Hope you are all doing well. The major U.S. stock indexes rose for the second week in a row, recovering much of the ground lost during three weekly declines in April. The Nasdaq was the best performer, up 1.4% for the week. As yesterday was Cinco de Mayo, I broke down this week’s update using the slogans of the major Mexican beer brands.
Stay Thirsty My Friends. – Dos Equis
The Federal Reserve remains thirsty for lower inflation. Last week, the Fed held interest rates steady. Keeping the benchmark interest rate at the highest level in more than two decades. Fed officials acknowledged that they have recently seen “a lack of further progress” in bringing inflation closer to the Fed’s 2% long-term target rate. Their commentary indicated conditions are not improving at a pace that would support a change in policy setting anytime soon. I continue to believe the next Fed rate move will be a cut at the tail end of this year.
Find Your Beach. – Corona
The US economy has found its beach with a strong labor market spurring GDP growth despite an aggressive Fed. However, now with inflation ticking higher the stock market is again looking for help from the labor market. This time hoping for bad news. When workers get raises, companies pass that cost off to consumers in the form of higher prices. So it is harder to get inflation under control if we have higher wage growth. The ideal scenario for stocks is if the labor market softens enough to allow wage growth to fall but not enough to turn the job gains into job losses. So we are rooting for slightly bad news. Knowing what the market is looking for helps explain some of the moves we saw in stocks. Early in the week, the Employment cost index (ECI) showed wage growth as higher labor costs were reported. Markets responded with a Tuesday sell-off, because again higher labor cost leads to higher inflation. Friday we saw a significant rally in stocks following the release of a cooler than anticipated jobs report. The U.S. economy is still adding jobs, 175,000 in April, but at a slower pace. However the real driver of the rally was that year-over-year wage growth ticked down to a three-year low of 3.9%, down from 4.1% the previous month. This helped offset the concerns from the ECI data earlier in the week.
Brewed For Those With a Fighting Spirit. – Modelo
Markets have been resilient over the last few months as we have dealt with an escalation in the Middle East and a change in expectations for Fed rate cuts. The market went from pricing in six rate cuts to one rate cut in 2024. The reason we have seen only a 5% pullback is earnings growth. We are now finishing up another very strong earnings season and the outlook remains great. Earnings growth for the Magnificent Seven (Nvidia, Tesla, Meta, Apple, Amazon, Microsoft, and Alphabet) has topped 50% in the last two quarters. Those companies have not been impacted as greatly by the higher labor and borrowing costs that has caused the earnings for the remainder of the S&P 500 to be flat to down. However the other 493 stocks in the S&P 500 are showing they have some fight in them. The most encouraging sign from this earnings season is that earnings across other non-tech sectors are finally gaining some momentum. Earnings growth in the most recent quarter was strong in the consumer discretionary, communication services, health care and industrials sectors. The next leg of this bull market is going to need more than just 7 stocks producing all the gains so this is a very encouraging sign.
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