This sure was an eventful week, crammed into just 4 business days after the holiday weekend. The Dow and S&P notched back-to-back weekly gains in what’s become some pretty choppy price action. Here’s a summary of what happened and why we think it matters:
There were 559K jobs created last month. That was twice the number from April’s small surprise, but less than expected again. The Leisure and Entertainment industries saw the biggest gains. Construction actually saw contraction. The unemployment rate fell to 5.8%. Perhaps most importantly, wages were up 0.5% on month and 2% from a year ago. These are some large increases in a short period of time. That said, those are numbers that the Market seems to be very ok with. Indications are they’re temporary. Companies are definitely having trouble finding workers. They’re having to pay more to keep up with the Government. Burger King was offering a $250 signing bonus. A signing bonus, at Burger King?!? That will likely change in the Fall.
The labor force actually shrunk in May. There are multiple explanations. It is obvious that some people continue to tread cautiously in recovery. Childcare is another issue, as many parents were forced out of the labor market to take care of their kids during Covid. Summer won’t remedy that situation. The cost of childcare can often be more than an income. Back to School is what will be needed to see a material increase in the labor force. It’s also hard to dispute that many Americans have opted for the large unemployment benefits rather than go back to work. That’s not a sustainable situation.
Inflation, Interest Rates and Tech
The reopening of America got a major lift over Memorial Day weekend with people out and about with open wallets. Inflation showed up too. It’s becoming harder to find goods and services that haven’t increased in price in recent months. The US Consumer Price Index rose by 4.2% in April. We’re going to find out next week what prices did in May. We know they went higher. The question really is how high and whether it’s sustainable.
Inflation continues to be the biggest issue, but there are no signs that it is getting out of control. It likely relieves some pressure from the Fed feeling the need to taper prematurely. The Fed has said all along it will be patient in this process. This report supports the plan. Steady as she goes. In addition to keeping the overnight rate near zero, the Fed keeps buying $120 Billion of Treasuries and mortgage securities each month. It has said it would slowly wind down (taper) its purchases before raising interest rates. The May job report seems to have bought more time. The Bond Market has been taking all of this in stride with the 10-Year Treasury yield still pinned to the 1.6% level. It actually closed below, at 1.56%, the lowest on the week.
Tech and the 10-Year have been doing a dance all Spring. It’s like the tango. They’ve been going in opposite directions. One moves higher, the other moves lower. Higher yields choked off Growth and led to a Tech-wreck in March and May. There’s been a big correction there. But yields have fallen of late, sending Tech stocks higher into the weekend. Leadership rotation has been a constant. Despite the S&P hanging out near all-time highs for weeks, the price action has been so volatile below the surface.
Washington & Taxes
President Biden met again with Republican Senator Capito in the latest round of infrastructure negotiations. The 2 sides still seem far apart as I type. The President lowered his ask again from $1.7 to $1 Trillion in new Federal spending. Republicans previously countered with $257 Billion in new spending in its $928 Billion offer. Biden also said he’d be willing to pay for it with a new 15% minimum Corporate Tax. That would seemingly negate the proposed hike in the Corporate rate to 28% from 21%. It’s just not clear if it would cover the cost. Politicians keep politicking. The Washington games continue as the clock ticks and patience evaporates.
Here’s the deal: The President’s inserting a 15% minimum Corporate Tax would sidestep the Republican red line of dismantling the Trump 2017 tax cuts. Senate Minority Leader Mitch McConnell responded that it was unlikely to appeal to members of his caucus. The back-and-forth negotiation in pursuit of a bipartisan deal is clearly running out of time. Polls indicate the American people want an infrastructure deal and prefer it to be bipartisan. Not everyone agrees on what it looks like and how to do it. Then there’s this: A ruling by the Senate Parliamentarian stated that multiple budget reconciliations are not permissible. That threw a wrench in Democrat plans. It now appears that Congress will only be able to pass one reconciliation bill in the coming months. A single reconciliation bill could include somewhere between $3 and $4 Trillion in spending plus tax increases. Getting it done by July 4th looks even less likely. Our Washington sources believe Republicans are willing to take their chances on having the Democrats pursue their plans through budget reconciliation and see what the American people think in 2022.
Higher taxes are a big sticking point. Plans to raise taxes on income, capital gains and carried interest, as well as eliminating the stepped-up basis upon death and limits on 1031 exchanges, are circling. Taxes are always a major political issue. People have been fleeing high tax states like California, New York and New Jersey at a very fast clip. Goldman Sachs believes it will continue and projects over $3 Billion in lost revenues for the Empire State alone. Goldman said that over 5% of New Yorkers earning $10 Million or more have already left New York. Florida has been the most popular landing spot. There is talk in Washington circles that the important SALT (State And Local Tax) deduction cap will not go away, but might be raised from $10K to $50K. The high tax states are Blue. Democrats are having trouble with this issue within their own party.
There was another ransomware attack on America’s supply chain. This time it targeted our food. So too was the Massachusetts Ferry system targeted. They have been linked to criminal actors with ties to Russia. This is a major issue that just does not seem to have been met with a sense of urgency. That seems to be changing. It could get far worse. President Biden meets with President Putin in a couple of weeks. The agenda is stacked. The hacks are at the top. There is significance that President Biden said it wasn’t clear the Russian government was behind these attacks. That would make it an act of war. To that end, a covert response from the US wouldn’t be either. Something to consider as the nefarious activity remains ongoing in the Dark Web.
Stock Market Mania
Speculation has returned with trading in stocks like AMC and GameStop. AMC nearly doubled in price on Wednesday, following four trading halts. The movie theater chain was worth over $30 Billion. That made it more valuable than half of the companies in the S&P 500. Keep in mind, nothing fundamentally supports this value. It’s not like within 24 hours’ time it became clear that twice the number of people previously estimated are expected to go to the movies this year. This is a direct result of swarm trading and short-covering. Volume swelled. Retail investors are sticking it to Wall Street. There’s a lot to be said for that. It’s a sideshow for sure.
Increased liquidity has led to bubble-like conditions in certain pockets. The biggest concern is it hurts credibility and investor confidence in the Stock Market. The Stock Market has been the greatest engine of wealth creation in history. It propels innovative ideas and better ways. But it requires broad participation and trust. Greed and speculation are not new; It comes with the territory. What’s going on in this shallow area of trading is a game of Market Musical Chairs. That music won’t play forever. Someone always loses. In fact, most participants lose. We don’t play that game.
Have a nice weekend. We’ll be back, dark and early on Monday.