We had a Sharknado type of a week for investors, with news flow so bad it’s good. Investors absorbed the negative news of an escalating trade dispute with Mexico (not to mention no resolution with China), reports that mega-cap tech companies are under antitrust scrutiny by the department of justice, and a disappointing headline jobs number. Sometimes in investing, bad news is good news as stocks rose over 4% on the week. The weak data has given the Fed cover to raise hopes of an economic boost in the form of a rate cut.
Headlines This Week
- The U.S. economy added 75,000 jobs in May, below the consensus expectation of 180,000. The 12-month average is running at a pace of around 195,000 per month. The unemployment rate remained unchanged at an all-time low of 3.6%. The below-consensus number, along with revisions lower of previous months prints fueled calls for a rate cut.
- The short-term U.S. Treasury yields declined (bond prices rose) swiftly this week, which helped to close some of the gap created by the yield inversion (short rates higher than long rates). According to Bloomberg’s World Interest Rate Probability metrics, markets imply about a 60% chance that the Fed will cut rates from 2.50% to 2.25% in July. With some looking for a cut of half of percent.
- The European Central Bank (ECB) President Mario Draghi indicated that the central bank is open to cut interest rates, which would push them into negative territory from its current zero rate. The significant change in their monetary policy is in response to concerns surrounding slowdown in the global economic growth picture.
- Central Banks are back to stimulating economies which boosted equities this week. Large and mid-cap led the way, while domestic outpaced international. Also, in response to easing central banks, gold had a strong week and is hovering at a one-year high. Emerging markets was the laggard this week, which may be a result of continued trade disputes. Momentum was the leading factor, while quality was the laggard.
U.S. Unemployment Rate
The headline monthly non-farm payrolls (jobs) number was weak on Friday, coming in at just 75,000 compared to the 180,000 expected. As we write often, this data series is notoriously volatile, and therefore, media has a field day reporting on it. We prefer to look at the longer term trend, which shows that over the past year, job creation has been well within the healthy range we have experienced over the past eight years. On top of that, unemployment is very low at 3.6%, helping to drive up wage inflation.
The Week Ahead
- Technology behemoths Facebook (FB), Google (GOOG, GOOGL), Amazon (AMZN) and Apple (AAPL) will receive a dose of Congressional dissection as the House Judiciary Committee’s panel on antitrust will hold its first public hearing on Tuesday.
- Economic data next week includes a JOLTS report (Job Openings and Labor Turnover), inflation reads from the Consumer Price and Producer Price Indexes, the Import and Export Price Indexes, a Retail Sales report, an Industrial Production report, and the University of Michigan Consumer Sentiment Index. Data points will be the freshest data the Federal Reserve will have going into its rate decision later this month.
- Sports will take center stage, as we should have a National Hockey League champion crowned. Currently, the St. Louis Blues are up 3-2 on the Boston Bruins. An NBA Champion should emerge as well. The Toronto Raptors up 2-1 on the Golden State Warriors going into next week. Finally, The U.S. Open at Pebble Beach, California, will kick-off on Thursday.
Stock Highlights from Max
A Big Probe-lem
The best week of the year for stocks yielded a too-close-to-call top sector. Not surprisingly, the battered Technology sector is one; surprisingly, the Consumer Staples sector is the other. The laggard this week goes to Communication Services mostly due to…
- Alphabet Inc. (GOOG, GOOGL) settled its case with the Federal Trade Commission, yielding to the Department of Justice (DOJ) to take its shot at the search giant. Add the DOJ to the list of entities probing the company, as the EU has been investigating U.S. tech giants and Russia is looking to set some fines for user data law violations. Also, the Judiciary committee in Congress begins its investigation next week.
- Citigroup expects the DOJ case to settle just as the EU case did, with a hefty fine, but no impact to Google’s business model. On the positive side, the company made two announcements this week worth mentioning. First, they plan a November launch of a video-gaming platform that is console free, called Stadia. The base service will be free and allow gamers to purchase games one-by-one. There will also be a premium service “Pro” for $9.99 a month. In addition, they announced an acquisition of privately-owned Looker for $2.6 Billion. Looker is a business intelligence and big data analytics firm. The most recent private equity raise had the company valued at $1.6 Billion. The acquisition is intended to help Google make up some space in cloud computing, where it is in third place.
- In other strategy news, CVS Health Corp. (CVS) held its investor day and served up a plan to accelerate growth. The company will leverage its retail footprint to deliver medical care services via the HealthHUBs, which will be in 1,500 location by 2021. The company expects mid-single-digit earnings growth by 2021 and low double-digit growth in 2022 and beyond.
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