Thoughts On ... The Five

June 05, 2023 | Karen Barasch


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This week, we are going to dance around a few different issues (five to be exact) in rapid fire fashion, so let’s get to it.

One – We have a deal! We won’t spend much time on this one except to say – the U.S. once again went to the brink of utter stupidity before coming to an 11th hour agreement on raising the debt ceiling. Say what you will about President Joe Biden, but in a very fractured U.S. political system where inter-party and cross-party disagreements run deep, the President managed to get a deal that did not appear to give up much, while gaining a 2-year extension on the debt ceiling, which will push the issue beyond the next election.

Two – Back to the Future: Non-farm payrolls for the month of May came out this morning and, once again, the gains were, err, chubby. The U.S. economy created 339,000 jobs in May, which was close to double expectations (190k); although, the unemployment rate did rise to 3.7% (from 3.4%). The jobs market remains resilient, despite last year’s sharp upward move in interest rates, which has simultaneously provided some hope that a recession can be avoided and stoked fears that the Federal Reserve will have no choice but to continue raising interest rates to cool the economy and beat back inflation. Let’s look at a chart and then comment:

As you can see, monthly job growth was on a pretty clear downtrend through the back half of 2022 and into 2023 (save for a weather-infused January blip), but that has reversed over the past 3-months. Sure – there are some signs beneath the surface that the jobs market is deteriorating – the “Quit Rate” is dropping, which is a signal that people are more cautious about leaving their jobs, job openings are on the decline and some pockets of the jobs market – namely manufacturing – have seen outright job losses over the past few months. But 339k is still a lot of jobs.

In fact, over the past 12-months, the U.S. economy has created more than 4-million jobs, which probably sounds like a lot, but here’s some context that really brings 4-million home – let’s look at a chart of all the 12-month periods from the time that Marty McFly went “back to the future” (1985 in case you forgot) through the time just before COVID and draw a line at 4-million:

Notice something? There were exactly zero times that the U.S. economy managed the 4-million feat over the 35-year period (by the way, if Back to the Future were released today and Marty McFly repeated his 30-year journey back in time, he would go back to 1993). So, while there are signs of slowing when we look beneath the hood – 4 million is still an astonishingly high number.

Three – Divergence: While 2023 appears to be off to a great start (especially if one focuses on the performance of the S&P 500), the reality is starkly different. The emergence of Artificial Intelligence (AI) has turbo-charged a select group of stocks, while the vast majority of other stocks are languishing. Let’s look at a chart and then comment:

As you can see, the S&P 500, which is weighted by market cap, is up more than 11% year-to-date, while the S&P 500 Equal Weight (EW) index is basically flat for the year. This 11% 5-month gap in performance is amongst the largest gaps ever recorded with mean reversion generally the theme coming out of a period such as this. For its part, the TSX, which is also cap-weighted, tends to look a lot more like the S&P 500 EW and the Dow Jones Industrial Average.

Four – Could the BoC go again? The Canadian economy continues to show resiliency and inflation remains well above the Bank of Canada’s target. For some time, the expectation had been that the Bank of Canada was done raising rates with the “pause” that began in January of this year more of a signal that the next move will be a cut at some point in the back half of the year. For our part, we have been skeptical that a cut would come before 2024, but we shared the view that BoC was done with rate hikes. However, some chatter has begun that the BoC may look to do at least one more 25 basis point hike given firm growth, sticky inflation, and a still strong labour market. For its part, RBC Economics believes that the BoC will pass on a rate hike next week, but should the economy continue to show strength through the back half of June and into July, a July rate hike would be very much on the table.

Five – A Most Unlikely Matchup: With the Vegas Golden Knights set to face the Florida Panthers, it is worth noting that this is the most unlikely Stanley Cup matchup in at least the past 20-years. To put it in perspective, the Golden Knights were 6 to 1 to win the Western Conference when the playoffs began, while the Panthers were 16 to 1 to win the Eastern Conference. This hypothetical matchup would have paid more than 100 to 1.

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