Now What? After Monster May Jobs Report, Debt Ceiling Resolution, Market Searches For New Themes

(Monday market open) With the drama of earnings season, the debt ceiling battle, and last Friday’s crucial jobs report in the rear-view mirror, Wall Street enters the week seeking new catalysts.

Major indexes posted new 2023 highs Friday following the May jobs data, but much of this year’s performance was driven by a handful of info tech and communication services stocks that all boast dramatic gains. The rest of the market basically has treaded water. And this week’s light data and earnings calendar doesn’t offer much direction.

The S&P 500® Index (SPX) starts this week on the cusp of a new bull market. A close of 4,292 or above would represent approximately a 20% gain from the 2022 low close of 3,577 posted last October 12. A 20% gain from the bottom represents a new bull market. That said, the SPX is still down about 11% from its all-time high close of 4,796 posted January 3, 2022.

You may recall a strong rally last summer. But the 17% rally that lasted from mid-June 2022 through mid-August 2022 lifted the SPX just 17%—not enough to put it into bull market territory.

After being outperformed so far this year by every other S&P sector, energy sector shares got a boost this morning when Saudi Arabia decided to cut crude production again over the weekend. That sent WTI crude (/CL) up more than 2% and gave some of the major energy firms a boost in premarket trading. The sector came into the week down 9% for the year. Two months ago when OPEC announced a surprise production cut, it helped ignite a 20% rally in energy shares—all of which they gave back by early June.

Morning rush

• The 10-year Treasury note yield (TNX) rose 6 basis points to 3.75%.
• The U.S. Dollar Index ($DXY) climbed to 104.29.
• The Cboe Volatility Index® (VIX) futures traded near three-year lows at 15.15.
• WTI Crude Oil (/CL) jumped to $73.22 per barrel after Saudi Arabia said it would cut production.

Saudi Arabia’s production cut of 1 million barrels of crude a day is a voluntary one. OPEC and its allies left overall production quotas unchanged at their weekend meeting. The Saudi decision came as a surprise to some analysts and reinforced ideas that the country is determined to defend the price of oil.

Volatility fell to its lowest levels since before the pandemic late last week, below 15 for the VIX. Sometimes a very low VIX can be a contrarian indicator of overbought conditions in the stock market. Today’s rise in the dollar and Treasury yields is also slightly concerning, and bearish sentiment remains elevated.

What to Watch

The SPX is now up 11% year to date and has broken out of a trading range it had been stuck in for some time between 3,800 and 4,200 on the charts. For a long time, 4,200 represented a tough technical resistance level, but that’s now been taken out.

From a sectors standpoint, Friday’s rally saw traditional “cyclical” sectors like materials, energy, and industrials take the lead instead of the usual suspects, info tech and communication services. The PHLX Semiconductor Index SOX, which had been on a tear late last month, dipped slightly on Friday as most of the market skyrocketed on what was the best trading day of the year. This could be a healthy development, indicating that perhaps investors aren’t so fearful of recession. Cyclical sectors tend to perform better when the economy is firing on all cylinders.

It was also refreshing to see financial companies among the strongest performers Friday, with the KBW Regional Banking Index KRX rising more than 6%. There’s an old saying that it’s hard to rally without the financial sector participating, and it’s been a real drag on the market so far this year. One day doesn’t change that, of course, but it’s progress.

Stocks in the Spotlight

Stay tuned for Apple’s AAPL Worldwide Developers Conference, which begins today. The highlight of this annual conference is usually product announcements, and this year the company’s “mixed reality” headset introduction could take center stage.

Q1 earnings season was 99% over through the end of last week and the overall S&P 500 earnings per share (EPS) decline came in at 2.1%, Factset notes. It was the second straight quarter of declining year-over-year EPS, which is often defined as an “earnings recession.” Still, things turned out much better than the 6% losses analysts had initially expected. We’re almost certainly not out of the woods yet, as analysts predict a 6.4% year-over-year earnings decline in the current quarter. However, that could set up the market for positive earnings surprises, considering the bar is rather low.

What’s not low is the SPX’s forward price-earnings (P/E) ratio, which FactSet pegged at 18 before Friday’s rally. That’s above the 10-year average of 17.3, which suggests stocks might have a challenge keeping this rally going if earnings estimates don’t start to improve. One area to watch for potential resistance on the SPX chart is 4,325, which represents last summer’s intraday high.

Eye on the Fed

Chances of an interest rate pause at the June meeting stand at 77% as of this morning, according to the CME FedWatch tool, which also prices in a nearly 70% chance that rates will rise by July. The May jobs report didn’t end up influencing June rate expectations too much, perhaps a sign that recent dovish remarks by Fed officials got heard loud and clear by market participants.

The Federal Open Market Committee’s (FOMC) meeting is June 13–14, beginning on the very day of the critical May Consumer Price Index (CPI) report. However, unless the CPI is absolutely off the charts hot, a pause might not surprise many.

The term “pause” doesn’t mean “end.” Fed officials have been telegraphing more of a “skip” that would allow them an extra month to contemplate the impact of more than a year of rate hikes on the economy. There’s now a 68% chance built into the futures market that rates will be 25 to 50 basis points higher after the July meeting than they are today, according to the FedWatch tool.

May’s monster 339,000 jobs growth initially fueled concerns the Federal Reserve might see the data as inflationary. However, there were some caveats that tempered those worries, including wages rising just 0.3%, down from 0.5% in April and in line with analysts’ expectations.

Robust jobs growth keeps the potential for a Fed rate hike at the June meeting alive and reduces the likelihood of rate cuts later this year, notes Kathy Jones, chief fixed income strategist at Schwab. We’ll have to see how the inflation data turn out, she adds. That’s the next hurdle for the market.

CHART OF THE DAY: : BULLY. The S&P 500 index (SPX—candlesticks) came within a whisker Friday of reaching bull market territory, defined as a 20% gain from the most recent long-term low close. If the SPX can close above 4,292 (red trend line), it would represent a 20% rise from the last October 12’s close of 3,577. Data Source: S&P Dow Jones Indices.Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Summer travel: Recent retailer earnings reports emphasized a cautious consumer not eager to buy “want to have” items and focused on staples. As consumers avoid discretionary goods, services inflation remains high and points toward people spending more on experiences. That would suggest some resilience in experience-related stocks like casino, airline, and hotel companies, but that’s not exactly the case. Airline shares are holding their own ahead of what industry executives said could be a busy summer travel season. But casino shares are losing at the slots, with shares of major companies mostly lower over the last month. Hotel chain shares aren’t getting as many visits as they might desire, either, for that matter. Also, shares of Walt Disney DIS, which has its white-gloved fingers on the pulse of consumer spending on theme parks, movies, resorts, and other entertainment, are down more than 20% from their early February peak close for 2023.

Moving truck: If you’re closely following consumer sentiment, one idea is to keep an eye on the Dow Jones Transportation Average ($DJT), which has been flat over the last month. This index touches both discretionary and services spending, as it includes trucking and delivery companies along with airlines. It’s down about 9% from its 2023 closing high set back in early February, but if it starts creeping up it could give you advance notice of consumers starting to open wallets again. The $DJT moved much higher on Friday after the debt ceiling crisis ended and the May jobs report indicated further resilience in the economy.

Jobs Divergence: Last Friday’s May Nonfarm payrolls data underscored a widening gap between the establishment survey, which polls businesses and showed growth of 339,000, and the household survey, which showed a drop of 310,000. The dichotomy between the data from these two reports has been growing for some time, leading some analysts to wonder if the establishment survey is somehow overestimating jobs growth. It shows jobs growth of 3.8 million over the last year, while the household survey shows growth of 2.4 million. One hypothesis suggests that the discrepancy is due to people taking multiple part-time jobs, showing a larger number of positions on payrolls than the number of people who report working.

Calendar

June 6: No major earnings or data.

June 7: April Trade Balance and April Consumer Credit and expected earnings from Campbell Soup (CPB).

June 8: April Wholesale Inventories.

June 9: No major earnings or data.

June 12: No major earnings or data

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image sourced from Shutterstock

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