Investment Insights

 — Steve Orr 

And we wait.

Another week, another all-time high for the S&P 500 and NASDAQ. Volatility remains stuck at August vacation levels. Can it get more boring? Well, markets can, but we bet they turn exciting this week. Let’s go global for starters. Elections in India cranked up the volatility in that market last week after Modi’s party suffered setbacks. Over the weekend, several European countries saw their ruling parties lose seats in their parliament and EU delegations. Most of the seats lost were for parties that lean left and spend freely. The uncertainty of snap elections in France and the rise of center-right parties on the continent gave traders an excuse to sell Monday morning.

The largest election effect this month was in Mexico. The controlling socialist party was expected to win, but not by a landslide. The big win gave the Morena party a super-majority in the lower house and a majority in the Senate. Currency and stock traders did not like the possibility of increased regulation and control by the party. Mexico’s BOLSA index suffered its second-worst performance week since the 2009 financial crisis, falling nearly 12%. 

More fun

This Wednesday, the FOMC’s every-six-week meeting concludes with a press release and Chaiman Powell’s press conference. We expect that the Fed will leave short rates unchanged and lower their median projection for rate cuts from three to two. That morning, we and the Fed will learn that May’s consumer price index likely held steady at 3.4%.

Breadth, ticks, new highs, new lows. 

Recent volatility readings have been so low that even Roaring Kitty and another good jobs headline could not roust gains out of traders. We are wary of new all-time highs in the NASDAQ and S&P 500 when only a few stocks are driving the indices higher. We would like to see the number of new stocks outpacing new lows each day. Index members making new highs or lows are part of breadth analysis, or trying to understand just how broad a rally or decline is across a market.

In the chart below, the S&P 500’s run from last October’s low saw the index post yearly new highs in the 30 to 50 range per day (green vertical bars). New 52-week lows, in contrast, were less than 10 per day. In the recent consolidation period, new highs are less than 20 per day and new lows are averaging around seven. Yes, highs are ahead of lows, but not at impressive Bull levels. 

The global All-Country World and all the U.S. indices remain in uptrends. All have 50-day moving averages above their 200-day moving averages. All have prices above or near their 50-day moving average. So, the Bull trend remains in force. We may hold our nose at some of the market’s internals, but history says most of the time, problematic breadth usually resolves itself in favor of the Bulls. 

Jobs, sort of

May’s non-farm payroll’s report of 272,000 net-new jobs made nice headlines. Digging into the numbers, the small business birth/death model made up 231,000 of those jobs. Further digging lead us to estimate probably 130,000 or so are “real” new jobs. Most of the gains were concentrated in what we call “government-related” fields: government positions and healthcare. Two notes: May is usually an outlier as teachers and students go for summer jobs. The net gain in the payrolls report is almost all foreign-born.

Over in the Household report, employment fell by 408,000 month over month. Net job growth year over year was less than one-quarter of a percent. The unemployment rate ticked up to 4%. The payroll report suggests that the economy can trundle along in second gear. The Household report suggests a slower path, downshifting to first gear in the coming months. We tend to go with the latter: a possible downshift to first gear.

Another indicator that the economy is doing fine is Average Hourly Earnings. This series is released with the jobs report each month and tracks wages across the U.S. The year-over-year growth in wages for May ran a healthy 4.1%. About 80% of all employment is production and non-supervisory positions. That sub-series of AHE is rising at a 4.2% clip. Both series are now running ahead of inflation and well below their 2022 peaks of 5.9% and 7%. The declining rate in wage growth is consistent with the job market coming back into balance after the shutdowns of 2020–21. This too should cheer the Fed.