Category: Markets

The Week Ahead –  Powell is Back, PCE Report, and Summer Trading Activity

Posted on by phoffman@channelchek.com

This Week’s Economic Focus Will be on PCE Inflation

It’s the last trading week of the month, quarter, and first half of 2023. The Fed Chair is scheduled to speak on Wednesday at the ECB Forum on Central Bank Policy, and the Fed’s favored inflation gauge will be released on Friday. As we approach the 2023 halfway point, the S&P 500 is up 13.25% YTD. Historically, whenever the S&P 500 is up at least 10% YTD at the end of June, the index ends the year up on the year 82% of the time. However, it gained 7.7% on average for those years, which suggests some gains were given back in the average year.

Monday 6/26

•             The ECB Forum on Central Banking 2023 is a three day event beginning Monday. The US Federal Reserve Chairman will take part in a panel discussion Wednesday.

Tuesday 6/27

•             8:30 PM ET, Durable Goods orders are forecasted to have fallen 1.0 percent in May after April’s 1.1 percent rise. Ex-transportation orders are seen unchanged with core capital goods orders, after jumping 1.3 percent in April, rising a further 0.6 percent.

•             10:00 AM ET, Consumer Confidence is expected to rebound slightly in June to 103.7 versus May’s 102.3 which was better than expected but still down 1.4 points from April. The index has sat at depressed levels for the past year.

•             1:00 PM  ET, Money Supply, including the closely watched M2 will be released. M2 had stood at $20,673.1 Billion as of the last reporting. The act of the Fed tightening credit conditions, is typically orchestrated by reducing money in the system which can be expected to reduce money supply by its two most watched measures, M1 and M2.

Wednesday 6/28

•             9:30 AM ET, at 2:30 PM in Portugal a panel discussion on policy will be modersated by CNBCs Sara Eisen. The four member panel will include J. Powell, US Federal Reserve, A. Bailey, Bank of England, C. Lagarde, ECB, and K. Ueda, Bank of Japan.

•             10:30 AM ET, The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

Thursday 6/29

•             8:30 AM ET, First quarter GDP third estimate is expected to show 1.4% growth. While this is not e a strong pace, it indicates the US is not currently in a recession.

•             8:30 AM ET, Jobless Claims for the week ending  June 24 are expected to be 270,000 versus a second straight and elevated 264,000 in the two prior weeks and 262,000 the week before.

•             4:30 PM ET, Factors Affecting Reserve Balances, otherwise known as The Fed’s Balance Sheet or the H.4.1 report is a weekly report of a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances, otherwise known as the “H.4.1” report.

Friday 6/30

•             8:30 AM ET, Personal Income and Outlays, including PCE Inflation, will be released as part of a data set. Income is expected to rise 0.4 percent in May, with consumption expenditures expected to increase by 0.2 percent. These would compare with April’s 0.4 percent gain for income and 0.8 percent jump for consumption. PCE Inflation readings for May are expected at monthly increases of 0.1 percent overall and 0.4 percent for the core (versus April’s respective increases of 0.4 percent for both) for annual rates of 3.8 and 4.7 percent (versus April’s 4.4 and 4.7 percent).

•             10:00 AM ET, Consumer Sentiment is expected to end the first half of 2023 at 63.9 for June, this would be up nearly 4 points from May.

What Else

The summer doldrums is a Wall Street term for reduced trading activity between Memorial Day and Labor Day. Many professional investors take time off from work during the summer; this means portfolios are in the hands of the second-string portfolio managers that are there to monitor and maintain but not take big positions or make big decisions. Volume is often reduced, which could cause exaggerated swings in prices.

Lifeway Foods, Inc. (LWAY), which has been recognized as one of Forbes’ Best Small Companies, is America’s leading supplier of the probiotic fermented beverages. Wherever you are on Monday, you can attend the virtual roadshow and better understand directly from management the many intricacies of the probiotic food business as it relates to Lifeway. Should you have a question for management, there will be an ample Q&A period for participants to get their questions answered.  

Paul Hoffman

Managing Editor, Channelchek

Capitalizing on Less Certainty

Posted on by phoffman@channelchek.com

The Market Averages Suggest this Move

Different investment timelines call for different investments.

Have you ever looked at a chart of a company you were interested in, let’s say year-to-date, and thought, wow, this company has just dipped to where it could be expected to start to bring in buyers and go up? Then you look at a five-year chart, and the same stock has been trending down for years, and is actually close to where, from a longer-term perspective, a technical analyst would view it as more likely to weaken. Based on time perspective, both expectations can coincide with each other. This is why it is important to understand your own investment time frame before pulling the trigger on a stock.

The big question that needs to be answered first is, are you expecting the trade to work out in minutes, weeks, or years? Often this is based on any future needs of your invested capital.

If a trader is trying to make incremental income, they may use a five-minute chart. An investor looking to gain by holding weeks or months may use a one or three-year chart. Longer-term investors, those that are looking to put to bed what they hope will be the next Apple or Tesla in terms of performance, may look at charts using 20 years, or the “Max” time period.

Those that are longer-term investors can be less cautious about the exact timing on most investments, or less concerned about deciding if this is the ideal timing. This is especially relevant today in light of recession talk, rate increases, global risk, and other possible disruptions.

In fact, last year’s downward market direction was a wake up call for a lot of less seasoned investors, coming off so many so many positive years before. And this years retracement back up, is a good reminder that over time, markets have always broken new highs.

As mentioned above, when times are less certain, the investor that is looking to hold for an extended period, is the investor less likely to question their decision; many actually average into a position based on calendar buys, not price targets.

Having the long view, or deciding uncertain markets has dictated a longer view, would likely steer the investor to include smaller companies. Smaller companies have had the best long-term performance. It’s a category that may be more volatile but over time, has served investors better.

Over the past few years, small cap stocks have participated far less in the upward trend. That is less than larger companies (on average) and far less than they have versus their own historical average relative to large caps.

Source: Koyfin

The chart above compares performance since the beginning of the decade of the Russell 2000 Large Cap performance (blue) to the Russell 2000 Small Cap index (gold). One thing that is evident immediately is the small cap stocks outperformed large caps long term by a large margin over time. The second is the trend is up. If you’d like, add a third which is there has been a significant dip in value (last year’s bear market).

“From our perspective, the uncertain present offers a highly opportune time to invest in small caps for the long run.” —Francis Gannon, Co-CIO Gannon Investment Partners (June 13. 2023)

Long term investors looking at this scenario could easily make a case for getting involved knowing that small caps historically overperform large caps. So if an investor is looking to maximize return, large caps may not have the highest probabilities. The above graph makes both points clear.

Source: Koyfin  

This second chart begins only five year ago. If one was to look at it by itself, the trendline over the years is upward, with gains in both large cap and small cap . But the large caps have a steeper upward pace. On the other hand, small caps are noticeably flat since the beginning of 2022.

Source: Koyfin  

The last chart is just since the beginning of this month. Small cap stocks seem to finally have caught their tailwind, going up by more on most up days, and coming down by less on down days. Time will tell if this is a trend that will continue.

The small cap stock index won’t catch the large caps over night. If it happens, it will be months or years before investors that have been in small caps catch and pass those that have been in large cap stocks. Those investing now will outperform those that got in earlier. Of course, long-term investors are cautioned to also be diversified across many industries and of even market cap sectors.

Perhaps rebalancing the allocation after so many periods of small cap underperformance is a strategy that fits all the basic tenets that have been true of long-term investing.

They are:

Over time the stock market goes up and breaks new records.

Diversified portfolios spread risk and are less volatile.

Rebalance so allocations in sectors that have done well are not now undermining your asset mix.

Take Away

One can look at the same stock, over different time periods and see completely different trends. Those investing longer term, providing the company or industry isn’t in a decades long tailspin, reduce the risk of loss by letting time iron out the ups and downs.

Small cap stocks over time have outperformed larger companies. Assuming this hasn’t changed, when the volatility is “ironed out” small caps have a lot of catching up to do before they pass. This argues that they will return even greater comparative performance than if they were already ahead in recent years.

Paul Hoffman

Managing Editor, Channelchek

Sources

Why the Time Looks Right for Small Caps —Royce (royceinvest.com)

The Week Ahead –  Fed Chairman Jerome Powell Will Again be the Focus

Posted on by phoffman@channelchek.com

This Week We’ll See if the Small-Cap Rally Continues, and Which Individual Stocks Move from the Russell Reconstitution

The FOMC interest rate pause at 5.00-5.25% last week created investor uncertainty as there was little forward guidance as the policymakers insist they remain data dependent. Chair Jerome Powell was emphatic in his comments to the press on Wednesday that getting inflation down to the 2 percent average inflation target is the FOMC’s unanimous goal – although there may be differences on the speed or level at which rates need to be adjusted.

Powell will have the spotlight again this week as he gives two testimony’s, the first on Wednesday before the House Financial Services Panel, and then on Thursday before the Senate Banking Committee.

While the mood of markets is still apprehensive, this did not stop the S&P 500 from rallying and reaching the highest weekly close since April 2022.

Monday 6/19

•             US Markets closed in celebration of the Juneteenth holiday.

Tuesday 6/20

•             8:30 PM ET, May Housing starts are expected to hold steady after experiencing a bounce in April. Exonomists expect May’s starts to have been 1.433 million, they were 1.416 million in April.

Wednesday 6/21

•             10:00 AM ET, Federal Reserve Chairman Powell will appear before House Financial Services Panel.

•             10:00 AM – 4:00 PM ET, While Fed Chair Powell will be getting the attention as he reads prepared remarks and answers question, the day will be filled with other FOMC members speaking and sharing their view and outlook for the first time since the June FOMC meeting concluded. This includes Lisa Cook at 10:00 AM ET, Philip Jefferson also at 10:00 AM ET, Austan Goolsbee at 12:25 PM ET, and Loretta Mester at 4:00 PM ET.

Thursday 6/22

•             8:30 AM ET, Jobless Claims for the June 17 week, is expected to remain near the previous weeks level. The consensus is 261,000 versus 262,000 last week.  

•             10:00 AM ET, Existing Home sales for May are expected to slip slightly to a 4.25 million rate. The National Association of Realtors described sales as “bouncing back and forth” but remaining “above recent cyclical lows.”

•             10:00 AM ET, Federal Reserve Chairman Powell will again be the focus as he appears before the Senate Banking Panel.

•             10:00 AM ET, The Index of Leading Indicators was down by 0.6 percent in April, for May it is expected to post a 14th straight decline, the consensus is down 0.7 percent. This index has been in sharp decline and has long been a trendline toward slow or no economic growth. signaling a pending recession.

•             4:30 PM ET, Factors Affecting Reserve Balances, otherwise known as The Fed’s Balance Sheet or the H.4.1 report is a weekly report of a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances, otherwise known as the “H.4.1” report.

Friday 6/23

•             9:45 AM ET, The Purchasing Managers Index (PMI) is not expected to show significant change in June compared to May; manufacturing underperformed at 48.5 and services even though services were strong at 53.5.

What Else

On Friday the Russell Indexes will have new components beginning the moment the market closes. The following Monday morning the indexes will reflect these changes, and index funds that are designed to match the performance of the funds will hopefully have gotten their trades off in time. Expect some interesting moves of a few stocks on Friday as a result.  

Small-cap stocks have joined the stock market rally in June and, according to an article in Morningstar, “trouncing the larger indexes.”

Noble Capital Markets has been hosting road shows of interesting small-cap companies in various cities and towns throughout the US. This week features a very busy week with company’s speaking to potential investors in St. Louis and Florida. Also there will be two virtual events, so that no one is excluded by geography. Become informed here.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bing.com/search?q=small+cap+stocks+on+a+rolll&filters=ex1%3a%22ez2%22&pglt=41&cvid=480e1d5e96354e0f85be232f12f9721e&aqs=edge..69i57j0l8.5031j0j1&FORM=000017&PC=LCTS&qpvt=small+cap+stocks+on+a+rolll

https://www.zerohedge.com/economics/key-events-week-no-data-releases-fed-speakers-galore-including-powell-twice

https://us.econoday.com/byshoweventfull.aspx?fid=562858&cust=us&year=2023&lid=0&prev=/byweek.asp#top

This Year’s Russell Rebalance May Accelerate Market-Cap Sector Rotation

Posted on by phoffman@channelchek.com

Investors Already Wary of Big Tech’s Dizzying Heights May Deviate Away From Swelling Large Cap Weightings

What’s different about this year’s Russell Index Reconstitution?

When the market closes on Friday, June 23rd , the overall FTSE Russell 3000 index and the other indexes that it impacts, including the Russell 1000 Large-cap and Russell 2000 Small-cap index, will be rebalanced to reflect current market-cap size. When the bell rings on Monday June 26th, the indexes will have different members and adjusted weighting of those constituents. Some market watchers and analysts expect this year to be a “headache” for active portfolio managers. Here’s why.

The new FTSE Russell makeup is already known. There is only a small chance a change in that might occur between now and Friday, it is largely assured that the reconstitution will increase the concentration of the top ten biggest companies in the large-cap Russell 1000 Index to a historical high of 29%. Active managers that are already underweighted mega-caps and big tech represented in the large-cap indexes will have to decide if they are going to increase holdings or be even more underweighted in comparison to an index that investors are likely to compare them to.

Additionally, while active fund managers are freer to weight their portfolios (within the boundaries of the fund’s prospectus), investors tend to compare the returns of index funds to the performance of managed funds when investing. This would increase the size of the bet in terms of fund percentage for managed funds, some already underweighted in tech. They’ll have a decision to make.

Further confusing things on the large-cap side is that the wisdom of diversification is being tested. If ten of the largest company’s make up 29% of an index, one that financial advisors and mom-and-pop investors are comparing them to, then roughly mimicking its concentrations would reduce diversification. Investing in a fund with a more even balance of stocks had once been the primary driver of mutual funds’ growth in popularity.

The rebalancing will heap a higher weighting to mega-cap names, including those referred to as FAANG stocks. This group of companies have already had tremendous gains this year, a pace that history would indicate is not sustainable.

Just look at the numbers, as we near the mid-year mark in 2023.

To date the top 100 stocks in the Nasdaq, heavily weighted with mega-caps and large-cap tech, has increased 38.87%. Using historical returns, most would forecast that these topstocks have much more downside for the next six months than upside. Yet, to stay on the same playing field with index funds, managed money would have to bet against stock market history.

The largest of stocks, as demonstrated below, are pulling a lot of weight. Nvidia (NVDA) is up nearly 200%, Meta (META) returned 137%, Tesla (TSLA) is also up over 100%. A fund manager with flexibility could be torn; on the one hand, afraid to bet against such momentum, on the other, historical probabilities suggest they should.

Source: Koyfin

There’s recent evidence that portfolio managers are looking for value away from the mega-cap stocks that have had the kind of run that in some cases made them twice as expensive. The Russell Small-cap Index, which is part of the June rebalancing is made up of the lowest 2,000 companies in terms of market cap of the broader Russell 3000. June has been a great month for the index so far. The index month-to-date is up 7.75% compared to the Nasdaq 100’s 6.56%. This beats June’s returns for Microsoft (MSFT), Apple (AAPL), and Amazon, among others. The performance, which includes an increase of 3.6% and a 2.8% jump on June 6th indicates investors are rotating away from large-cap stocks that have become historically expensive and into smaller companies that are cheap by historical standards.

The reconstitution also provides investors in the weeks and hours leading up to the rebalance to speculate on how the rebalance will impact individual stocks. Since the preliminary list of changes was announced last month, companies expected to be added to the Russell 1000 Index have gained 4.9%, while the those that moved to a smaller-cap index have grown 11.3%, according to data compiled by Wells Fargo (6/14/23).

Take Away

The Russell Reconstitution elevates the percentage weighting of mega-cap tech stocks that usually trade in rough tandem. Mutual fund managers, and other managed money will have to rethink their weighting of a sector that has already skyrocketed on speculation of future growth.

There has already been signs of a slowdown of interest in mega-tech, compared to a significant increase in attention to small-caps that are cheap by most measures. If the rotation continues, money managers that adhere to tried and true wisdom related to diversification, and metrics like P/E ratios, may wind up the year outperforming the indexed funds they tend to be compared to.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.ft.com/content/01ad3636-f15c-42c2-ab2c-81418f8160be

https://www.forbes.com/sites/jjkinahan/2023/06/16/stocks-looking-to-keep-the-party-going/?sh=4e85e4c86067

Equity Investors Shouldn’t Fear Quadruple Witching if They Understand It

Posted on by phoffman@channelchek.com

June Quad-Witching is the Friday Before a Three-Day Weekend

Double, triple, and quadruple witching hours are often characterized by increased stock market activity as traders manage expiring positions in the last hours of trading. Friday, June 16th is a quadruple witching which may demonstrate increased activity as it leads into a weekend where markets are closed on Monday.

The term “quadruple witching hour” is used to describe the simultaneous expiration of stock options, stock index futures, and stock index options and single stock futures contracts on the same day. This happens only four times a year on the third Friday just before a quarter end. The same expiration date of all three types of stock derivatives can cause unusual swings as expiring derivative positions can cause increased trading volume and unusual price action in the underlying assets as traders close, roll, or offset expiring derivative positions, particularly in the final hour of trading.

Options Expirations and Futures Contracts

Stock index options, and stock options, are financial instruments that grant the holder the contractual right, but not the obligation, to buy (call option), or sell (put option) a specific quantity of an underlying security or value of an underlying index at a predetermined price (strike price) within a specified period. The final day of the period is known as the option’s expiration date.

Stock index options are options based on the broad market indexes, such as the S&P 500 or the NASDAQ-100. These options give investors exposure to the overall market’s performance rather than individual stocks.

Stock options work similarly, but are based not on index values, but on stock price.

Stock index futures and single stock index futures are contracts that obligate (not optional) traders to buy or sell an index at a specific price or a single stocks at a specific price on a future date.

Expiration Fridays often witness heightened trading activity, as investors attempt to rebalance portfolios and positions. This can cause increased volume and produce significant price fluctuations in the underlying, impacting both individual stocks and the overall market.

Arbitrage Opportunities

Though much of the trading in closing, opening, and offsetting futures and options contracts during witching days is related to the squaring of positions, this increased, and at times, frantic activity can create price inefficiencies, this may provide short-term arbitrage opportunities for those skilled and quick enough.

The arbatrageurs would generate even more volume into the close on quadruple witching days as traders attempt to profit on small price imbalances with large trades that may execute a buy and sell in seconds.

Additional Reasons To Care About Triple Witching

As four types of derivatives, with related underlying indexes and securities expire, traders, especially before a long weekend, will often seek to close out all of their open positions well in advance of the close. This can lead to increased trading volume and intraday swings. Traders with large short positions are particularly exposed to price movements that could be more difficult to manage leading up to expiration. Arbitrageurs try to take advantage of abnormal price action, this actually serves to keep prices more in synch.

The higher trading volumes can be one-sided and potentially result in wider bid-ask spreads and greater slippage. Investors mindful of the potential one-sided liquidity challenges may decide to wait for the smoke to clear the following week, or see if they can benefit by feeding into demand if they can.  

Traders who are skilled at interpreting trends, and have great execution, may find quick opportunities to make money during these multiple expiration dates.

Take Away

Quadruple expiration dates, which happen four times a year, can have significant implications for traders and investors. It is best to, at a minimum, know the dates to understand unusual price moves. Understanding the intricacies of option expiration, and multiple witching hours helps investors navigate markets. Advanced traders may even find ways to capitalize on the moves intraday.

June 2023 is unusual in that the quadruple witching hour comes before a three-day weekend; this could push more volatility to earlier periods during the afternoon.

Paul Hoffman

Managing Editor, Channelchek

Pause, Pivot, or Push Higher – What to Review After the FOMC Announcement

Posted on by phoffman@channelchek.com

The FOMC Member’s Change in Sentiment is a Big Focus

Whether the Fed moves rates up after the June FOMC or not could mean little to whether there is additional drag on the economy. The short end of the yield curve, where savers benefit, has risen each time the Fed has raised rates. Out further, the 10-year T-Note, which is the benchmark for 30-year mortgages and from which corporate 10-year notes are spread, has been remarkably steady. Nine months ago, when Fed Funds were 3.00%- 3.25%, the 10-Year Treasury yielded 3.76%. Today the Fed Funds target rate is 5.00-5.25%, the 10-Year is still at 3.76%. This may be why the Fed has had a difficult time reeling in inflation, longer interest rates, where they impact the economy most, had reached 4.25% last October, the Fed has since tightened 200bp, and 10-year rates have traded around 50 bp lower     since the October high, despite the tightening. And for the same reason, mortgage rates are lower now than they were last October.

Summary Of Economic Projections

More meaningful for market participants might be the Summary of Economiuc Projections (SEP). Outside of a normal knee-jerk reaction after Wednesday’s policy announcement, or a quick trade that can be had off Powell’s press conference remarks, what the Fed members now expect by year-end is a better indication of any new mindset on monetary policy.  

The Summary of Economic Projections includes estimates from the FOMC members showing where they see rates at the end of 2023 (and beyond). At the March meeting (see below), most of the Fed policymakers saw rates staying at current levels, with a few signaling additional hikes may be coming. While Powell will answer questions at the press conference that may be indicative of what they are thinking, the change in the SEP numbers (released in the statement after the meeting) is a better indicator of whether the Fed is now more hawkish or dovish.

Source:  Board of Governors of the Federal Reserve System

A big shift toward expectations of higher rates would indicate a more hawkish stance. It will be useful to note how projections have evolved compared to March – Chair Powell will, of course, provide further color through his press conference.

Pause, Pivot, or Push Higher

Has the view changed with recent economic data? Was the view in March skewed by what could have turned into a banking crisis? We’ll see in hard numbers, without reading between any lines. We can see in black and white what the aggregate thinking is of the members when behind closed doors, where the important discussions happen – inside the FOMC meeting room.

After the announcement, Channelchek subscribers will receive a summary in their email of the announcement, changes in language from previous meetings, and the new SEP to compare any change in sentiment (subscribe at no cost).

While the actual impact on the overall economy of a 25bp move compared to a Fed pause may have little impact on the economy, company earnings, or even Treasury Bonds, each time the Fed raises overnight rates, there are investors that are more comfortable with a larger allocation of cash. Depending on where “uninvested” assets are held, they may be earning near 5%. This is a risk to stock prices as some investors may find be comfortable with money market returns for a larger portion of their portfolios. Fewer assets in the stock market have a depressing effect on prices.

Take Away

While pre and post-Fed meeting investor conversations tend to swirl around words like, “pause”, “pivot”, and “tighten”, the Fed’s overall change in rate expectations, which they have the most control over, is more telling than any polished statement or press briefing. These numbers are on the SEP report.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://ycharts.com/indicators/10_year_treasury_rate

The Week Ahead –  FOMC Meet, Quadruple Witching Hour, Consumer Inflation

Posted on by phoffman@channelchek.com

This Week’s Events are Sure to Keep Investors on Their Toes

I wouldn’t want to be Fed Chair Jerome Powell this week. The June 13-14 FOMC meeting may be the first meeting of the Committee that sets monetary policy, since January 2022, when a tightening of monetary targets doesn’t occur. The decision will come down to the wire as very important inflation data won’t be released until the first day of the meeting on Tuesday. While most on the Committee have expressed seeing current inflation data as problematic, there usually is a delay between when the Fed first alters policy, and the impact it creates.


Whether the Fed again acts to slow the economy, or takes a breather, announced at 2:00 on Wednesday, Powell will face reporters having to explain the Fed’s action or inaction. With likely less personal conviction than at previous press briefings, his responses may be more general than usual.

Monday 6/12


• 2:00 PM ET, The Treasury Statement is the U.S. Treasury’s release of a monthly accounting of the surplus or deficit of the government. Changes in the budget balance reflect Federal policy on spending and taxation. Forecasters see a $205.0 billion deficit in May that would compare with a $66.2 billion deficit in May one year ago, and a surplus of $176.2 billion in April this year.

Tuesday 6/13


• The June FOMC Meeting begins day one of two.


• 6:00 AM ET, NFIB Small Business Optimism Index has been below the historical average of 98 for the past 16 months in a row. May’s consensus is for a decline to 88.4 versus 89.0 in April.


• 8:30 AM ET, The Consumer Price Index this month could move markets significantly if there is a significant change in the data from the previous month. Core price increases in May are not expected to have slowed. They are expected to keep their pace of April’s 0.4 percent monthly increase. The core’s year-over-year rate is seen easing to 5.3 from 5.5 percent. Overall price increases are expected to halve to 0.2 percent on the month from 0.4 percent and 4.1 percent on the year from 4.9 percent.

Wednesday 6/14

• 8:30 PM ET, The Producer Price Index – Final Demand number is another important inflation index that the FOMC members may want to peak at before voting Wednesday on any policy shift. After rising 0.2 percent in April, producer prices in May are expected to fall 0.1 percent. The annual rate in May is seen at 1.6 percent versus April’s plus 2.3 percent. May’s ex-food ex-energy rate is seen up 0.2 percent on the month and up 2.9 percent on the year, matching April’s 0.2 percent monthly rise and just below the month’s 3.2 percent yearly rate.


• 10:30 AM ET, The Energy Information Administration (EIA) will be providing its scheduled weekly information on petroleum inventories, whether produced in the US or abroad. The level of inventories helps determine prices for petroleum products.


• 2:00 PM ET, The FOMC Announcement is when the world gets to learn what the Fed decision is on interest rates, and why.


• 2:30 PM ET, The FOMC Chair press briefing provides additional context to the just announced direction of the FOMC’s policy decision. The questions and answers with the media can shed far more light of the intentions of the Committee than the carefully worded statement released at 2PM.

Thursday 6/15


• 8:30 AM ET, Jobless Claims for the June 10 week are expected to ease back to 250,000 versus the prior week’s large 28,000 jobs jump to 261,000. This has been a very closely watched report. If as expected, it would indicate the Fed has room to tighten further if other data remain strong.


• 8:30 AM ET, May Retail Sales are expected to be unchanged, matching April’s 0.4 percent rise.


• 8:30 PM ET, The Philadelphia Fed (Philly Fed) manufacturing index has been in contraction for the last ten reports. At minus 10.4 in May, with June’s consensus is at minus 13.2.


• 9:15 PM ET, Industrial Production is expected to push 0.1 percent higher in May after April’s 0.5 percent increase that was boosted by manufacturing output which jumped a surprising 1.0 percent. Manufacturing in May is seen up 0.2 percent.


• 4:30 PM ET, The Fed’s Balance Sheet is a weekly report presenting a consolidated balance sheet for all 12 Reserve Banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. This has ben getting more attention as it indicates if the fed is on track with its announced quantitative tightening and if any bank borrowing has dramatically increased.

Friday 6/16


• 10:00 AM ET, Consumer Sentiment will be the first indication for June. It fell by 4.3 points to 59.2 last month, it is expected to inch up and report 60.5.


• Quadruple Witching is a phrase used to refer to the expiration of four different derivative contracts: Stock index futures, Stock index options, Single-stock options, Single-stock futures. Quadruple witching happens four times a year, on the third Friday of March, June, September, and December. It is a time of heightened volatility in the markets, as traders adjust their positions in anticipation of the expiration of these contracts.

What Else


The key factors that the Fed will consider when making its decision are the pace and trend of economic growth, the level of inflation, the strength of the labor market, and the risk of recession.
Additionally, the FOMC will have to determine if the moves to date will have a more substantial impact if allowed to have more time to have an impact.


While OPEC is cutting output and it seems like we are on a path of oil and natural gas prices again inching up, Alvopetro Energy (ALVOF), an enviable gas company, headquartered in Canada, operating in Brazil, will be conducting roadshows in New York and St. Louis. Learn more about attending here.
Paul Hoffman
Managing Editor, Channelchek

When Shorting a Stock Becomes Illegal

Posted on by phoffman@channelchek.com

Crossing the Line into Naked Short Selling

Shorting a stock by itself is not illegal and can even be thought of as helping the liquidity in the company’s shares as many more continuously change hands (volume). Brokers and institutional investors can also reap additional benefits. For all participating investors, it allows the opportunity for money to be made as long as the stock is moving up or down. However, among the legal shorts, there are illegal short positions being made. This has been the subject of controversy, Volkswagen in 2008, GameStop 2021, and AMC which has worked to end attempts of this kind of activity in its stock.

The Upside-Downside of Legal Short Selling

Selling a stock that you don’t own puts you, the seller at a greater risk than buying a stock. The reason is simple, stocks can theoretically go up by an infinite amount, however, they can only go down by their current value. If your shorts go up, you are losing value in your position. With this risk in mind, selling shares you don’t own, or a shorting strategy, certainly can work in your favor if your risk management short-circuits are in place and the stock’s value erodes.

A legal short position involves your broker borrowing shares on your behalf, perhaps from a large institutional holder, paying them a daily accrual rebate rate (interest) during the period that you hold the short position. The strategy is to buy them back at a lower price in the future than what you sold them at today.

Crossing the Line to Naked Short Selling

The word “naked” when it comes to most investments, suggests that you are without that which you are trading. If the same amount of shares has been borrowed on your behalf or by you as part of your short transaction, you are not naked in the position.

Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist. This can happen when there are so many market players thinking shares will decline in value that more shares are sold than obtainable to back up each trade.

Despite the SEC making this illegal after 2008 in response to some failing investment banks that had been sold beyond the number of shares in existence, naked shorting still goes on today.

One example still fresh in many self-directed investors’ minds is GameStop (GME) shares. In 2021, traders reportedly sold short around 140% of GME shares outstanding. This meant a substantial amount of shares of the company were sold that didn’t exist. What allowed these trades go through was something called ‘phantom’ sales, the tool of naked short selling.

Phantom Sales?

The term “phantom sales” sounds even more nefarious than “naked shorts.” What it means, is that the naked short sellers deposited digital IOUs into buyers’ accounts, promising that they will locate shares and make good delivery to the buyer as soon as possible. Unfortunately, it can become impossible when more shares are sold than exist. That creates a failure to deliver or simply “FTD” which is used in a hashtag that most that follow AMC Theatres (AMC) are familiar with.

When a stock gets oversold to the point of more shares sold than exist, it can be very bullish for the holders. This is because the short sellers desperately need to make good on their IOUs held by buyers.

If buying demand picks up in the stocks, the short positions are considered to be getting “squeezed” –  a “short squeeze” is taking place.

In the case of GME, communication made better through social media channels and stock message boards allowed individual investors to loosely coordinate and heighten the squeeze on short sellers, including large institutional hedge funds that may have had naked short positions.

Naked Shorts Banned

Imagine the problems and stress that occurs when trades don’t settle on time due to naked short-selling delivery failures.

The SEC banned the practice of naked short-selling in the United States in 2008 after the financial crisis. The ban applies to naked shorting only and not to other short-selling activities. Prior to the ban, in 2007 the regulator amended a 2005 rule called Regulation SHO. The amendment limits possibilities for naked shorting by removing loopholes that existed for some broker-dealers in 2007. Regulation SHO requires lists to be published that track stocks with unusually high trends in failing to deliver (FTD) shares.

These lists are available to investors and often used to determine where activity may become frantic.

A variant that is not banned, or in violation of SEC is rules is an FTD where the shares were located, but there is a legitimate failure to deliver. That is the short seller contacted a holder (usually through a broker) and they both agreed to terms of the short-seller borrowing authentic shares of the company.

Take Away

Short selling is a normal function of trading and not frowned upon by the regulators. However you have to be in touch with shares that are available for you to borrow at an agreed-upon interest rate. Otherwise you may find you are naked selling because you don’t own the shares, and can not make delivery.  

These rules apply to stocks that trade on a national exchange. For those stocks not listed on a major securities exchange, the SEC may require more disclosure from the transacting broker.

Paul Hoffman

Managing Editor, Channelchek

Why Small Cap Stocks Started to Attract Mega Cap Investors

Posted on by phoffman@channelchek.com

Small Cap Companies Making June 2023 a Whole New Race

June is shaping up to be the month when small-cap stocks are the stocks to watch. This investment news is based on the huge lead they have taken since the opening bell on Friday June 2nd. The Russell 2000 index tracks U.S. small-cap stocks. While the index is up less than 3% in 2023, and the S&P 500 is up nearly 12%, and Nasdaq is up almost 27%, historically, the average return over time is expected to be greater for small-caps. In order for the averages to come back in line with historical norms, the large-cap stocks either have to begin trending down, the small-caps upward, or maybe a little of both. There is new reason to believe that now is the time that small-caps are finally getting back into the race.

The Russell Small-Cap Index, which is made up of the lowest 2,000 companies in terms of market cap of the broader Russell 3000, was up 3.6% on Friday, June 2nd; it gave up 1.1% on the following Monday, then rallied on Tuesday, June 6th by 2.8%. Meanwhile, the other indexes stalled. Friday’s gains were its largest one-day increase in six months, and Tuesday represents its biggest gain since early March.

Both large-cap indexes attribute their gains to the high-flying mega-cap tech stocks. Much of the non-tech portions of these indexes are not contributing to the year’s great performance. Some analysts are beginning to express concern that Nasdaq valuations are stretched. In contrast, price/earnings ratios on many small-cap stocks are below historical norms.

What’s more, is the earnings per share (EPS) is beginning to be revised upward, “small caps are finally starting to participate in the EPS revisions recovery,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a research note Monday. “The rate of upward EPS estimate revisions has moved up to 50% for the Russell 2000,” she said, adding that more than half the sectors in the index are “now in positive revisions territory for both EPS and revenues.”

Source: Koyfin


Calvarisa highlighted these sectors: utilities, consumer staples, healthcare, industrials, communications services, information technology, and TIMT (technology, internet, media and telecommunications), saying they have both positive EPS and revenue revisions among the small-caps.

Another interesting reason for the promise of small-caps stealing the show in June, according to the RBC research, small-cap stocks usually bottom three to six months before EPS forecasts start rising again.

The introduction of artificial intelligence (AI), from primarily small market cap companies and how the new technology can help with online research and creative inspiration, has placed investors in megacap stocks like Google and Microsoft on notice. They now know that a younger superior technology may disrupt a large part of these tech giants’ business. Not dissimilar to what they had done as small companies a few decades earlier.

Take Away

June is always an exciting month for companies with small market cap as the Russell 3000 index reconstitution also reshapes the small-cap Russell 2000 during June. Many self-directed investors try to front-run the institutions that are required to own or eliminate stocks from their portfolios. Price movements can be large.

The excitement is being compounded by the fear creeping in among large-cap investors, EPS revisions, and of course the reversion to mean average performance of large-cap stocks, to small-caps.  

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.morningstar.com/news/marketwatch/20230606265/small-cap-stocks-are-surging-tuesday-as-broader-us-market-sleeps-heres-why

https://www.morningstar.com/news/marketwatch/20230605260/small-cap-stocks-lag-in-2023-but-heres-where-theyre-finally-starting-to-see-positive-earnings-revisions

https://www.cnbc.com/video/2023/06/02/small-caps-are-benefitting-from-the-value-trade-catchup-says-rbcs-lori-calvasina.html?__source=iosappshare%7Ccom.apple.UIKit.activity.CopyToPasteboard

https://app.koyfin.com/share/09d4d3eaad

The Week Ahead –  Debt Limit Clouds Lift

Posted on by phoffman@channelchek.com

This Week Will Feature Few Economic Releases and a Focus on Next Weeks FOMC

The week ahead is quiet on the economic release front. And there won’t be any market moving Fed president addresses to keep the market on its toes; the Fed members are in a blackout period leading up to next week’s June 13-14 FOMC meeting.

The markets can also stop talking about whether the US will default on debt as the short end of the fixed-income market will have to adjust to a sudden but short-lived increase in US Treasury bills.

Monday 6/5

  • 10:00 AM ET, Factory Orders are expected to have risen 0.8 percent in April versus March’s 0.9 percent rise. Durable Goods Orders for April, which have already been released and are one of two major components of this report, rose 1.1 percent on the month. Factory Orders are a leading indicator, it represents the dollar level of new orders for both durable and nondurable goods.
  • 10:00 AM ET, The Institute for Supply Management Services (ISM Services) is expected to be relatively steady at 52 for May after a 51.9 print in April.

Tuesday 6/6

  • Nothing Scheduled

Wednesday 6/7

  • 8:30 PM ET, International Trade in Goods and Services is expected to show a deficit of $75.4 billion for April for total goods and services trade which would compare with a $64.2 billion deficit in March. Advance data on the goods side of April’s report showed a very large $12.1 billion deepening in the deficit.
  • 10:30 AM ET, The Energy Information Administration (EIA) will be providing its scheduled weekly information on petroleum inventories, whether produced in the US or abroad. The level of inventories helps determine prices for petroleum products.
  • 3:00 PM ET, Consumer Credit is expected to have increased by $21.0 billion in April versus an increase of $26.5 billion in March. This report has surprised on the high side the last three months.

Thursday 6/8

  • 8:30 AM ET, Jobless claims for the week ending June 3 are expected to have increased to 240,000 versus 232,000 in the prior week. This has been a very closely watched report as it is expected it has indicated the Fed has room to tighten further if other data remain too strong.
  • 10:00 AM ET, Wholesale Inventories will be released as a second estimate before the final. The second estimate for April is expected to be a 0.2 percent decline, unchanged from the first estimate. Wholesale trade measures the dollar value of sales made and inventories held by merchant wholesalers. It is a component of business sales and inventories  Corporate Profits are pulled from the national income and product accounts (NIPA) and are presented in different forms.
  • 4:30 PM ET, The Federal Reserve’s  Balance Sheet has attracted additional attention as it is a good indicator of whether it is following its quantitative tightening plan, and whether there has been a significant change in banks looking to the Fed, which may mean trouble in the sector. For the week ending June 7, the Federal Reserve is expected to hold assets worth $8.386 trillion. This would be a week-on-week decline of $50.4 billion. All non-cash assets can be viewed as money that at one time was  injected into the economy as stimulation.            

Friday 6/9

  • 10:00 AM ET, The Quarterly Services Survey focuses on information and technology-related service industries. These include information; professional, scientific and technical services; administrative & support services; and waste management and remediation services. Services revenue is expected to have increased by 2.9%.

What Else

The key factors that the Fed will consider when making their decision next week at the FOMC meeting are the pace and trend of economic growth, the level of inflation, the strength of the labor market, and the risk of recession.

Additionally, the FOMC will have to determine if the moves to date will have a more substantial impact over time. Currently, inflation is not coming down, jobs are abundant relative to job seekers, and the risk of a recession over the next two quarters seems low. For these reasons, some believe the Fed will remain hawkish yet pause for this meeting. However, next week during the first day of the two-day meeting CPI (consumer inflation) will be released. It would be premature to forecast a Fed decision until the contents of that report are known.

Paul Hoffman

Managing Editor, Channelchek

What Investors in Stocks Can Learn from Index Investors

Posted on by phoffman@channelchek.com

Why Aggregate Portfolio Return is More Important than Any Single Holding

Have you ever agonized over a stock in your portfolio that is not performing as you had hoped? While it’s the nature of investing to not bat 1000, it can be hard not to think of the decision to have bought it as a mistake. It probably isn’t. Here is a better way to look at it that uses a recent example (June 1, 2023).

On the first day of June, investors in the Nasdaq 100 (NDX) found themselves up 1.17%. That’s a decent run in one day, and since they are focused on the indexed fund that they are invested in as one investment (not 100), they are content and confident.

But what if they owned the underlying 100 stocks in the fund instead? They might be kicking themselves for having bought Lucid (LCID), or 22 other holdings that are down. Using Lucid as an example, it is lower by 15.6% (June 1); the day before it closed at $7.76, and it is only worth $6.55 today.

Ouch? Or no big deal?

The overall blend of the portfolio is up, yet at the same time, 23 holdings are down – no big deal – this is the way portfolio investing works. In fact ten of the stocks in the NDX declined by more than the 1.17% the overall portfolio is up. Most index fund investors just look at one number and don’t look under the hood for reasons to feel remorse (or glee).

Aggregate Return

There are many reasons investors, even professional financial advisors, avoid building a portfolio with individual stocks, but choose index funds. One is not taking responsibility. If you own, or if an investment manager buys a mix of stocks that are in total up a respectable amount, yet some are underperformers, laggards and drags on the overall portfolio performance, there is a feeling of responsibility for the holdings that are down, the dollar amount lost, and the drag on return that is staring them in the face possibly causing sleepless nights.

On this one day, almost 25% of the Nasdaq 100 was down while the index was up 1.17%. The biggest gainer, PDD Holdings (PDD), is only up by half the percentage of LCID’s is selloff. Yet those looking at the aggregate return and not individual return are feeling mighty good about themselves. And that’s good.

If you hold a portfolio of stocks and did your research, whether it be fundamental analysis, technical analysis, industry trends, etc., and understand why every stock is in your portfolio, you could easily be better off if you learn not to agonize over losers. The returns in most of the last five years in index funds have come because of the weighting of the stocks that have gained, not by having more winners. It has become normal for an index that is up on the year to have been carried by just a dozen or so stocks that are in the mix.

Don’t Undermine Your Portfolio

Investors can negatively impact their performance by focusing too much on one stock. When this happens, they can make bad decisions, some of these decisions might be pain-related, others ego, either way, rational decisions are based on investment probabilities, not human emotions, or overthinking; these can ruin good decisions that would have led to improved returns.

Other investors undermine their portfolio differently, by not wanting the responsibility. They buy the index, and they are done – its out of their hands. If average returns are their goal, they’ve succeeded. Or if they are a financial professional and separating themselves from responsibility is the objective, index funds allow them to blame “the market”; it isn’t their fault – they have succeeded.

If an investor can overcome both of these, they can manage their own holdings and be as or more content than an index fund investor. If they follow good portfolio management strategies including, diversification, analysis, research, etc., and then mainly focus on aggregate return, they can make bette decisions and lose less sleep. Individual stocks don’t matter as much when you are purposeful when choosing holdings. Most large indexed funds aren’t purposeful, they aren’t intended to be investments, there makeup is formulaic and meant to mimic the market, not provide stellar returns.  

Take Away

No investor bats 1000. Even top portfolios may have more losers than winners, the key is to have bigger winners and not overreact or over focus on a few holdings. For investors, a portfolio of individual companies can lead to more mental highs and lows as each stock is a personal decision with great expectations. Avoid this by thinking differently. If those one or two stocks don’t perform as expected, think of all the down stocks in all the index funds that the owners aren’t even paying attention to. All these investors are looking at is one number, aggregate return on all the holdings. Maybe you should too.

Paul Hoffman

Managing Editor, Channelchek

Source

Nasdaq Market Activity

What Investors Learned in May That They Can Use in June

Posted on by phoffman@channelchek.com

Looking Back at the Markets in May and Forward to June

Conviction in the overall stock market was weak in May, while enthusiasm for specific sectors was strong. June investors may regain some clarity as markets may be relieved from the debt ceiling dark cloud that kept investors overly cautious. But a renewed fear that the Fed is losing ground to inflation may become the focal point until the coming FOMC meeting. In the meantime, any increase in the debt limit signed into law kicks the can down the road, ongoing increases in borrowing and spending may not haunt the overall market in June, but the path of escalating debt is unsustainable for a healthy U.S. economy.

The next scheduled FOMC meeting is June 13-14. We will have another look at consumer inflation numbers before the June 14 Fed monetary policy decision date CPI (June 13).

While the Fed is wrestling with stubborn inflation, it is keeping an eye on the strong labor markets, which provides leeway and perhaps even a strong reason fo it to continue riding the economic break pedal by being increasingly less accommodative. Although low unemployment is desirable, tight labor markets are helping to drive prices up. The Fed aims to find a better balance.

Image Credit: Koyfin

Look Back

Three broad stock market indices (S&P 500, Nasdaq 100, and Russell 2000) are positive on the month of May. The Dow Industrials spent the entire month in negative territory. The Nasdaq 100 was the big winner (+8.7%) on the back of tech stocks as many have been inspired by the earnings performance and stock price performance of Nvidia (NVDA). The S&P 500 (+1.46%) and Russell 2000 (+1.21%) had a good showing putting the Russell 2000 back in positive territory for 2023. The Dow Industrials is negative (-2.30%), leaving this NYSE index down (-.72%) on the year.

During June, inflation showed signs that it was not decelerating but instead could be building strength. While the Fed raised rates by .25% and continued on pace with quantitative tightening, the impact has been seen as a sharp decrease in money supply (M2), but the central banks’ intended effect has not been realized.

Monetary policy is seen as having a lagging effect; that is to say, when the Fed pushes rates up today, it may take a year to work its way into the system to cause slowing and less demand to reduce price increases. Whether the Fed has done enough can only be seen in the rearview mirror months from now.

Source: Koyfin

Market Sector Lookback

Of the 11 S&P market sectors (SPDRs), three were in positive territory as May came to a close. Technology, ticker XLK (+8.85%), was the only sector that showed an increase the previous month as well (.08%). That is followed by Communications Services, ticker XLC (3.92%), and Consumer Discretionary, ticker XLY, (+3.56%).

The S&P 500, which is comprised of the 11 market sectors, was barely positive during the month of May (+56%). 

Of the three worst performers are Industrials, ticker XLI (-3.67%), it faired the best as the industrial sector has been relatively flat on the year. The Materials, ticker XLB, (-6.87%) took a larger hit as commodities prices dropped during the month; this sector was positive on the year going into May. Energy, ticker XLE, (-11.73%) has been volatile during 2023. It is just off its low (-12%) that it reached in mid-March.

Looking Forward

The job market is strong, and inflation, at best, isn’t declining; this makes it more comfortable for the Fed to raise rates. Another way to look at it is it creates a need for them to continue to hammer away to reverse the inflationary trend – and the economic latitude in which to do it.

While the energy sector was the worst performer among S&P 500 sectors, there are factors suggesting the trend could hold until OPEC and Russia begin to work in synch again. Oil prices are near their lowest levels all year, reflecting a drop in global demand, on the output side, since October, OPEC+ was supposed to be reducing production by 3.5 million barrels a day. There are signs that a key country in the alliance isn’t adhering to the announced production cuts. Whether this causes additional “cheating”, or causes the cartel to force members to fall in line remains to be seen.

Technology stocks, particularly those that could possibly benefit from the artificial intelligence revolution, are likely to be among the focus for a while. The sudden broad awareness of what the technology can do has sent investors scrambling for exposure. Whether the potential (AI) is unleashed quickly or the promise of AI now takes a slower road remains to be seen.

The Russell Reconstitution will be complete as of the first Monday in June. The index will have its new components and the portfolio managers of indexed funds ought to own the stocks that were added to the indexes in their funds and sell out of those that are no longer in the funds index. This creates a lot of activity around June 24. When the market opens on June 27, the index with its new makeup will be set.

Take-Away

The market was full of uncertainty in May. Yet three of the four major market indexes were higher. The signing into law of an increased debt ceiling will make one of the most worrisome objections to being involved disappear. This may unleash buyers that were sidelined.

Technology, caused by high expectations of AI was the focus during May; often, hype causes investors to shoot first and aim later. There will be winners and losers in this technology segment, as with any investment; remove yourself from the hype, carefully evaluate the opportunity, and read the professional research, positive and negative, of those you trust.  

By the end of the month we will have two quarters of 2023 behind us, and there are no signs of a recession and little on the horizon to cause U.S. growth to falter quickly enough for there to be a recession this year. It is unlikely the Fed will ease in 2023. It is, however, likely a pause will eventually happen. There are reasons to believe that the pause won’t happen in June.

The axiom, sell in May and walk away is in question. Three of the four major indexes were up in May, so the jury is still out as to whether selling made sense for 2023.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting

Koyfin | Advanced graphing and analytical tools for investors

Should Investors Expect Ongoing Monetary Policy Tightening Through 2023?

Posted on by phoffman@channelchek.com

Is the Fed Falling Behind on Slowing the Economy?

Is the Federal Reserve’s monetary policy losing out to inflationary pressures? While supply chain costs have long been taken out of the inflation forecast, demand pressures have been stronger than hoped for by the Fed. One area of demand is the labor markets. While the Federal Reserve has a dual mandate to keep prices stable and maximize employment, the shortage of workers is adding to demand-pull inflation as wages are a large input cost in a service economy. As employment remains strong, they have room to raise rates, but if strong employment is a significant cause of price pressures, they may decide to keep the increases coming.

Background

The number of new jobs unfilled increased last month as US job openings rose unexpectedly in April. The total job openings stood at 10.1 million. Make no mistake, the members of the Fed trying to steer this huge economic ship would like to see everyone working. However, with the Bureau of Labor Statistics (BLS) reporting “unemployed persons” at 5.7 million in April as compared to 10.1 million job openings, creates far more demand than there are people to fill the positions. Those with the right skills will find their worth has climbed as they get bid up by employers that are still financially better off hiring more expensive talent rather than doing without.

This causes wage inflation as these increased business costs work their way down into the final cost of goods and services we consume, as inflation.

Where We’re At

The 10.1 million job openings employers posted is an increase from the 9.7 million in the prior month. It is also the most since January 2023. In contrast, economists had expected vacancies to slip below 9.5 million. The increase and big miss by economists’ forecasting increases in job opportunities is a clear sign of strength in the nation’s labor market. This complicates Chair Jerome Powell’s position, along with other Fed members. 

It isn’t popular to try to crush demand for new employees, but rising consumer costs at more than twice the Fed’s target will be viewed as too much.

The Fed says that it is data driven, this data is unsettling for those hoping for a pause or pivot.


The Investment Climate

These numbers and other strong economic numbers that were reported in April, create some uncertainty for investors as most would prefer to see the Fed stimulating rather than tightening conditions.

But the market has been resilient, despite the Feds’ resolve. The Fed has raised its benchmark interest rate ten times in the last 14 months. Yet jobs remain unfilled, and the stock market has gained quite a bit of ground in 2023. The concern has been that the Fed may overdo it and cause a recession. While even the Fed Chair admitted this is a risk he is willing to take, he also added that it is easier to start a stalled economy than it is to reel one in and the inflation that goes along with expansion.

So the strong labor market (along with other recent data releases) provides room for the Fed to tighten as there are still nearly two jobs for every job seeker. Additional tightening will eventually have the effect of simmering inflation to a more tolerable temperature. If the Fed overdoes it on the brake pedal, according to Powell, he knows where the gas pedal is.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/news.release/pdf/empsit.pdf