Wentz Weekly: Labor Data Still Mixed, Stocks Still Driven By Mega Caps

Wentz Weekly Insights
Labor Data Still Mixed, Stocks Still Driven By Mega Caps

A trend that we saw for much of 2023 and a portion of the first half of 2024 strengthened the past two weeks. That is the narrowness in the market and the outperformance of the megacap companies (more specifically the top seven, referred to by most as the ‘Magnificent 7’) compared to the average stock. This past week the S&P 500 gained another 1.4% to a new record high, with the tech-heavy Nasdaq rising a stronger 2.4%, both rising six of the past seven weeks. Meanwhile the equally weighted S&P 500 index fell 0.7%, reflecting weakness in the rest of the market, and the small cap focused Russell 2000 fell 2.1%.

The fixed income market saw a small rally to start the week, but as we touch on in a moment, that faded on Friday with the latest labor market data. However bonds still finished the week higher overall. The 2-year Treasury yield fell as much as 22 basis points, but finished the week down roughly unchanged at 4.90% while the 10-year yield fell as low as 4.27% (down 23 bps), but finished the week at 4.44%. Good economic data has consistently sent Treasury yields higher, while slowing or ‘as expected’ data has sent yields lower – both due to the perception of how that will affect the Fed’s decision making when it comes to possible rate cuts.

While on the central bank topic, last week the Bank of Canada and European Central Bank both took the first steps in reducing interest rates, each cutting their policy rates by 25 basis points. They became the second and third central bank to cut rates this cycle (after the Swiss Bank did several weeks ago). This puts them on a potentially separate path from the Federal Reserve, who has recently indicated rate cuts may not begin until the end of the year. We will see more detail on the Fed’s thoughts regarding this on Wednesday week when the FOMC meeting concludes. The meeting will include the quarterly update to policymakers projections on rates, inflation, economic growth, and unemployment.

One of the bigger corporate headlines was the continued momentum in Nvidia, the chip maker that powers artificial intelligence and accelerated computing. The stock rose another 10% last week and the company’s market capitalization just passed $3 trillion, becoming only the third US company to do so, and on Thursday passed Apple as the second largest US listed company. Nvidia now carries a 7% weight in the S&P 500 index, a major jump from its 0.35% weighting just five years ago. In addition, the top three companies (Microsoft, Nvidia, and Apple) account for one-fifth of the S&P 500 index for the first time ever (since data started being tracked), and the closest it got to 20% prior to this instance was in September 2020 when Apple Microsoft and Amazon made of 19.9% of the index.

The start of the new month means it was jobs week – where we saw economic data updates on the labor market. Economic data as of late has been somewhat confusing – all of inflation, labor market, consumer spending, wages, and manufacturing data have bounced back and forth from positive to negative this year.

Regarding the labor market, last week’s data showed up jobless claims held steady, ADP’s payroll data for May was a little strong than expected, the job openings survey suggested a big drop in the number of job openings, but most importantly the labor report on Friday showed businesses added many more jobs in May than expected, however, unemployment increased.

The Department of Labor’s May employment report showed businesses added 272,000 jobs, much more than the 180,000 expected, with most job gains in health care, leisure and hospitality, and government. In addition, prior two months saw small revisions (a net 15,000 less jobs). In addition, the establishment survey showed the average wage increased 0.4% in the month and 4.1% from a year ago, both higher than expected and both the highest since the beginning of the year. These two strong numbers led to worries inflation will remain sticky (the thought is strong labor market and faster wage growth leads to stickier inflation).

As we reported on in our May 6 newsletter (see here), the establishment survey which provides the above data has conflicted with data from the household survey. Just as is sounds, this survey is given to households versus the establishment survey that is given to businesses. The household survey showed overall employment fell by 408,000 while the number of people unemployed rose by 157,000. The number unemployed is the highest since November 2021 at 6.649 million (number employed remains near highs from a strong economy and population growth).

The result was a 0.2% increase in the unemployment rate to 4.0%, the first time over 4% since January 2022. After seeing two job openings for every unemployed person for much of 2022 and 2023, that ratio has steadily declined and now sits a 1.21 job openings per unemployed person.

Investor have put more weight on the headline number of 272,000 (not to mention faster wage growth), which explains the decline in stocks and pickup in Treasury yields on Friday for the fear of stickier inflation and higher rates for longer.

The next catalyst is the FOMC meeting and the consumer inflation report Wednesday which should provide markets with better direction after a couple weeks of quietness.

For the week the major U.S. indices finished as follows: Nasdaq +2.38%, S&P 500 +1.32%, Dow +0.29%, and Russell 2000 -2.10%. Bonds had a positive week with the two-year Treasury yield unchanged at 4.90% while the 10-year yield fell to 4.44%. Oil saw a sizeable decline to start the week and never recovered after OPEC’s recent meeting, finishing the week down 1.96% for the third consecutive weekly decline. Gold had a positive week until Friday’s decline, resulting in a 0.9% weekly drop, and the dollar index 0.2% mainly due to sterling and euro weakness.

Recent Economic Data

• Employment Report: According to the Dept of Labor’s May employment report, the labor market remains strong and there remains solid demand for labor by businesses. The report released this morning noted businesses hired 272,000 people, more than the 180,000 expected. The report always sees revisions, and the past couple years revisions have consistently been to the downside – March was revised down 5k to 315,000 and April was revised down by 10k to 165,000. Most job gains were seen in health care, leisure and hospitality, government, professional services, construction, and retail, with small losses in temp help. The average hourly earning rose 0.4%, which is higher than expected and the strongest increase since the beginning of the year with the average wage up 4.1% over the past year, which has accelerated and is the highest since February. The average length of the workweek was unchanged at 34.3 hours. Turning to the household survey, the labor force declined 250k leaving the labor force participation rate 0.2% lower at 62.5%. Also, over thee past two months the unemployment rate has increased 0.2% to 4.0%, the first time over 4% since January 2022. The reason is the survey showed the number of people employed declined 408,000 while the number of people unemployed increased 157,000 to 6.649 million, the highest since November 2021. After moving below pre-pandemic lows of unemployment in late 2022, unemployment has steadily increased since.

• ADP Employment: ADP’s monthly payroll data shows its private payroll count grew by 152,000 in May, slightly below the 173,000 increase expected, mostly due to a decline in manufacturing and slowdown in hiring in leisure and hospitality. Payroll growth was seen in all businesses sizes outside of those between 20-50 employees. The report noted a solid labor market but “notable pockets of weakness tied to both producers and consumers.”

• Job Openings and Labor Turnover Survey: The number of job openings on the last day of April was 8.059 million, another drop from the prior month with openings falling 296k from March, according to the job openings and labor turnover survey. In fact, job openings are at the lowest level since February 2021 and is the last time we saw openings under 8 million. Over the past year there has been a decline of nearly 2 million job opening. For comparison purposes, job openings pre-pandemic peaked at 7.6 million and averaged 6.37 million the 5 years prior to the pandemic. The number of separations was relative unchanged at 5.372 million (down 200k over the past year) with quits rising 100k to 3.507 million, and down 100k over the past year. Overall, this is additional evidence of a slowing/normalizing labor market. there are still 6.5 million people unemployed, equaling 1.24 job openings for every unemployed persons.

• Jobless Claims: The number of unemployment claims the week ended June 1 was 229,000, an increase of 8k from the prior week. The four-week average was relatively unchanged at 222,250. The number of continuing claims was 1.792 million, up just 2k from the prior week, with the four-week average up 3k to 1.788 million.

• ISM Manufacturing Index: The ISM manufacturing index was the opposite – the index was 48.7 for May, down from 49.2 in April and below the estimates of 49.8. New orders deteriorated further, resulting in lower production, while backlogs declined further as well. Employment surprisingly improved and the prices index fell nearly 4 points to a still elevated 57.0. The report noted demand remains elusive as companies show unwillingness to invest due to high rates/tight financial conditions and other conditions.

• PMI Manufacturing Index: The PMI manufacturing index was 51.3 for May, a surprise to the upside – beating estimates of 50.9 and improving from 50.0 from April and indicating expanding conditions. The index has only been over 50 (expansion territory) twice since October 2022, which occurred earlier this year. New business returned to growth, supporting an increase in production and business confidence. Employment improved as well. The downside was input cost inflation picked up the fastest in over a year resulting in higher selling prices.

• Factory Orders: Factory orders increased 0.7% in April, right in line with expectations, however March’s increase of 1.6% was revised down to a 0.7% increase. Shipments of factory goods were even better with a 1.0% increase, both up three months in a row. Transportation equipment led the increase in both, up 1.1% for orders and 3.4% for shipments. The final read for April of the component that goes into calculating GDP, shipments of nondefense capital goods excluding aircraft rose 0.4% in the month after a 0.3% decline in March.

• ISM Non-Manufacturing Index: The ISM services survey suggested economic activity in the services sector grew in May after a contraction in April for the first time since December 2022. The ISM services index was 53.8 for May for the best in nine months, and better than the 50.7 expected. The report saw a pickup in new business. Two of the components with most attention was employment at 47.1 which was up slightly but still disappointing as it remains under 50 and shows weak hiring, while prices paid was 58.1, a slight downtick from last month but still elevated and still higher than where it started the year, suggesting inflationary pressure still exist.

• Construction Spending: April construction spending declined 0.1% versus the expectations for a 0.2% increase. The decline was due to a 0.3% decrease in nonresidential construction spend and partially offset by a 0.1% increase in residential spend. Compared to a year ago spending is up a strong 10.0%, driven by both a 8.1% increase in residential and 11.5% increase in nonresidential.

• Trade Data: The most recent trade data for April shows the U.S. trade deficit increased $6.0 billion to $74.6 billion in the month. The increase in the deficit was due to a much larger increase in imports than exports – imports in April rose a solid $8.0 billion, or 2.4%, while exports rose $2.1 billion, or 0.8%. While the large increase in imports could signal further domestic demand, it is a negative to GDP since GDP looks at net exports (exports minus imports). Another way to look at the trade data is trade activity, or volume of trade. Trading activity is $70 billion, or 3.0%, higher year-to-date through April than it was the same period in 2023.

• Vehicle Sales: There were 15.9 million vehicle sales in May (on an annualized pace), a little better than expected and picking up from Aprils annualized rate of 15.7 million. Good news for the manufacturing sector. about 7.5%. 

Company News

• Computex Trade Show: At the Computex trade show in Taipei, Taiwan, many semiconductor companies announced next generation chips and AI accelerators that power everything artificial intelligence related.
  • On Sunday, prior to the Computex trade show, Nvidia announced its plans to shorten its upgrade cycle to annually, now rolling out upgrades to its accelerated computing chips each year. It also said it would rollout the next generation of its powerful data center chips, revealing the new platform called Rubin, in 2026. This will be the successor to its Blackwell chip platform that was recently revealed and will begin shipping this year.
  • At the same Computex trade show, AMD announced new chips that power AI that it said would be available in 2025 and provide a 35x increase in performance, while revealing other next-gen CPU and GPU chips. The company also introduced a path to develop AI chips over the next couple years.
  • In addition, Intel introduced its new generation of processors and chips in effort to compete with Nvidia and AMD, which will be priced much lower than the two.
• AI Chips To X: CNBC report said Elon Musk directed Nvidia CEO to prioritize its powerful GPU chips to its X AI business over Tesla, citing internal emails, which contradicts some statements made by Muck on Tesla’s earnings call recently. Musk responded saying Tesla had no place to send the chips, so they would have just sat in a warehouse, so directed them to X AI instead.

• AI Lawsuits: Bloomberg reported, according to people close with the negotiations, U.S. regulators, including the Justice Department and Federal Trade Commission FTC, are negotiating an agreement to divide an investigation of anticompetitive practices by some of the largest technology companies in the artificial intelligence space. It states the two regulatory agencies are getting ready to launch investigations into potential anticompetitive practices by Microsoft, Nvidia, and OpenAI. The DOJ is set to investigate Nvidia on its leading position in supply the high end chips that power AI computing, and the FTC is set to investigate Microsoft and OpenAI on having unfair advantages in the use of large language models (a use of AI).

• Spotify Raising Prices: Spotify shares rose about 5% Monday after it said it will raise prices for its premium service by $1 per month starting in July, going from $10.99/month to $11.99/month. In addition, the family and duo plans will rise $3/month to $19.99/month.

• Warner Bros. Discovery Raising Prices: Warner Bro. Discovery said it would raise the price of its ad-free Max service, following a list of other streaming providers raising prices. The price of the ad-free option will increase $1/month to $16.99/month. Max has three offerings currently – an ad supported option, and ad-free option, and an ultimate ad-free option that allows for more devices and downloads.

• Waste Management: Waste Management announced it has agreed to Stericycle for $62/share, or $5.8 billion, a 12.5% premium to where shares traded prior to the announcement and a 24% premium to the 60-day volume weighted average price (when the rumor of an acquisition first surfaced). Stericycle is a provider of medical waste and compliance services.

• Dollar Tree Spinoff?: After acquiring Family Dollar in 2015 for $9 billion, Dollar Tree is consulting with advisors on a strategic review and possible sale or spinoff of the Family Dollar business. The report from WSJ adds the business has struggled to generate sales and requires additional investment for a turnaround plan.

• Robinhood Investment: Robinhood went forward with a $200 million investment in Bitstamp despite threats of being sued by the SEC over digital asset business and violations of securities laws. It makes it Robinhood’s largest acquisition to date and would allow the company to serve institutional crypto clients and expand offerings internationally.

Other News

• OPEC Meeting & Oil: Oil was almost 4% lower to start the week, and down 2% for the week, after a weekend OPEC+ meeting where the group decided to keep its voluntarily production cuts in place through the year, but signaled a plan to wind down those cuts starting later this year which would be earlier than expected. To recap, the oil group is cutting supply a combined 5.86 million barrels per day, under previously announced agreements that have been extended a number of times. Of that, 2 million bbl/day is from combined commitments from members, 1.66 million bbl/day of that is from voluntary cuts through the end of the year by a select number of members, while the other 2.2 million bbl/day is from voluntary cuts that will last until the end of the quarter, unless extended again. For reference, global demand is about 101 million bbl/day.

• Bank of Canada Cuts Rates: The Bank of Canada yesterday cut its benchmark policy rate by 25 basis points to 4.75%, becoming just the second central bank in the world to cut rates this cycle (after Swiss Bank). Its policymakers said with underlying inflation easing, it agreed policy no longer needs to be as restrictive, but said further cuts are expected if inflation continues to ease.

• European Central Bank Cuts Rates: The European Central Bank at this morning’s meeting cut its policy rates by 25 basis points as well, as was widely expected despite inflation data from last week that was higher than expected. It said that based on the updated inflation outlook it was appropriate to moderate the degree of monetary policy restriction. It added price pressures remain and wage growth is elevated, so policy is not on a pre-determined path. 

WFG News

WFG Anniversaries

 Wentz Financial Group recently had two employee anniversaries; Matt Norris reached his 10 year milestone at Wentz Financial Group on June 1, and Tim Porter has reached his 20 year milestone.

WFG Summer Hours

Please note that beginning after Memorial Day (May 28), Wentz Financial Group will be implementing its summer hours. We will be open and available between 8:30am and 4:00pm Monday through Friday from Memorial Day through Labor Day. As always, if you need to speak or meet outside these hours, please contact us and we are happy to set up a time that works.