Weekly Commentary: May 30 - June 5
THE WEEK IN REVIEW: May 30 - June 5
The market is the only game in town
We saw a strong May jobs number on Friday, although the 559,000 jobs added were below the consensus expectation of 671,000. The additions were still healthy, and the worst fears floated around after the massive miss in April have not materialized. The ADP employment situation report on Wednesday was also strong, coming in at 978,000. In addition, the unemployment rate dropped to 5.8%, a level we haven't seen since March 2020.
Yes, weekly unemployment claims are decreasing, but they're still high by historical standards. In an expanding economy, initial unemployment claims should be in the 200,000 to 300,000 range; last week the number was 385,000. Whether it's lingering effects of enhanced unemployment benefits or fear of infection that's preventing a more robust return to the workforce is hard to pin down. But with the virus in retreat, fears of infections should decrease as we move into summer. Half the states will stop federal enhanced unemployment benefits in the next few months, and the program is expected to end by September for everyone (unless it's extended).
In-person school should be back by September as well, giving those folks who have remained at home to teach and care for their kids an opportunity to return to work. All of these factors may be contributing to muted jobs results. It will be interesting to see what the jobs landscape looks like when the floodgates open. Currently, there are about 8 million job openings out there. Will there be something for everyone by the end of the summer?
That brings us to the Federal Reserve. So long as job growth remains muted, at least in the near term, the Fed is off the hook and can continue its current course of pumping liquidity into the markets. Rates will likely remain low and the stock market will likely continue to be the only game in town. If, however, inflationary pressures continue to build and the Fed begins to signal its willingness to address it, we could have a problem. My concern would be that as the Fed begins tightening to curb inflation, it would do so at exactly the time when all the job seekers are hitting the employment market. Employers would then scale back growth and hiring plans due to reduced liquidity and an increased cost of capital. It would potentially be a double whammy: People coming off unemployment would likely be unable to find work just as higher rates cool the economy. Screams for more stimulus and easing would be renewed. It could be a vicious circle.
In my view, the stock market is not taking that possibility very seriously. Instead of looking six months ahead into our economic future, it's only looking at the very near term. That's why we are seeing markets sitting at current levels. They're not confident enough to go forward and uncomfortable with accepting the alternatives just described.
Where's the beef?
My favorite new phrase is "Meat Hack." (Kinda rolls off the tongue, doesn't it?) Last week, Russian hackers sidelined JBS, our country's largest meat processor, which controls 20% of the U.S. beef market. After hearing about the incident, I couldn't help but think of the line from the Coasters' song "Charlie Brown." You know, the song where the guy with the really deep voice asks, "Why is everybody always picking on me?"
Our meat supply got hacked, our gas supply got hacked. What's next, our water supply or financial markets? The government's reply: Businesses need to bolster their cyber defenses to prevent hacking. Sure, putting locks and alarms on buildings and securing websites should be every company's responsibility. But when you have criminal elements outside the country attacking and paralyzing our internal infrastructure and food supplies, I want some action from our government. Isn't there something in the preamble of our Constitution that calls for providing for the common defense and promoting the general welfare? I would think not having food or being able to travel within our borders fits that bill.
Make no mistake: We live in a world where the concept of warfare as we all knew it has changed. Our military is so lethal that it would be suicidal for any nation to be openly aggressive toward us. Instead, crippling our infrastructure to weaken our economy and create a state of unrest is the most effective way to defeat our country. As I see it, the most recent lessons from the pandemic should show us that 600,000 dead and an economy that stalled for a year can bring this country to a standstill. What if the next pandemic is planned and executed intentionally? In my mind, we need a better plan from our government to defend against this type of bad international behavior, or our markets and the economy will slowly crumble and collapse. We could go out as
T.S. Eliot so elegantly put it, "Not with a bang, but a whimper."
Coming this week
Markets will continue digesting the June jobs report this week, including what it may mean concerning action or inaction on the part of the Fed and the future of interest rates.
We'll get the JOLTS (Job Openings and Labor Turnover Survey) report on Tuesday, completing the employment picture. Hopefully, openings will begin to decline as people come off the unemployment rolls. We'll also see Small Business Optimism Index reading and international trade data that same day.
Mortgage applications on Wednesday may give some confirmation that housing activity may be slowing.
CPI on Thursday will give us a reading on inflation. This will be a big one to watch this week.
Finally, Friday will be quiet, with consumer sentiment the only data point.
Have a great week!
Tom Siomades, CFA®
Chief Investment Officer
AE Wealth Management
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