Weekly Market Update Highlights
• The U.S. economy added 559,000 jobs in May—an improvement over April but still short of forecasts. The unemployment rate dipped to 5.8%.
• Initial jobless claims fell to 385,000 for the week ended 29 May, marking their first reading below 400,000 since the pandemic began.
• The ISM Manufacturing Index beat expectations and rose to 61.2 in May, while the Services Index surged to a record high of 64.
• The 10-year U.S. Treasury yield edged down last week, closing at 1.56%.
Global equity markets were broadly positive last week. Gains for the S&P 500, DJIA and Nasdaq came in close to or modestly above 0.5%, while outside the U.S., the MSCI Emerging Markets (1.6%) and ACWI ex-USA (1.o%) benchmarks outperformed the developed-market MSCI EAFE (0.7%). The S&P 500 and the three MSCI indexes have risen in seven of the past 10 weeks.
Economic Week In Review
• While trading in U.S. equity markets was relatively quiet during the holiday-shortened week, the economic calendar was busy. Strong manufacturing and service-sector growth in May was tempered by the lackluster jobs report, reflecting an economy that is hot but not overheating.
• Energy led all U.S. sectors, rising 6.7%, followed by real estate (3.0%) and financials (1.7%). Value extended its outperformance over growth, and small caps continued to beat large caps. Consumer discretionary (-1.0%) and health care (-1.2%) were the only sectors to post a loss for the week.
• Volatility in “meme” stocks returned, with a surge in call option volume indicating individual investors are again heavily engaged with some of these names. While we expect large swings in a limited number of specific stocks, we don’t believe this will be a precursor to a broader market selloff.
Market Drivers And Risks
• The Fed is likely to remain on the sidelines. May’s frustratingly low job creation gives the Fed cover for maintaining its ultra-accommodative monetary policy and refraining from “taper talk,” even in the face of robust economic activity. This should help ease investor concern that the economy is running too hot.
• Wage inflation, however, remains a concern, as average hourly earnings growth once again came in stronger than expected last month—in part because employers likely had to incentivize new hires with higher pay. With more than 9.3 million people still out of work despite a record-high 8.1 million job openings, further wage pressures may well be in store.
• Not much relief from U.S. policy uncertainty. Ongoing negotiations on various tax and spending issues have yet to bear much fruit. But last week saw some new developments, with President Biden proposing a corporate tax floor of 15% in lieu of raising the corporate tax rate to 28%. Biden also offered a compromise on his infrastructure package ahead of a 7 June deadline to either reach an agreement or pursue a Democratic-only solution.
• On the international front, the president signed an order banning U.S. investment in several Chinese companies, including Huawei. The order amends an existing Trump administration policy and will take effect on 2 August.
• Vaccinations = economic recovery. Most developed nations have made good progress in vaccinating their citizens against Covid-19. Not surprisingly, the economies of these countries are experiencing faster and stronger rebounds than their emerging markets counterparts, where access to vaccines and efficient health care delivery remains challenged.
• In particular, virus case counts are spiking in certain parts of Latin America and Africa, perpetuating public health and economic crises.
Risks To Our Outlook
Inflation concerns are coming into sharper focus. In addition to the sizable gain in average hourly wages, the ADP jobs release showed unit labor costs rising by a higher-than-expected 1.7%. If employers continue to increase pay to attract or retain workers, inflation pressures could be deemed as more than transitory, forcing the Fed to discuss tapering more openly.
Related, we think labor supply constraints may exert a drag on the economy’s return to “normal.” With businesses finding it increasingly difficult to fill positions, we are starting to see signs of flattening mobility, which could hamper economic and earnings growth.