Week of May 8th, 2023

Key Points for the Week

• Stocks continue to defy the negative sentiment.
• April employment data suggests the economy remains healthy.
• The economy created 253,000 jobs in April, above consensus expectations of 179,000.
• The unemployment rate is at 3.4%, the lowest it has been since 1953.
• Aggregate incomes across the entire economy are growing faster than inflation, which is good news for consumption.
• The Federal Reserve raised rates by 0.25% at its May meeting.

Economic Update

Last week, the April employment report for the United States arrived. It showed that unemployment dropped to the lowest level in more than 50 years – 3.4 percent. Other highlights included:

• The creation of 253,000 jobs in April. That was well above consensus estimates, according to Catarina Saraiva and Steve Matthews of Bloomberg.
• The highest workforce participation rate since 2008. This is the percentage of Americans who are either working or looking for a job, reported Megan Cassella of Barron’s.
• The lowest unemployment rate for African American workers ever. By race, the April unemployment rate was 2.8 percent for Asian Americans, 3.1 percent for white Americans, 4.4 percent for Hispanic Americans, and 4.7 percent for African Americans.
• Average hourly earnings rose 4.4 percent year-over-year. Wage growth may be one reason inflation remains higher than the Federal Reserve would prefer, according to a source cited by Bloomberg.

There were signs, however, that the labor market growth might be slowing down. The number of jobs created in February and March were both revised lower.

The Federal Reserve will be weighing the strengths and weaknesses of the labor market, as well as other data, as it makes future rate hike determinations. Last week, the Fed raised the federal funds rate from 4.83 percent to 5.08 percent, and Chair Powell suggested it could be the end of the tightening cycle, reported Jeff Cox of CNBC.

As the Federal Reserve works to rein in inflation, the labor market’s confounding durability has given central-bank officials space so far to keep interest rates in restrictive territory without having to worry about widespread layoffs or acute economic pain.

Barron’s

Last week, major U.S. stock indices finished the week with mixed performance, reported Barron’s. Yields on most U.S. Treasuries moved lower over the week.

This Week in the Markets

In the face of more regional bank collapses and numerous worries about the economy, the stock market continued to hang tough. In fact, stocks have rallied late for two consecutive weeks.

In what might come as a surprise for many investors, the S&P 500 is virtually flat over the past year. Despite countless negative events — record high inflation, a bond market crash, the most aggressive Fed policy in 40 years, the war in Ukraine, lockdowns in China, the second and third largest bank failures ever, an earnings recession, a mortgage market crash, and many more negative events — stocks are flat. Going forward, the 4,200 level on the S&P 500 is significant. As the chart below shows, this area has proved to be troublesome in the past.

Many Stocks Are Going Up

A common concern is that a handful of large stocks account for most of the stock market’s gains. This is a bearish notion as it suggests there have been weak underpinnings to the rally since October. A bull market survives with broad participation.

It has been widely reported that the largest two stocks in the S&P 500 (Microsoft and Apple) represent close to 40% of the rally this year, and the FAANG companies — Meta (formerly Facebook), Amazon, Apple, Nvidia, and Alphabet (formerly Google) — account for about 80% of the year-to-date gains.

However, this is perfectly normal. The best stocks always account for most of the gains. It’s similar to sports where the best players account for most of the points or great plays. This isn’t odd or nefarious.

What’s the easiest way to show that more than a few stocks are rising? The advance-decline (A/D) lines is good for this purpose. An A/D line is simply a cumulative total of how many stocks went up or down each day. Throughout the market’s history, A/D lines have broken out to new highs before the indexes, while they also break down well ahead of actual price. This is one of the best ways to see what is really happening under the surface.

The Dow A/D line recently reached new highs after consolidating for more than a year. With the Dow about 6% away from new highs, this is a clue that the nearly 125-year-old index may be following the A/D line to new highs sooner than later.

The S&P 500 A/D line shows another potentially bullish scenario. This one hasn’t quite broken out to new highs, but it is extremely close. Take note how this has trended sideways for the duration of the recent bear market, implying the tailwind for a bull market wasn’t happening. Should this break out, it could suggest continued strength through 2023 and potentially beyond.

The Economy

The April employment data suggests the economy is doing just fine, and perhaps more than fine. Of course, the banking crisis is a problem. Banks are tightening credit availability, but that will likely be a slow-moving adverse force on the economy.

The economy created 253,000 jobs in April, well above economists’ expectations for a 179,000 increase. Payroll numbers in February and March were less than what was originally reported, as they were revised down by 149,000. So, job growth in the first quarter was slightly weaker than originally thought.

The economy has created more than 1.1 million jobs in the first four months of 2023. Even excluding January, the last three months have averaged 222,000 jobs. That’s well above the pre-pandemic average of 183,000, which was a very strong pace.

A Historically Strong Labor Market

Any skepticism of the job creation numbers washes away with the unemployment rate, which fell to 3.4%. That’s the lowest level since 1969!

What Does This Mean for the Federal Reserve?

The Fed’s aggressive rate-hike campaign to fight inflation appears close to an end. The Fed has raised rates by 5%, including the latest 0.25% increase implemented last week. The federal funds rate is now in the 5-5.25% range, which was the highest point it reached during the mid-2000s economic expansion.

The rate hike in May was expected, but more welcome was the fact that the Fed didn’t think “additional policy firming may be appropriate.” While this was not an explicit signal that Fed officials are pausing, it indicated they will be more data dependent. Fed Chair Jerome Powell explicitly referenced this in his comments about the future direction of policy, saying it will be assessed based on incoming data, including employment and inflation. The Fed has done a lot — and officials believe the economy is yet to reflect the full impact.

The April payroll report suggests the labor market remains strong, which means the Fed is unlikely to cut interest rates any time soon.

Average hourly earnings accelerated in April, rising at a 5.9% annualized pace for all private workers. These numbers can be noisy, so it helps to look at an average. But even that is running high. Average hourly earnings have been growing at a 4.2% annualized pace over the past three months, and they are up 4.4% over the past year. Pretty steady, but that also means the Fed will remain concerned about inflation. In the Fed model, strong wage growth is likely to keep underlying inflation elevated.

The biggest reason that the employment picture matters is consumption makes up 70% of the economy. And consumption is driven by income. Overall income across the entire economy is dependent on three factors:

• Employment growth (strong)
• Wage growth (strong, but maybe too strong for the Fed)
• Hours worked (steady)

Multiplying these factors adds up to overall income growth across the U.S. economy, which is up 6.6% over the past year. It’s down from about 12% in February 2022, but still above pre-pandemic levels.

Even better news — income growth is running above inflation, which is up about 5% over the past year — and energy and food prices continue to fall. That means people have more money in their pockets, which is positive for the economy.

Did you Know? This Week in History

May 9, 1914: Woodrow Wilson Proclaims the First Mother’s Day Holiday

On May 9, 1914, President Woodrow Wilson issued a presidential proclamation that officially established the first national Mother’s Day holiday to celebrate America’s mothers.

The idea for a “Mother’s Day” is credited by some to Julia Ward Howe (1872) and by others to Anna Jarvis (1907), who both suggested a holiday dedicated to a day of peace. Many individual states celebrated Mother’s Day by 1911, but it was not until Wilson lobbied Congress in 1914 that Mother’s Day was officially set on the second Sunday of every May. In his first Mother’s Day proclamation, Wilson stated that the holiday offered a chance to “[publicly express] our love and reverence for the mothers of our country.”

Weekly Focus

Middle age is when you’ve met so many people that every new person you meet reminds you of someone else.

Ogden Nash, Poet

The love of liberty is the love of others; the love is power is the love of ourselves.

William Hazlitt, Essayist