According to the futures market, stocks appear set for a negative open to today’s trading. Before the bell, the Bureau of Labor Statistics released employment data for the month of May. A total of 272,000 jobs were added to the economy, considerably above the expected increase of 190,000 and the revised prior-month tally of 165,000. Conversely, the unemployment rate ticked up to 4.0%, versus economists’ outlook of 3.9% and the April level, which was also 3.9%. Hourly wages improved a stronger-than-expected 0.4%, on a monthly basis, compared to an anticipated 0.3% gain and the previous month’s 0.2% advance. Year to year, wages stepped up 4.1%, faster than the month-ago pace of 3.9%. Labor force participation in May slipped to 62.5% from the April measure of 62.7%.
The latest employment figures indicate a still-solid labor market. They follow the less-favorable data points released earlier this week showing higher initial jobless claims (for the week ended June 1st), a weaker Automatic Data Processing job addition number (May), and a more modest count of job openings (April). We note that hiring in the health care and hospitality sectors remains strong. On balance, though, elevated short-term interest rates and prices for goods and services are prompting many employers to be conservative about expanding staff. Employees are being conservative, as well, switching jobs less frequently. The Federal Reserve is keeping a close watch on employment in consideration of potentially adjusting the federal funds rate, currently at 5.25%-5.50%.
Shortly, investors will get a read on wholesale inventories and, this afternoon, data on consumer credit. Inventories for April look to rise approximately 0.2%, which would be a reversal from the March decline of 0.4%. Consumer credit in May is estimated to have risen above the $10 billion mark from $6.3 billion in the previous month. Businesses are trying to properly balance supply with demand in order to avoid unnecessary carrying costs. Consumers continue to spend, as highlighted by the Institute for Supply Management’s (ISM) May report that the services sector is expanding. That said, consumers are budgeting more carefully, increasingly focusing on necessities instead of discretionary items. Well-heeled consumers, compared to those on lower-income rungs, however, have largely sustained their free spending ways.
For the current week, stocks seem set to post modest gains. As of Thursday’s close, the tech-heavy NASDAQ composite was up 2.6%, the broader Standard & Poor’s 500 (S&P 500) index had gained 1.4%, and the blue-chip Dow Jones Industrial Average was clinging to a 0.5% improvement. Year to date, the NASDAQ, S&P 500, and the Dow have performed solidly, up 16.3%, 12.9%, and 3.1%, respectively. The U.S. economy is holding firm, though pockets of softness are appearing. Wall Street optimism that the Fed will cut short-term interest rates in September appears to be fading. The European Central Bank recently cut rates on the Continent by 25 basis points, apparently trying to contain real interest rates, that is, basically, the difference between lending rates and inflation. Here in the United States, the Fed may need to do the same before yearend to keep the economy from slowing.
Even given hints the economy is moderating, we would not be surprised to see the major domestic stock market indexes post incremental gains through yearend. Portfolio diversification, with a healthy weighting of financially-fit stock-sector leaders, is always a sound strategy. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
