Major stock averages at record highs on positive jobs data

I tell my father’s story of the gambler who lost regularly. One day he hears about a race with only one horse in it, so he bet the rent money. Halfway around the track, the horse jumped over the fence and ran away. – Howard Marks

Stocks continued their upward climb last week as all three major averages posted gains with the S&P 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index closing at all-time highs. It was the seventh consecutive record high for the S&P 500 and the broad-based index also ended June with its fifth straight monthly gain. The biggest reasons for the stock market’s strength last week appeared to be general optimism about an economic recovery and better than expected reports on the labor market. Nearly 60% of adults in the U.S. have now received a Covid-19 vaccine, which should allow the economy to open back up at a faster pace. While there is still concern over the spread of the so-called Delta variant of the virus, fatality rates in countries with widespread vaccinations are low. The number of positive Covid-19 cases has fallen significantly, too. There also was positive news last week on the jobs front as all three pieces of jobs-related data exceeded expectations. ADP reported that private payrolls rose 692,000 in June, far better than the 550,000 that were expected. That report was followed by the weekly jobless claims, which fell to 364,000, setting a new low during the pandemic. On Friday, the Bureau of Labor Statistics released the June employment report, which showed that 850,000 new jobs had been created, much higher than the 700,000 jobs that were expected and the 559,000 that were created in May. Although the unemployment rate rose to a higher-than-expected 5.9% from 5.8% in May and average hourly wages were up 3.6% on a year-over-year basis, the overall report was viewed as positive by the market. Market sentiment also received a boost in the aftermath of the Federal Reserve’s bank stress tests as all 23 of the major banks passed easily, allowing them to increase their dividends and buy back their stock. The major money center banks all announced dividend increases last week and will be able to pay an extra $2 billion in new quarterly dividends after the Fed stress test results.

Last Week

Besides the favorable jobs data last week, other economic data was also positive. The consumer confidence index for June was higher than expected, reinforcing bullish readings on the economic recovery. The index is almost back to its pre-pandemic peak as more people have become vaccinated and positive Covid-19 cases fall. Pending home sales in May rose to their highest level since 2005 as mortgage rates declined and remain near historic lows. The S&P Case Shiller National Home Price Index showed an annual gain of nearly 15% in April, which was the highest percentage monthly gain in more than 30 years of tracking this data. Finally, the June ISM manufacturing index was in line with estimates and showed continued expansion.

For the week, the Dow Jones Industrial Average gained 1.0% to close at 34,786 while the S&P 500 Index rose 1.7% to close at 4,352. The Nasdaq Composite Index jumped 1.9% to close at 14,639. All three major stock averages ended the week at record highs.

This Week

The June ISM Purchasing Manager’s Index (PMI) for the services sector is expected to be slightly lower than in May, which was at a record high. The services sector index has been in expansion territory above 50 for twelve consecutive months.

The Federal Open Market Committee (FOMC) releases minutes from its June monetary policy meeting and investors will look for Fed officials’ views on inflation and their timetable for tapering monthly bond purchases and raising interest rates.

There are no notable companies that are scheduled to report quarterly earnings in this holiday-shortened week and second quarter earnings season begins next week.

Portfolio Strategy

With no important economic data to be released this week and first quarter earnings season essentially over, investors will turn their attention to the Federal Open Market Committee (FOMC) minutes of the June monetary policy meeting. The Fed talked about the possibility of reducing its monthly bond buying program at some point in the future but did not reveal any details as to the timing or amount. The minutes could provide clues on both counts. Right now the Fed is purchasing $80 billion a month in Treasury securities and $40 billion per month in mortgage-backed securities in an effort to keep interest rates low and help spur an economic recovery from the pandemic. The health of the labor market is an important variable in forming monetary policy and while the June jobs number was much better than expected, the economy is still nowhere near the pre-pandemic level for payrolls. The unemployment rate in June was also expected to fall, but it rose instead, suggesting that the Fed’s easy monetary policies will likely remain in place for the foreseeable future.   The market is very sensitive to any change in the Fed’s monthly bond purchase program as it represents the first step in the tightening process and the raising of interest rates. Although corporate earnings have been stronger than expected during the pandemic, historically low interest rates have also contributed significantly to the stock market’s outsized gains. The Fed already moved up its timetable for two rate hikes from 2024 to 2023 in its new forecast and the minutes could provide more potential market-moving information as to its future plans.