Nothing to see here. Stocks posted a mixed close on Friday on a weak jobs number and an upbeat Fed Chairman. Traders largely overlooked a weaker than expected jobs growth number, pointing to the still low unemployment rate as a good sign.
MY TWO CENTS
- What sayeth the mighty Fed Chair? With just 9 days until the next Federal open Market Committee meeting, the Fed has entered a blackout period in which members are silent until after the meeting. Fed Chairman Powell got the honor of being that last speaker before the black out period, making his speech that much more weighty. Quite a bit of mud has been slung from the White House on Pennsylvania Ave to the Eccles Federal Reserve Board Building on Constitution Ave. (I see no reason not to chuckle). Powell has largely kept out of the fight, as his job mandates. Two weeks ago, former FOMC Vice Chairman Bill Dudley penned an Op-Ed opining that the Fed should not “enable” the Administration’s bad policy decisions by easing credit. Of course, the controversial article received lots of scrutiny as it was directly aimed at the President. In Friday’s speech, Powell, in his typical cool-headed style said that the Fed was “committed to non-political decision making”. In other words he would not allow the Fed to weaponize as implied by Dudley’s writing. Quite right, then. The Fed has and must remain, non-politically focused on the US Economy, regardless of the causes of economic strife. The Chairman also said that the Fed was not expecting a recession any time soon but that they continued to see downside risk as a result of trade uncertainty and low inflation. He pointed to Friday’s weak unemployment number choosing to highlight wage growth and greater workforce participation. The bottom line? Nothing new. Fed Funds futures now point to a 91.2% chance of a -25 basis point rate cut and a 8.8% chance that rates will be held at current levels.
- The smaller things in life. When the media talks about “the stock market”, they are usually referring to the S&P500. Though it is a good gauge of stocks, it is composed of the 500 largest publicly traded US companies. Moreover, the index is capitalization weighted, which means that the largest companies have the largest impact on the index. In fact, Microsoft, Apple, and Amazon alone represent 11% of the index! Ok, Ok these are important companies to not only the US, but also the world, so it is clear why so much focus on the index is justified. But what about all of the smaller companies that represent the real “meat” of the US economy? If you want to know about them, you would turn to the Russell 2000 index, which is composed of the smallest 2000 companies in the broad Russell 3000 index. A big factor in economic performance in the past 18 months has been … wait for it… the trade war. That being the case, the trade war should, in theory, only hold back companies who manufacture or sell goods overseas. Small cap companies should therefore be insulated from the headwinds that have resulted from all of the supply chain disruptions and tariffs. Comparing the two indexes, we can see that year to date, large caps have actually outperformed the small caps in return with the S&P having climbed by +18.82% and the small caps having increased by only +11.61%. Looking at earnings we can see that trailing twelve month earnings per share of large caps is $152 while the small caps earned just $44 per share. What can we learn from this? The companies that should make up the bulk of the growth in the US economy are not doing as well as the elites that make up the bulk of the large cap index… despite the trade war.
Markets ended the week with a mixed close as Non-farm Payrolls missed that mark but Chairman Powell offered consoling words. The S&P500 rose by +0.9%, the Dow Jones Industrial Average advanced by +0.26%, the Russell 2000 slipped by -0.37%, and the NASDAQ Composite Index dropped by -0.17%. Bonds traded up and the 10-year treasury yields increased by +1 basis point to 1.56%.
– Consumer Credit is expected to have grown by +$16 billion compared to prior period’s growth of +$14.596 billion.
– On deck for the week will be JOLTS job openings, MBA Mortgage Applications, Producer Price Index, Consumer Price Index, Retail Sales, and the University of Michigan preliminary Sentiment. Please refer to the attached earnings and economic release calendars for details.