As of last Thursday, the S&P 500 and the NASDAQ 100 (QQQ) were back to new all-time highs. They got there quickly as the US Treasury interest rates began an aggressive decline. This new move up in the markets sort of had a wrench thrown in as the employment numbers came out far stronger than expected last Friday. This did nothing more than continue the frustration and confusion surrounding an economy that is less than ebullient, and at the same time inflation that is clearly less than tame from a labor standpoint due to Non-Farm Payrolls.
Looking deeper into the employment numbers, overall unemployment remains low at 4.0%, up only 0.3% from a year ago. Expectations were much worse given the biggest interest rate increase imposed by the Fed ever. But that overall modest increase masks some large increases among younger workers. Unemployment among 16- to17- year-olds has soared to 13.6% from 9.7% a year ago. Unemployment among 20–24-year-olds has risen to 7.9% versus 6.3% a year ago. The kids are increasingly not alright in the current labor market. This sniffs at the level of illegal immigrants possibly getting these entry level jobs.
So last week was another stair in the stairstep ascent of the equity markets. Last week I explained that even though it is often thought that summer is a soft time in the markets, June-August in an election year tends to negate this action and historically is quite strong. This had other statistical precedent associated with it given the action in the first quarter, followed by a difficult April / May and then a subsequent 100% historical rise in June. In looking at the most recent time period, the equity markets seem to be drug along by the yields in the US Treasury market. My favorite maturity to follow is the 10-year as this is the rate that mortgage rates are pegged off of. As seen in the above chart of the recent yield changes in the 10-year, softness in the economy has begun to take the rate lower, but the labor numbers on Friday reversed this higher once again, yet the overall downtrend is still unaffected.
It's been a recurring theme of pretty much every presidential election starting in 1932, if not before. What should the federal government itself do to address poverty, expand opportunities for the poor, and close the gap between the rich and poor? It’s a potent political talking point, large parts of the government spending, along with many agencies and programs, are designed to address it visually. Inflation, immigration, record-high corporate profits, and soaring stock markets stay in the spotlight.
Looking back over the past few weeks, this choppy market has proven to be unsettling for Bulls and Bears alike, but some consolidation following steep runups are typical, and can provide opportunity. The conclusion is that even with Friday's violent spike in interest rates, this did very little to distract the large-cap growth companies. Bears keep stating that the breadth is not improving and that the small-caps as seen by the Russell 2000 index just can't seem to get its motor running nor can the broader, equal weighted S&P 500. But the conclusion is that a push back to monthly highs should get back underway this week. According to Thomas Lee of FundStrat, he sees 5,500 in the S&P 500 in June as the most likely outcome. In the final analysis, as the tensions continue to mount in the domestic, political arena, and as we continue to get conflicting growth and inflation data, the line to the ultimate advance into the end of August should not look anything like a straight line!
Jeffrey Saut of Saut Strategy said it best this Monday in his weekly comment, " There are times in the stock market when you should be doing something and there are times when you should be just 'sitting' and doing nothing. And sitting and doing nothing is one of the hardest strategies to adopt because it seems to be a universal feeling to always be doing something."
This summer seems to be setting up to be a period of "picking your weeds and watering your flowers." What I mean by this is as leading sectors digest robust gains and lagging sectors just can't seem to get their motor running, it could be an advantageous time to decrease holdings in those that have not participated thus far in 2024 and add to those that have led that are experiencing a pullback currently but show continued promise moving forward.
The newest wrinkle is the action out of the European Union. They came out and lowered rates last week for the first time since 2019. Lowering the rates was an expectation, but doing so ahead of the US Federal Reserve is very uncommon and may mean that the EU is actually bracing for a recession. Rate cut fervor seems to be whipping back up as the mainstream finally notices just how bad the economy really is. Many are saying that pockets of the US economy are in a recession, yet the broad economy is reporting stability due to the unbridled US Government spending. This overspending by government and the massive debt that they have orchestrated should ultimately come home to roost, but the question remains as to when. The most confusing catalyst to the slowdown is the credit being given to the AI which seems to be expanding profits to an extent that it is single handedly masking the larger ills in the broad economy. Global prices have remained sticky due to AI. Both input and output price growth have been little changed and continue to hold above their pre-pandemic levels.
This brings me back to my final question; Is good news good news again?
Markets seem to be balanced between growing evidence of an economic slowdown and the ultimate implications for rate cuts. Economists seem to be collectively kicking and screaming about their concern about an impending recession, but better-than-expected economic data has been a welcome backdrop for equity investors. By March of this year, the narrative switched and some even called for a Fed rate hike and at best a longer delay for rate cuts. This last week, this narrative flipped once again due to a soft ISM report, showing in May its falling to a three-month low. Job openings also fell for the fourth time in five months to a 38-month low. Then, the services sector rose more than expected and the markets cheered the economic strength! In the end, the weight of evidence remains bullish for stocks, although some economic indicators have turned less positive. Equities have trended higher on increasing confidence that real economic growth will continue to hold up, with runaway inflation and a crippling recession both held at bay.
I began this week's note by referencing the S&P 500 and the NASDAQ 100, and specifically how they have continued their progress in face of waning breadth as measured by the lack of participation in the Russell 2000. My friend Ari Wald, Chief Technical Strategist, Oppenheimer & Co., said it best this week in his comment, "Go Big or Go Home." See below the reversal of the very negative down day on May 23rd in the S&P followed by new all-time highs, but even more important the clear and continued outperformance to the Russell:
Boiling down the S&P leadership even more, the clear leaders are in the QQQ. The chart of the QQQ relative to the S&P Shows that after a digestion of relative performance for the past few months, not only is this index leading annual performance numbers to new all-time highs, it is appearing to begin a new breakout above past highs going back to 2021:
By the time you get this we will have gotten the CPI this morning and we will be awaiting the comments from Fed Chairman Powell and the Fed interest rate announcement. Next week we should be able to see what this next set of economic data brings in price movements, but the leaders tend to be oblivious to moves in interest rates and more dependent on earnings. So as Saut says, "Sometimes it’s best to just sit." The real, and only proven, way to create less inequality is to allow free market capitalism to work. Interfering in that process creates more problems than it solves.
- Ken South, Newport Beach Financial Advisor
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The Standard & Poor's 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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The Nasdaq-100 is a large-cap growth index. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
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