False Alarm

By Matthew Klein |  Friday, May 29

Never Mind. U.S. investors were worried about what President Donald Trump might do in response to the Chinese government’s plan to impose a new “national security” law on Hong Kong. They shouldn’t have been. While his rhetoric was harsh, Trump’s much-anticipated announcement on Friday was not game changing. (His pledge to leave the  World Health Organization is another matter.)

There won’t be any push to force Chinese companies to delist from American stock exchanges – an idea that had been proposed but, apparently, has been rejected.

Traders were pleased, with the S&P 500 gaining about 1% during Trump’s speech. The cumulative gains in the large-cap index since the beginning of April have made for the best two-month stretch since April 2009.

The major U.S.-listed Chinese companies rallied after the announcement, as well, with Alibaba, JD.com, and Baidu all gaining 3% to 5% after noon.

The other big news of the day was the release of data on income and spending in April from the Bureau of Economic Analysis. Thanks to the one-time “economic impact payments” distributed to the majority of American households as part of the CARES Act, U.S. disposable personal income spiked 13% in April compared to March -- the biggest one-month increase since the data began in 1959.

Exclude those one-time payments, however, and the picture looks a lot worse. Small business income was down 20% in April compared to pre-pandemic levels in February, while employment income was down 11%. Even though many laid-off workers are getting more from unemployment insurance than they did from their old jobs -- at least until the end of July -- the increase in unemployment insurance payments since February has only replaced about a third of the total lost earnings for workers.

The simple explanation is that white-collar job losses and pay cuts are having a much bigger economic impact than layoffs at retailers, hotels, and restaurants. Something to keep an eye on in the next jobs report.