Is Good News Good Again?

If there’s been one economic data point that forecasters and the Federal Reserve have had a difficult time getting a handle on, it’s been the labor market. And that continued this week, with a slew of data beating Wall Street’s expectations. 😮

Nonfarm payrolls rose 339,000 in May, topping the 190,000 estimate by a wide margin. This marked the 29th straight month of positive job growth, bringing the number of jobs created in 2023 to nearly 1.6 million. It also aligned with the 12-month average, showing that the labor market remains strong despite the Fed’s efforts to cool it.

The labor force participation rate was unchanged. However, a 369,000 decline in self-employment pushed the unemployment rate to 3.7%. 🔺

A 0.3% MoM increase in average hourly earnings aligned with estimates. Meanwhile, the 4.3% YoY increase was 0.1% below expectations. Additionally, the average workweek fell by 0.1 hours to 34.3 hours.

April’s JOLTs report from earlier in the week indicated 1.8 job openings for every unemployed person. That increased from 1.7 in March, as job openings jumped to 10.1 million. And the initial and continuing jobless claims trends remain volatile and near historic lows.

Overall, this combination of data keeps the Federal Reserve in a difficult spot. It recently came out and signaled a likely pause at the June meeting. However, its assumption that inflation will continue to trend lower includes a weaker labor market and reduced consumer spending. ⏯️

So far, we’ve not seen that. At best, we’ve gotten mixed signals from companies this earnings season about their view of the consumer. Many are baffled at how well spending has held up in the face of many challenges. But baffling aside, that’s what is happening. 🤷

The news sent treasury yields higher and stocks soaring. But, despite higher yields putting pressure on multiples and economic growth prospects, the market remains optimistic that corporate earnings can hold up in the current environment. As a result, stocks are going up. 

The Federal Reserve’s next meeting is on June 13-14. Investors will be watching closely to see how the Fed interprets the current environment and adjusts its policy outlook. As of today, the bond market is pricing in a 70% chance of a June pause and a 30% chance for another 25 bp hike. And expectations for the first rate cut have been pushed out to January of 2024. 📆

Only time will tell who is right. But for now, optimism is reigning supreme. 🌞

By far, the most talked about chart today was the S&P 500, which broke out to a new year-to-date high. The index joins the Nasdaq 100, which has been leading the U.S. stock market higher, marking two of the four major indexes breaking out. 📈

Bullish investors view this as a broadening out of market participation and the potential nail in the coffin of the “bear market” narrative. However, bearish investors suggest that the overlap between holdings skews the results, as only a few mega-cap stocks account for most of the gains. 🐻🐂

Regardless of your side, all eyes are on whether the Dow Jones Industrial Average and Russell 2000 begin to play catch up. Both indexes have lagged their counterparts off their October lows, so the bulls want to see them play catch up. The more stocks that are participating, the better the argument for a “new bull market” becomes.

That’s particularly true of the small-cap Russell 2000, which has been sitting near year-to-date lows since March. Whether or not today’s 3.63% rally in the index is the start of its move higher remains to be seen. Rest assured, investors will be watching this development in the coming weeks. 👀

It’s been a rough environment for telecom stocks, particularly the largest ones with diversified media businesses. However, things may get more challenging as Amazon enters the fray. So let’s see what today’s news and initial reaction were. 👇

The original report was from Bloomberg, which stated that Amazon was in talks to offer free or discounted mobile service to U.S. Prime Members. It indicated the tech giant had been talking with wireless carriers, negotiating with Verizon, T-Mobile, and Dish Networks to get the lowest wholesale prices possible. 📱

However, T-Mobile and Verizon both denied discussions, and Dish declined to comment. That’s likely because this represents a catch-22 for them.

While this offering would give the big carriers another major distribution network to expand their 5G networks, it would come at the cost of margins. The big carriers’ unlimited plans start at roughly $60. So if Amazon does offer a free or $10/month plan to its prime members, that would pose significant competition to those regular-priced bundles. 🛒

The move would likely mean more customers on their networks but less profit per customer. 🔻

Ultimately, the telecom giants will have difficulty saying no to Amazon for several reasons. First, they need new distribution channels to grow the 5G network. And second, the tech giant has shown it’s willing to lose billions on certain member perks to maintain its edge against Walmart+ and other alternatives. If Amazon wants to enter a specific industry, it will do it, with or without cooperation.

So these companies will likely cooperate; it’s just unclear how the final deal will look.

In the meantime, investors are ratcheting down their earnings expectations. That weighed on already heavy stock prices. 📉