It’s a new month, but a similar theme: The Stock Market just doesn’t want to go down.
It had been trading sideways since March, in a very tight range. June started out with a bang and the rally continued, with the DOW and S&P reaching fresh new highs. It keeps happening in the face of so much turmoil and confusion in Washington and around the globe. Many are just scratching their heads in disbelief.
It seems so counterintuitive, but it shows that stocks are driven more so by earnings and corporate growth than politics and geopolitics.
Friday brought a disappointing job report. What’s worse, both April and March were revised lower, showing the labor market is not as strong as previously thought. A big problem is the fact that some jobs can’t be filled due to the lack of qualified skills, particularly in Silicon Valley. It may also be a sign business leaders are reluctant to expand their workforce until they see more evidence the White House plans are translating into legislation that’ll simplify and lower taxes and accelerate growth. Our sense is this Market had been pricing in tax reform and other pro-growth policies being passed in early 2018, not this year, but it’s still very much up in the air.
With these revisions, the 3-month average of payroll gains was the weakest since 2012.
Is the economy slowing or is it a temporary issue?
The Bond Market is showing some signs of concerns with the 10-Year Treasury yield back below 2.2% for the first time this year. Money has been flowing into Bonds of late, seeking a little safety. As a refresher, Bond yields drive prices. When yields go up, prices go down and vice versa. Will this new bit of uncertainty have the Fed switching gears? It doesn’t seem so, with the Futures Market pricing in a 91% probability of another interest rate hike in 2 weeks. We will find out soon enough. One thing is certain, there still is a great deal of skepticism out there.
As we’ve mentioned on numerous occasions, Bull Markets generally grow on skepticism and die on euphoria. There is very little euphoria out there, but there is some brewing. We’re starting to see it in Tech, where some stocks have been soaring while the broader Market has not. The Top 5 stocks in the S&P 500 are having a huge impact on this Market rally. They are Apple, Google, Microsoft, Amazon and Facebook. Case in point, these 5 stocks represent a mere 1% of the 500 S&P companies. However, they represent nearly 13% of the weighting of the index. These 5 Tech stocks have been the biggest drivers for the US Stock Market. It’s even more pronounced when you consider the Tech-heavy NASDAQ. The same 5 stocks represent over 40% of the weighting of the NAS 100 index. It’s a handful of stocks that are driving the rally. It’s a momentum rally. The Bull Market is maturing. A rotation of leadership is overdue. It’s needed for the next stage of this Bull, in our work. We still see higher levels to be reached. We definitely expect the choppy price action to continue.
Have a nice weekend. We’ll be back, dark and early on Monday.