/ June 10 / Weekly Preview
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Monday:
N/A
Tuesday:
N/A
Wednesday:
Core Inflation Rate YoY (3.5% exp.)
Inflation Rate YoY (3.4%)
Fed Interest Rate Decision
FOMC Economic Projections
Fed Press Conference
Thursday:
Initial Jobless Claims (227K exp.)
PPI MoM (0.2% exp.)
Friday:
Michigan Consumer Sentiment Prel (73 exp.)
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Monday:
N/A
Tuesday:
CrowdStrike CRWD
Verint Systems VRNT
Wednesday:
Dollar Tree DLTR
Thor Industries THO
Lululemon Athletica LULU
Thursday:
Ciena CIEN
DocuSign DOCU
Vail Resorts MTN
Friday:
N/A
Conflicting Jobs Report Points to Economic Weakness
Last week, the equity market has marginally set all time highs, amid mega cap outperformance. The key trading day occurred on Friday, as the BLS published its latest Non-Farm Payrolls data. Reaction was mixed across factors and asset classes, as we’ll discuss below. But first, let’s cover the market’s technicals.
The S&P 500 index remains in a clear bull trend in the short and medium term, gaining around +1% on the week. Upside remains somewhat limited in the near term due to the overbought nature of the benchmark ETF, but there’s still enough theoretical distance to our 1-year price target to justify an investment ($582, +8.99%).
With the MACD signal flipping to positive on Friday, and the 20-DMA acting as primary support, there is limited downside to be concerned about ($R1, $531, -0.56%). Volatility remains suppressed, giving the vibe of a dull tape and suggesting that traders are not worried about any significant decline in the near future. This week, we’ll get the latest inflation readings, as well as the FOMC meeting on Wednesday, which could move the markets in an outsized way, at least in theory. Therefore, we continue to manage risk in our portfolio.
Friday’s employment report initially tanked stocks, as the economy added 272K jobs, way above the 185K that economists were estimating. This knee-jerk selling reaction is somewhat justified by an embedded expectation that the Fed will cut interest rates sooner rather than later and a “hotter” print makes this less likely.
However, when analyzing the data more carefully, the headline number becomes meaningless, and the report itself was downright terrible. Full-time employment declined by 625,000, while part-time employment increased by 286,000. This was the biggest drop in full-time employment since December, and the recent trend is not at all flattering.
For those keeping count, the cumulative total since March last year is 1.26 million part-time jobs added and 1.02 million full-time jobs lost. The year-on-year decline in full-time employment dropped to an annual change of -0.81%, coinciding with every other recessionary onset in the past 50 years.
Naturally, full time employment is a necessary and critical factor in supporting robust economic activity. The Fed will surely take not of the uptick in the U3 Unemployment Rate, now at 4% (the U3 rate measures the number of unemployed as a percentage of the labor force).
Historically, a “breakout” in this data series aligns closely with other instances when the economy slowed and eventually headed into a recession. Arguably, we are getting such a breakout right now.
However, Friday’s data release led to a bounce in the Atlanta Fed GDPNow model. We’ve previously stated our concerns regarding the sharp drop in this projection system. Per the Atlanta Fed:
After this morning’s employment situation release from the US Bureau of Labor Statistics and this morning's wholesale trade report from the US Census Bureau, the nowcasts of second-quarter real personal consumption expenditures growth and second-quarter real gross private domestic investment growth increased from 2.4 percent and 5.8 percent, respectively, to 2.8 percent and 7.7 percent.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 3.1 percent on June 7.
Furthermore, we could not find any evidence of a slowing economy in the Lewis-Mertens-Stock index.
This index is a real time high-frequency data indicator, consisting of ten different daily and weekly series covering consumer behavior, the labor market, and production: Redbook same-store sales, Rasmussen Consumer Index, new claims for unemployment insurance, continued claims for unemployment insurance, adjusted income/employment tax withholdings, railroad traffic, the American Staffing Association Staffing Index, steel production, wholesale sales of gasoline, diesel, and jet fuel, and weekly average US electricity load.
If anything, it looks like the economy is humming along just fine, no matter the employment situation. Maybe the nature of professional work is simply changing, and “this time is different” (who are we to judge?). So how can we make sense of the market’s reaction given the conflicting data?
Overall, investors piled into large and mega cap stocks while simultaneously exiting more risky investments. The Vanguard Mega Cap Growth ETF (MGK) rose +2.50% on the week, in stark contrast to the iShares Russell 2000 ETF (IWM) which tracks small caps and fell -2.87% in the same period.
Technical pressure is mounting on small-caps, with IWM failing at the R1 level ($202) after previously bouncing earlier in the week. Significant downside could manifest if IWM does not bounce on Monday, with the next support level at $196 (M-Trend, -2.58%). Investor’s chief concern is the heightened economic vulnerability exhibited by smaller companies, as well as higher market rates.
The same concern regarding the economy did not translate into strength for treasuries. TLT fell -1.83% to S2 support following the BLS report. The move only makes sense if one interprets the headline 272K number as “hot and inflationary”. This was not our take at all, and we expect the bond market to reprice next week and support to hold. The key data point will be published on Wednesday (headline and core inflation), and it will be critical for our positioning in the treasury market.
On Wednesday, interest rate traders were pricing in a 65% chance of a September rate cut. As of Friday’s close, the same cut was priced at 50.5% odds, a hawkish shift which is really quite baffling given the economic data.
Our Trading Strategy
We are closely watching for interest rates to retreat (and expect bonds to hold support). Lower rates should also support small caps. If we are wrong, the only sensible move will be to cut exposure to both TLT and IWM from our portfolio and pivot to larger cap companies. In this sense, we are simply following the clues that the market is giving us.
Another asset class that caught our eye was Gold (GLD), which has recently corrected from all-time-highs. Bullion is nearing an excellent entry point, and we’d like to get exposure to that as well, especially if the position in TLT gets decreased on a stop-loss.
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