still reeling from the effects of the pandemic, job loss likely peaked in April, as many states have begun a phased reopening of businesses.

The Market Is Underestimating Many Risks To The Economy

While the worst of job losses is probably behind us, University of Chicago research estimates that 42% of recently unemployed workers won’t get their jobs back. This is something the stock market isn’t pricing in.

The stock market is also neglecting the risk of a second wave.

Scientists have warned that a second wave of infections is possible and could create a worse economic disaster.

Jonathan Parker, a professor of finance at MIT, said:

If a second wave of infections hits, we will be coming out of a bad GDP shutdown with a high unemployment rate and a debt-to-GDP ratio greater than 100% and projected deficits for this year are already $5,000 per American household. A second wave of infections would be, I think an even more major economic disaster than the current one.

Optimism about a quick economic recovery is currently fueling the stock market. But if that speedy recovery doesn’t happen, investors’ confidence will fade. And the stock market rally will end as it will have no more fuel.

Disclaimer: This article represents the author’s opinion and should not be considered investment advice from CCN.com.

This article was edited by Sam Bourgi.

Last modified: June 4, 2020 7:41 PM UTC