We know it’s not easy to look on the bright side, especially when we seem to be surrounded by negativity day in and day out. However, just because something isn’t easy doesn’t mean we shouldn’t try because optimism is contagious. Unfortunately, the Conference Board’s survey of consumer expectations toward the stock market has continued to grow even more pessimistic. According to the most recent survey, almost 38% of consumers expect lower stock prices compared to just 29% expecting higher stock prices. This “bull-bear” spread now sits at -9%, the lowest since October last year when the market reached its low point. Moreover, this reading extended the current streak of a negative “bull-bear” spread to 17 months. Dating back to 1987, this makes it the second longest period on record, trailing only the 18-month period during the Great Financial Crisis from 2008/2009.
So why should we be optimistic? Beyond the mental and physical health benefits that many health professionals proclaim, plenty of hard data points this week should start moving people toward a more positive mindset. Some of the most significant reports this week that came in better or in line with expectations include:
- Non-Farm Payrolls (339K vs. 190K)
- Average Hourly Earnings MoM (0.3% vs. 0.3%)
- ADP Employment Change (278K vs. 170K)
- Unit Labor Costs QoQ (4.2% vs. 6.0%)
- JOLTs job openings (10.1MM vs. 9.4MM)
(Current vs. Consensus)
What should be clear here is that all five reports above relate to the overall job market. And while there are plenty of other economic indicators, historically speaking, the job market has been one of the most important. Further, this should not be a massive surprise because if jobs are being created, then that means people are working, and if people are working, they have money, and if they have money, they tend to spend it. All of which will generally lead to a more robust economy, or at least one not headed toward a severe recession.
The most telling of these reports could be the Total Non-Farm Payrolls report, which significantly exceeded the experts’ expectations. And remember, these are estimates from teams of the brightest economists at the most prestigious financial institutions like JPMorgan, Morgan Stanley, Goldman Sachs, Citigroup, Barclays, etc. We don’t bring this up to disparage these people or institutions but to continue to point out that the economy and the stock market are impossible to predict. But the data shows us that the labor market appears to be relatively strong, with an addition of 339K jobs in May. And a strong labor market is contrary to one of the key ingredients needed for a recession. In fact, the Total Non-Farm Payrolls month-over-month change has flipped negative before or during every recessionary period in history (dating back to 1940). So while we can’t predict where the jobs number will be next month or the month after, at this point, we should be able to look on the bright side and stay optimistic with the data we have.
And one final piece of information that should help our optimism, the bill to increase the debt ceiling made it through both the House and the Senate with bipartisan support and has been signed by President Biden. This marks the 79th time since 1960 the debt ceiling has been raised, illustrating that cooler heads have always prevailed on this front.
Economy
- U.S. equity markets were up for the week ending June 2, with the S&P 500 up +1.8%, the Nasdaq up +2.0%, and the small-cap Russell 2000 up +3.3%. It was a big new week with the debt ceiling bill getting signed and a lot of new data on the jobs market.
- Total Non-Farm Payroll gains occurred in professional and business services (64K), namely professional, scientific, and technical services; government (56K); health care (52K); leisure and hospitality (48K); construction (25K); transportation and warehousing (24K).
- The number of job vacancies in the U.S. unexpectedly increased by 358K to reach 10.1MM in April. This latest figure represented a rebound from the previous month’s near two-year low of 9.7MM. It indicated a tight labor market, which could pave the way for additional interest rate hikes by the Federal Reserve.
- Unit labor costs in the U.S. non-farm business sector rose an annualized 4.2% in the first quarter of 2023, less than preliminary estimates of 6.3% and below market expectations of a 6% gain, revised data showed. It reflects a 2.1% increase in hourly compensation and a 2.1% decrease in productivity. Labor costs were up 3.8% YoY, easing from a 4.9% advance in Q4.
- The ISM Manufacturing PMI in the United States fell to 46.9 in May of 2023 from 47.1 in April, compared to forecasts of 47.0. The reading indicated a seventh consecutive month of contraction in the manufacturing sector, as companies “manage outputs to better align with demand in the first half of 2023 and prepare for growth in the late summer/early fall period.”
Stocks
- U.S. equities were in positive territory. Consumer Discretionary and Real Estate were the top performers, while Consumer Staples and Utilities lagged. Growth stocks led value stocks and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased 12 basis points to 3.69% during the week.
- Global bond markets were in positive territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
