Last Thursday, Federal Reserve Vice Chair Lael Brainard said that the central bank would check its future monetary plans against the upcoming jobs report on Friday. “We’ll be looking closely to the data to see that kind of cooling in demand, and moderation – better balance – in the labor market,” Brainard told CNBC. “With our number one challenge being the need to get inflation down, we do expect to see some cooling of a very, very strong economy over time.” This expressed a current theme in the market today – a desire for Goldilocks economic data, or numbers that are not too hot and not too cold. Too hot means inflation is continuing to exert increasing pressure on the economy, and too cold means that a recession is looming. Every new data report has to be just right.
On Friday morning, the Bureau of Labor Statistics reported a 390,000 increase in nonfarm payrolls over the month of May, beating the consensus analyst forecast of 320,000 new jobs, showing that there was still some heat in the labor market. This new number brought the domestic workforce even closer to its pre-pandemic size. The graph below shows just how jarring the recent labor market changes have been compared to recent downturns.
Labor force participation also inched up to 62.3% compared with 62.2% in April, though it still remains below its pre-pandemic level of 63.4%. On the other hand, average hourly wages grew 0.3% in May but not as fast as expected with economists predicting a 0.4% gain. This was a cooling signal from the report, meaning that labor costs weren’t pushing inflation unexpectedly higher.
However, coupled with the recent Institute for Supply Management’s (ISM) report indicating a faster-than-forecast pace for manufacturing activity last month, the recent data just wasn’t right for many market participants, so the S&P 500 dropped -1.7% by Friday’s close. Many are concerned that the numbers are still too hot, and that it will give the Federal Reserve confidence it can continue its proposed path of hikes in its benchmark short-term interest rate, which could possibly cause a recession. The futures market has priced in 0.5% rate hikes for both the Fed’s June and July meetings and believes that another 0.5% rate hike in September is more than likely. These rate hikes will try to tame inflation by cooling demand in the economy, but not so much as to cause an economic downturn. It is a precarious path that makes the market as finicky about economic data as Goldilocks was about the three bears’ porridge.
Whatever the final impact of the Fed’s rate hike path will be on the overall economy, the increased cost of financing will always hurt those companies with more promise than profits. Venture capital firm Sequoia Capital provided a quick visual of how many companies in certain high-growth areas have fallen below their pre-pandemic prices due to the recent market environment. Over half of software companies, two-thirds of internet service companies, and almost 3/4 of fintech companies – fintech is when you paste a financial service on top of a internet software product. It’s very trendy, and apparently very susceptible to shifts in funding costs.
Past performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
On Tuesday, May 31st, the Executive Wealth Management ETF Opportunity models underwent their monthly relative strength rotations. The Global model added positions in Latin American equities and inflation-protected fixed income, while reducing its exposure to gold and the real estate sector.
There were no other trades in the EWM Investment Solutions models during the week ending on June 4th, 2022. Large-cap domestic equity still maintains its long-term favorable trend, and U.S. stocks remain over-weighted versus international shares in EWM’s Asset Allocation models.
Quote of the Week
Here’s the 30-second TV game show, which shows a guy saying “I’ll take meme stocks! Invest!” and then hitting a button. And then his money falls through a trap door and he gets hit in the face with a pie.
Barron’s columnist Jack Hough giving novice investors his criteria for differentiating between growth and value stocks in the latest issue of the magazine.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on May 27, 2022 to closing price on June 3, 2022
1 Month = closing price on May 3, 2022 to closing price on June 3, 2022
3 Month = closing price on March 3, 2022 to closing price on June 3, 2022
YTD = closing price on December 31, 2021 to closing price on June 3, 2022
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