- The U.S. economy stands resilient, defying the looming threat of a recession. With job gains, improving inflation, and steady corporate profits, it displays strength amidst weaknesses in manufacturing and commercial real estate.
- May brought a mixed bag for stocks, with the S&P 500 showing cautious progress while the NASDAQ soared with the support of tech giants.
- Early June witnessed a significant market boost, driven by positive economic indicators such as robust employment gains and signs of cooling inflation.
- And we’ll talk a bit about AI, too…
This might be the greatest recession ever for the U.S. economy. Consider that 339,000 jobs were added in May, inflation is on the mend (we received more encouraging data on that front to kick-start June), corporate profits are not seeing any meaningful downturn, and there are inklings that the housing market is finding its footing.
The Recession That Just Won’t Come
Being realistic and serious for a moment, we are not in a recession. A recession is hallmarked by employment losses, contraction in both the manufacturing and services sectors, dismal consumer spending, and negative earnings on Wall Street. We just aren’t seeing that across the board. The sore spot is no doubt manufacturing and in parts of commercial real estate, but the pain is primarily confined to those sensitive spots.
A Mixed Bag in May
Last month, the S&P 500 inched higher by less than 1% while the tech-focused NASDAQ Composite surged almost 6% on the heels of monster leadership from mega-caps like Apple, Microsoft, Google, and the like. Small caps struggled with a loss of about 1% while foreign equities gave back some of their 2023 gains, falling 3%. Bonds, meanwhile, had negative returns care of rising interest rates throughout much of the month.
An Early June Jolt
But the real fireworks took place on the first pair of trading days this month. Following news of a debt ceiling agreement in DC, Wall Street was able to get back to business, focusing on earnings, economic data, and price action. The lengthy debates between Democrats and Republicans were a sideshow, and nearly all market participants recognized that. Unlike in 2011, there was no major stock market volatility spike or major dip in the S&P 500 this go around. It is yet another example of scary headlines having more bark than bite.
Job Market Gains, Easing Inflation – The Fed’s Fine with That!
Stocks surged on June 1 and 2 – not because of the conciliatory tone at the White House and on Capitol Hill – but because of downright upbeat economic news. After a solid ADP private sector payrolls report on Wednesday, suggesting robust employment gains for May, the key ISM Manufacturing dataset for the previous month brought mostly good news, too.
Manufacturing Activity Troughing
Cost Pressures Backed Off in May
Easing Wages – Good News on Inflation
Then Friday’s official jobs report was about as good as it gets. While the unemployment rate indeed spiked to 3.655% (above the 3.5% expectation), if we parse through the payrolls statistics, we uncover more encouraging news on the inflation front. Average hourly earnings and average weekly hours worked both verified less than forecast – another set of sanguine data points for the Fed to digest.
The May Employment Situation: Cooler Than Expected Wage Figures (And More Jobs Gains)
Source: Bloomberg
All Eyes on the June 14 Interest Rate Decision
Here’s why what the Fed does is so important right now – it’s not so much a potentially bearish case, but rather the optimistic scenario that Wall Street is finally coming to grips with. If inflation continues to cool, and there is no downturn in employment, then the goldilocks “no landing” could actually happen sooner rather than later. It appears stocks began pricing in that chance, too.
Music to the Market’s Ears
Between Thursday and Friday last week, the S&P 500 jumped 2.5%, reversing all the losses from May. Even more bullish, cyclical small caps surged nearly 5%. The Nasdaq, which has been the leader in 2023, also sported 2% gains late last week. From an economic perspective, lower interest rates ushered in by the Fed amid a steadily growing economy is an ideal backdrop, and from a stock market perspective, a broadening out of leadership from the mega-cap tech stocks to, say, financials, industrials, and small caps, would be even more encouraging.
A Summer Soft Landing?
And we think that can happen now that the so-called “soft landing” narrative is beginning to take hold even among the most doubtful economists out there. It might be time for mega-cap tech, which is up a cool 50% on the year by some measures, to pass the baton to this year’s laggards. Be on the lookout for new leadership from the beleaguered regional bank stocks, unloved industrials, and maybe even some commodity-related companies.
The ElephAInt in the Room
More broadly, let’s talk about AI. You know we couldn’t bypass all that’s going on with this game-changing technology. Nvidia (NVDA) soared last month – it’s the most important artificial intelligence-related stock since it is the key supplier of semiconductor chips that are required to meet the storage and processing requirements of AI. Think of it like the provider of picks and shovels to the gold rush of 1849.
NVDA reported monster earnings back on May 25, but it wasn’t so much the Q1 profit figure that stunned Wall Street. It was a seismic increase in NVDA’s Q2 sales outlook that was the jaw-dropper. Revenue is expected to be $11 billion for the current quarter compared to a consensus outlook of just $7.1 billion.
Taking a GlAIss Half Full Approach
AI promises to be a revolutionary technology. While many people fear what it might do to knowledge-based and clerical jobs, history shows that such efficiency improvements lead to more jobs – most of which we cannot even think of today. Sure, there are risks with AI, and the uncertainty is real, but there should be more hope than trepidation in our view. As for the stock market, it could be like the internet revolution all over again, helping to make the “roaring 20s” mantra for real. We’ll see.
The Bottom Line
May was a mixed bag for stocks and bonds. Yields rose as economic optimism generally increased, though gains in the market were largely focused on the same handful of big-cap tech-related companies. But a new month brought a new wave of buying. Last Thursday and Friday featured broad-based strength, capped by a robust jobs report that helped send small caps surging to their best day since last November. As inflation tapers and economic growth appears to be holding on, a soft landing or no landing at all appears within grasp.
