Wall Street prepared to end the sunny month of May in the black, despite mixed data this week revealing a fair-to-middling economic recovery experiencing pandemic-related whiplash.
While inflation spiked, personal incomes dropped double digits, durable goods orders unexpectedly dipped, revised first-quarter GDP estimates held steady and first-time claims for unemployment benefits fell to a new pandemic-era low. Consumer spending rose 0.5% in April—a solid increase, though a far cry from the stimulus-juiced spike of 4.7% in March—as Americans continued to shed masks and head back to bars and restaurants.
Perhaps most importantly heading into the holiday weekend, new COVID-19 cases sank to the lowest level in over a year.
On a total return basis, the Dow Jones Industrial Average is up 13.5% for the year through Thursday, May 28th while the broader S&P 500 has gained 12.5%. The MSCI EAFE index, a measure of developed international stock markets, has returned 9.6%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.51%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 2.4% year-to-date.
Inflation Updraft or Just More Hot Air?
After reports earlier this month that the Consumer Price Index surged higher in April, rising 4.2% (its biggest monthly move up since 2008), it wasn’t too surprising that the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditure Index, rose a greater-than-expected 3.6%, according to figures released Friday the 28th, morning—though when you eliminate the volatile food and energy categories the inflation trend was a bit more subdued at 3.1%.
Meanwhile, personal incomes are falling, but it’s not what you think. The labor market remains strong. It isn’t the demand-supply matrix that’s at play here; rather, it’s the government’s stimulus payments. Salaries and wages were up 12.3% in April after a 4.1% rise in March.
But total income dropped year-over-year in April by a whopping 13.7% on an inflation-adjusted basis, the largest monthly decrease since 1959. Is it time to batten down the hatches?
We don’t believe a storm is on the way. Our barometer? The bond market. The yield on the 10-year Treasury sits well below where it was at the end of March, before any inkling of inflation could be found in the economic data. Friday’s personal income numbers also failed to rattle bond traders, barely nudging yields lower after the report’s release. (It may be that they are taking comfort inthe fact that March’s 20.2% year-over-year increase in income was the largest gain on record.)
The stock market, too, seems to be taking inflation in stride. Perhaps traders finally believe the message the Fed has been repeating for over a year now—it won’t raise rates for the foreseeable future because it doesn’t think it will have to.
Yet, traders might be a little too sanguine about inflation. Despite intermittent rallies, “growth” stocks (which tend to prosper when inflation is high) continue to lag “value” stocks.
We’ve said before just how murky the distinction can be between growth and value. And these days, with the rise of funds that chase factors like momentum—and rush to buy equities whose prices are quickly rising—the line between growth and value is getting even blurrier. With value stocks having their day in the sun, they may be, in aggregate, becoming the growth stocks of the current market, if momentum is any measure.
In other words, as value stocks’ prices rise, they look less and less like, well, value buys.
Growth and value aside, we’ll continue to watch for inflation storm clouds while we also look to uncover quality companies, with solid fundamentals and battleship balance sheets, that have the ballast to sail in any climate.
In the meantime, be prepared to continue to be whiplashed by the month-to-month data as the impacts of stimulus and pandemic shutdowns and re-openings work their way through the system.
Big Oil Feels the Squeeze
In an otherwise languid week for the markets, a gritty undercurrent surged to the surface: Oil companies are facing a watershed moment.
On Wednesday, a climate friendly, activist hedge fund unexpectedly won seats on ExxonMobil’s board despite vociferous objections from the company’s CEO. Meanwhile, a court in the Netherlands ordered Royal Dutch Shell to reduce its total carbon emissions 45% by 2030, and Chevron’s shareholders backed a call for the company to reduce its emissions.
These moves come on the heels of a landmark report released last week by the International Energy Agency—a longtime industry advocate—warning that oil companies must cease investing in new fossil-fuel projects if the world hopes to avert the most catastrophic effects of climate change.
Big oil’s biggest customers haven’t stood silent either: Automaker Ford premiered its electric F-150 pickup truck and announced plans to invest $30 billion in electric vehicles (EVs) in the coming years, hoping EVs will make up 40% of its sales by 2030.
Oil company stocks were down slightly on the week, though the move points less to any immediate threat to their bottom lines than to long-term pressure on the industry as a whole.
Final Comments:
The employment data for May was very encouraging. There were 559,000 new jobs added in May, the unemployment rate declined 0.3 percentage point to 5.8%, and the number of unemployed persons fell by 496,000 to 9.3 million. These measures are down considerably from their recent highs in April 2020 but remain well above their levels prior to the COVID-19 pandemic (3.5% and 5.7 million, respectively, in February 2020). Notable job gains occurred in leisure and hospitality, in public and private education, and in health care and social assistance. The number of those who permanently lost their jobs decreased by 295,000 to 3.2 million in May but is 1.9 million higher than in February 2020. The labor force participation rate dipped 0.1 percentage point to 61.6%, and the employment-population ratio rose by 0.1 percentage point to 58.0%. In May, 16.6% of employed persons teleworked because of the pandemic, down from 18.3% in the prior month. In May, 7.9 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic, down from 9.4 million in the previous month. Average hourly earnings increased by $0.15 to $30.33 in May, following an increase of $0.21 in April. Average hourly earnings are up 2.0% since May 2020. In May, the average workweek was 34.9 hours for the third month in a row.
Purchasing managers were bullish on the state of manufacturing in May. The IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ posted 62.1 in May, up from 60.5 in April — a new record high. Stronger client demand and a commensurate increase in new orders pushed output higher in May. Also, strong demand and supply constraints drove supplier prices higher, leading to the sharpest rise in cost burdens since July 2008. The rise in cost was passed on to customers, with the rate of charge inflation quickening to a record high.
According to the latest report from IHS Markit, the services sector experienced its fastest rise since October 2009. The record expansion in output was driven by an increase in new business, particularly in new export orders. Employment in the services sector also expanded, although firms reported having difficulties filling vacancies. Input costs increased, prompting service providers to pass on their higher costs to clients, with the pace of inflation quickening at the steepest rate since the survey began.
For the week ended May 29, there were 385,000 new claims for unemployment insurance, a decrease of 20,000 from the previous week’s level, which was revised down by 1,000. This is the lowest level for initial claims since March 14, 2020, when it was 256,000. According to the Department of Labor, the advance rate for insured unemployment claims was 2.7% for the week ended May 22, an increase of 0.1 percentage point from the previous week’s rate. The advance number of those receiving unemployment insurance benefits during the week ended May 22 was 3,771,000, an increase of 169,000 from the prior week’s level, which was revised down by 40,000. For comparison, during the same period last year, there were 1,605,000 initial claims for unemployment insurance, and the insured unemployment claims rate was 13.3%. During the last week of February 2020 (pre-pandemic), there were 219,000 initial claims for unemployment insurance, and the number of those receiving unemployment insurance benefits was 1,724,000.
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