Week of June 10th, 2024

Key Points for the Week

• The summer rally continued last week.
• Stocks are in the middle of a strong three-month seasonal period for an election year.
• May job growth surprised to the upside with the economy adding a robust 272,000 jobs.
• Job gains are the key to consumer spending, which is the foundation of the U.S. economy.

Current Trends & News is a weekly financial recap curated by SPC Financial®’s team of wealth management and tax-integrated advisors.* We monitor and explore the intricacies of the financial world and share insights into market developments.

Economic Update

The S&P 500 benefitted from reports that forecast a slowdown in hiring for May. Economists expected the jobs report to show 190,000 new jobs were added by U.S. employers in May, and hourly earnings increased by 3.9 percent over the last 12 months, reported Jeff Cox of CNBC.

Why did investors want to see hiring slow down?

The answer is that the strength of the labor market is one factor the United States Federal Reserve (Fed) will consider when deciding whether the economy is slowing enough to lower the federal funds rate. Slower labor market growth is a sign of economic weakness, which could move the Fed toward rate cuts. Instead, U.S. labor market data suggested the economy is still strong.

“In theory, a decrease in the federal funds rate drives the stock market higher. This is because investors expect low rates to fuel spending and boost the economy, increasing the profitability of corporations.”

↳Rocco Pendola, Adam McFadden, and David Tony, CNN.

So, Friday’s employment report came as quite a surprise.

The economy added 272,000 new jobs in May, exceeding economists’ expectations. In addition, average hourly earnings rose faster than expected, rising 4.1 percent over the last 12 months. (Hourly earnings increased faster than inflation. The most recent Consumer Price Index showed headline inflation was 3.4 percent over the last 12 months.)

The good economic news disappointed investors, and U.S. stocks fell on Friday. Over the full week, though, major U.S. stock indices moved higher. Yields on many maturities of U.S. Treasuries moved lower for much of last week. On Friday, after the employment report was released and expectations for Fed rate cuts changed, Treasury yields generally moved higher.

This Week in the Markets

Earnings have sparked much of the rally this year, as corporate America has continued to report very strong earnings across the board. There are many worries out there, but if investors were forced to focus on only one thing, we would suggest keeping an eye on earnings. One-year forward expectations for S&P 500 earnings continue to rise and as long as that can continue to happen, that is good news for markets.

What else could spark a stock rally? Better inflation data could be the next thing to watch. Inflation may continue to slow, as prices paid on manufacturing and services both reported lower than expected last week, as did unit labor costs after a strong downward revision. This week we have both consumer and producer level inflation data due out.

May Payrolls

Job growth continues to catch most people by surprise, rising 272,000 in May. That was well above expectations for a 180,000 gain. In fact, “whisper” expectations seemed to be tilted to a downside surprise, perhaps close to 150,000. Expectations were low mostly because we had received some disappointing April data recently that suggested the consumer may be weakening, including retail sales, disposable income, and services consumption. Well, the May payroll report upended that narrative. We did not see significant revisions to March and April payroll numbers, and the 3 month average now sits at 249,000. A year ago, it was 242,000. In 2019, average monthly job growth was 166,000.

Now, the unemployment rate did rise to 4%, breaking a streak of 27 straight months in which it was below 4%. The unemployment rate data comes from what is called the “household survey,” which is a survey of about 60,000 households. The payroll number comes from the “establishment survey,” which is a survey of about 119,000 businesses and government agencies (about 629,000 worksites). So, the household survey is noisier, with the confidence interval around employment about 600,000, versus 130,000 for the establishment survey.

Over the last year, the unemployment rate has risen from 3.7% to 4%. That is not too alarming. We prefer to look at the “prime-age” (25-54 years) employment-population ratio,” since it gets around some issues that crop up with the unemployment rate. For example, when calculating the unemployment rate, someone is counted as being “unemployed” only if they are actively looking for a job. An aging population, with more people retiring and leaving the labor force every day, can also make the numbers noisier.

The prime-age employment-population ratio is a steadier measure and it was unchanged at 80.8% in May. That is only slightly below the high from last summer, and above anything we saw between 2001 and 2019 (when it peaked at 80.4%). In fact, the prime-age employment-population ratio for women hit a record high of 75.5% in April, and it rose to a new record of 75.7% in May. This by itself suggests the labor market is strong, with more people participating in it.

One narrative we have seen is that these numbers are good for a bad reason - more people are working part time. But we need to separate the reasons for why people are working part time. Some people may be working part time because they (or their partners) are earning enough, and so they can scale back. What would be worrisome is if more people started working part time because they could not find full-time work. The Bureau of Labor Statistics (BLS) measures this, via a metric called “part-time employment for economic reasons.”  As a percent of the labor force, this measure is now at 2.6% — matching its level in February 2020 and a tick below the 2019 average of 2.7%. It has increased over the past year, but that is likely just the normalization of a labor market that is no longer red hot. As you can see in the chart below, it remains at historically low levels.

What Matters for the Economy: Consumption (and Incomes)

Consumption runs on incomes, and the picture there is positive. If you look at overall income growth across all workers in the economy (a product of employment growth, hourly wage growth, and hours worked), that is running at a 6.0% annualized pace over the last three months. It has been steady at that level for a few months now.

This pace is stronger than what we saw pre-pandemic, when aggregate income growth averaged about 4.7% annualized, but well off the red-hot levels of 10%+ in 2021-2022 (when inflation surged), so the Fed should have little concern that the current rate could drive inflation higher. The 6% aggregate income growth we are experiencing provides a good first estimate of nominal GDP growth, and that is above the 2010-2019 trend of about 4%. That is important because nominal GDP growth is directly related to corporate profit growth.

The big picture is that the consumer is not really weakening. That also means the economy is not weakening, since consumption makes up close to 70% of the economy. While strong job and aggregate wage growth may mean it will take longer for Fed rate cuts to materialize (perhaps only in September now), it also means profit growth remains strong, and that is ultimately good for the stock market.

Political Polls and Investing

During elections, political polls tend to be abundant. Polling organizations gather data using a variety of methodologies and then publish information that purports to reflect the public’s views.

Last week, an article in Bloomberg reminded readers not to make investment decisions based on polling data.

“…While investors are good at gauging economic and corporate risks, political ones are harder. They tend to put more weight on opinion polls than they can bear; they are also prone to misjudge what politicians will do once in office.”

↳John Authers, Bloomberg

The election in India last week delivered a timely example.

“…India has the world's largest democracy with the world's most popular leader (according to the Morning Consult survey), favorable demographics, and debt on a sustainable path, all supporting the world's fastest economic growth.”

↳Jeffrey Kleintop, Charles Schwab

The country’s growth has been supported by domestic government policies and international supply chain diversification. As a result, the Indian stock market has been growing and moving closer to an equal weighting with China in the MSCI Emerging Markets Index, reported Kleintop.

Political polls predicted that Narendra Modi, India’s current prime minister, and his party would win by a landslide. Instead, Modi won but his party lost its majority, and a coalition government must be formed.

The unexpected result raised concerns about future government policies.

“Two days of dramatic trading drove the benchmark as the Sensex index shot for the sky after weekend exit polls indicated a landslide, then tanked in response to live results.”

↳John Authers, Bloomberg

The Guardian called 2024, the Super Bowl of democracy.

This year, 40 countries will be holding elections. The countries encompass 40 percent of the world’s population and a significant share of the global economy.

“From Mumbai to Mexico City, the Year of the Election…is already burning investors, providing an early warning as elections in the European Union and UK near, and five months ahead of the U.S. presidential contest…In the U.S. — with a neck-and-neck rematch shaping up so far between President Joe Biden and Trump — traders have started bracing for heightened volatility...”

↳Ezra Fieser, Bloomberg

If you have questions about the way elections could affect markets or your portfolio, please contact us.

A Reminder About Scams

Scams usually start with a phone call, email, text, or another form of communication. The person typically claims to be from an agency or organization you know – or one that sounds like it might benefit you, such as the National Sweepstakes Bureau or a lottery.

The person may know your name and address. They may give you their official title or an identification number. No matter how official they seem, you can be confident it is a scam if the person contacting you:

• Indicates there is a problem with your benefits.
• Asks you to pay to receive a prize.
• Suggests that paying will increase the chance of winning.
• Requests financial information, such as a bank account or credit card number.
• Pressures you to act immediately.
• Tells you to pay using a specific method, such as a gift card or cryptocurrency.

If this happens, remember that the Social Security Administration, the Internal Revenue Service, Medicare, and your bank do not call, email, or text to ask for money or personal information. They do not demand that you pay immediately, and they do not accept payment by gift card, prepaid debit card, cryptocurrency, or another untraceable form of money transfer.

When you suspect a scam:

• Hang up or close the message. Do not respond in any way.
• Remain calm.
• Think back over the call. Write down any personal information you may have inadvertently shared.
• Report the scam. Contact the Federal Trade Commission at ReportFraud.ftc.gov. You may also want to report the incident to your state’s attorney general or your local consumer protection agency.
• Share your knowledge. Talk with family, friends, and neighbors about your experience so they know what to look out for.

When you receive a digital message, no matter how official it seems, do not click on any links. Do not give or confirm any personal information, including your name, birth date, phone number, address, email address, place of birth, driver’s license, passport, or Social Security numbers, bank or other account numbers, and PIN numbers.

Being skeptical can keep you safe. Remove yourself from the situation. Do not share information. If you feel anxious and need to confirm that it was a scam, contact the organization using a method provided on their official website.

Corporate Transparency Act

The Corporate Transparency Act was enacted in 2021 and was passed to enhance transparency in entity structures to combat money laundering, tax fraud, and other illicit activities.

Beginning January 1, 2024, certain business entities created or registered to do business in the United States will be required to report identifying information about the beneficial owners to FinCen, the Financial Crimes Enforcement Network. Per FinCen rules, a beneficial owner is an individual or group of individuals who, directly or indirectly, owns or controls the company. Reporting companies typically include:

• Domestic reporting companies: Corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
• Foreign reporting companies: Entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with the secretary of state or any similar office.

FinCen has updated their FAQs that includes new information about the reporting process, reporting companies, reporting requirements and much more, with the expectation that further guidance will be provided in the future. The updated FAQs can be found here.

Did you Know? This Week in History

June 11, 1982: “E.T. the Extra-Terrestrial” Released

On June 11, 1982, the science-fiction classic E.T. the Extra-Terrestrial, was released.

Directed by 34 year-old Steven Spielberg, E.T. marked a return to territory he had first visited with the classic Close Encounters of the Third Kind (1977), in which Richard Dreyfuss played a man who came face to face with a fearsome alien force that eventually proved to be human-friendly. With E.T., Spielberg would create an even more appealing vision of alien life, in the form of a diminutive creature with wrinkled skin and a glowing belly looking to return to his home planet.

From the time that E.T. had its first showing, on closing night at the 1982 Cannes Film Festival, the film’s buzz was overwhelmingly positive. TIME included the fictional alien in its list of candidates for Man of the Year, the first film character to receive that honor. Nominated in nine categories at the 1983 Academy Awards, including Best Picture and Best Director, the film won four Oscars, for Best Sound Effects Editing, Best Visual Effects, Best Original Score and Best Sound.

E.T. was very successful at the box office, eventually raking in some $435 million (it was re-released in 1985 and a special 20th-anniversary edition was issued in 2002).

Weekly Focus

War does not determine who is right, but who is left.

Bertrand Russell, Philosopher

The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.

Stephen Hawking, Theoretical Physicist