The 'Fed Cut' Plus
Another 'softer' jobs report... Why this bad news is good news for stocks... It looks like the 'Fed cut' plus... The Nasdaq and S&P 500 make new all-time highs... Signals from the north and overseas... Portfolio Solutions updates...
Throw another log on the 'softening labor market' fire...
Today's private-sector payroll report for May from payment processor ADP showed the lowest number of jobs added in four months, notably below the past year's monthly average.
According to ADP, the U.S. added just 152,000 private payrolls last month, a significant drop from April's (revised) 188,000 and also off the one-year average of around 194,000 private jobs added each month. And it's well below Wall Street's consensus estimate of 175,000.
This report adds to the growing pile of "official" evidence that the jobs market is softening... And, perhaps counterintuitively, the market is bullish about it. Combined with another batch of data mid-day showing growth in the services sector – after a contraction last month – the major U.S. indexes were all up today.
The benchmark S&P 500 and tech-heavy Nasdaq Composite Index closed at new all-time highs. Chipmaker Nvidia (NVDA) made new highs, too, now trading above $1,200 per share. Today looked like an expression of the "Fed cut" trade – plus...
Every major asset class was up: stocks, with the tech sector leading... bonds, as yields dipped again... gold, for those who care about inflation... and oil and bitcoin, too, with the latter trading above $71,000 near an all-time high.
Bad news is good news...
The services-sector growth, which was the highest in nine months and above expectations, is good news and clearly lifted the markets in the afternoon. But the indexes were already up before that came out, which is what I (Corey McLaughlin) want to talk about.
An apparently weakening jobs market might strike you as bad news – and it is for people who are actually interested in working to generate income and keep up with inflation – but the markets are often perverse.
That's because investors are always thinking about what comes next... Today, we saw a growing stack of "soft" labor market data, plus second-quarter GDP estimates that recently went below 2% and a central bank that does not seem to care that inflation is still high.
This mix suggests a shift in monetary policy to a more encouraging environment for investors ahead.
Alternatively, really bad data – like a spike in the unemployment rate – could be bearish for the market in the shorter term. Then the central bank would inevitably intervene to "rescue" things (and cause more inflation in the process, but we digress). But we're not in that scenario right now. As we wrote on Monday...
Should any or all of these reports indicate a weakening jobs market, I'll be gauging whether bad news for the economy translates into "bad news" for stocks.
Will signs of economic weakness push U.S. stocks lower, given that a weak economy would be worse for businesses than the market had considered? Or will poor economic data be taken more as a sign that the monetary policy environment will indeed "loosen" with lower interest rates – and push stock prices higher on balance?
If anything, the market reaction to a series of relatively weaker jobs reports has appeared to lean toward the latter outcome: investors being more excited about looser monetary policy than worried about the economy slumping.
Throw in some other encouraging economic data at the same time – today's growth in the services sector – and you get a market making new highs.
At the same time, though, people may be getting ahead of themselves again...
Many investors have been practically begging for a "Fed pivot" since right after the central bank began raising rates in 2022. Instead, the Federal Reserve raised rates higher than expectations and has held them in the current range for nearly a year. This has been the "Fed pause."
And today, while statistics show the labor market weakening, it doesn't look like a disaster based on the data that the Fed follows. This makes it hard (though not impossible) for the central bank to justify cutting rates anytime soon with inflation still above its target.
This is why we keep saying, no matter what, prepare for high(er) inflation for longer.
Remember, yesterday's Job Openings and Labor Turnover Survey ("JOLTS") report for April painted a picture of "moderation" in the labor market – with the ratio of job openings to available workers – falling to 1.2 to 1. The major U.S. indexes were mixed.
Today, after more current data for May in the ADP report showed weaker job growth than in the past several months, most of the major U.S. indexes were up. As our Ten Stock Trader editor Greg Diamond shared earlier this week, from a technical-analysis perspective, the bulls appear to still be in control.
Today, Greg recommended a pair of bullish trades (Ten Stock Trader subscribers can find them here), noting that Friday's "nonfarm payrolls" report could be a catalyst for higher prices.
Should more jobs numbers show signs of relative weakness, this will likely fuel market expectations of lower interest rates ahead.
We don't have to go far to see it...
Up north and overseas...
Just today, the Bank of Canada cut its benchmark lending rate by 25 basis points to 4.75%, marking its first rate cut in four years. Canada is now the first G7 country to see a rate cut in the post-pandemic stimulus/inflation era.
Headline inflation is still at 2.7% in Canada as of April... But with first-quarter GDP at a reported 1.7% and with Canadian central-bank officials expecting inflation to continue easing, that's evidently enough to change policy course.
"Monetary policy no longer needs to be as restrictive," Bank of Canada Governor Tiff Macklem said today at a press conference after the policy announcement.
The Swiss and Swedish central banks have also lowered rates. We expect to hear similar comments from the European Central Bank tomorrow. You might be able to see why investors are increasingly expecting the same in the U.S.
Portfolio updates and more...
Earlier this week, our Portfolio Solutions team published updates to The Quant Portfolio, The Total Portfolio, and Stansberry's Forever Portfolio. If you're a subscriber or Stansberry Alliance member, be sure to check them out...
You'll find detailed updates on the model portfolios... and much more.
In The Quant Portfolio update, you'll find a discussion of which stocks led the market higher in May. The team also released allocation adjustments to make if you're following the portfolio, which continues to outperform the broad market.
In The Total Portfolio, Stansberry Research senior analyst Brett Eversole makes the case for investing outside the U.S. As Brett explains, U.S. stocks have gotten much more expensive than foreign markets, setting up a buying opportunity in high-quality businesses abroad.
And for Forever Portfolio subscribers, our director of research Matt Weinschenk details the lessons you can learn from Amazon's incredible, and still ongoing, growth story and explains why it's the perfect example of a "forever" stock.
New 52-week highs (as of 6/4/24): Alpha Architect 1-3 Month Box Fund (BOXX), Costco Wholesale (COST), Intuitive Surgical (ISRG), iShares U.S. Aerospace & Defense Fund (ITA), Coca-Cola (KO), Eli Lilly (LLY), Altria (MO), Novo Nordisk (NVO), Spotify Technology (SPOT), Verisk Analytics (VRSK), and Vanguard Short-Term Inflation-Protected Securities (VTIP).
A quiet mailbag today... As always, let us know what's on your mind at feedback@stansberryresearch.com.
All the best,
Corey McLaughlin
Baltimore, Maryland
June 5, 2024