Equity markets experienced a bit of a relief rally last week as the debt ceiling overhang moved into the rear-view.
On the week, the S&P 500 gained 1.88% and the DJIA increased 2.17%. The tech-heavy Nasdaq moved higher by 2.07%. International equities also closed higher with developed markets (MSCI EAFE) and emerging markets (MSCI EM) up 0.90% and 1.26%, respectively. Fixed income, represented by the benchmark Bloomberg U.S. Aggregate, jumped 0.96% last week as the longer end of the yield curve shifted lower. The benchmark 10yr Treasury yield closed at 3.69%, down from 3.80% the week prior. Gold was a positive contributor last week, closing at $1,963/oz. Oil (WTI) continued to move lower closing at $70.10 a barrel.
Last week, we received many economic data points related to the jobs market. The May employment report showed a net creation of 339,000 jobs, well ahead of expectations and an increase from April’s release. The unemployment rate increased 0.3% but that was mostly attributed to more people entering the workforce. The April JOLTS report was a bit of a mixed bag; job openings had a slight uptick to 10.1m after several months of decline. On the other hand, the quits rate fell to 2.4% which might signal fewer people would be interested in leaving their jobs or the quality of jobs available isn’t there. Overall, the labor market showed some signs of stabilizing, which should be seen as a positive for the economy.
Congress finally agreed on a bi-partisan package to increase the debt ceiling with a slight decline in spending. This removed one big overhang on the market, but Friday’s rally was likely the brief tail wind that would be expected from the agreement. The S&P 500’s 11% return year-to-date has been incredibly narrow and concentrated. Just seven companies account for that return while the other 493 would have delivered a slightly negative return over the same period. Those mega-cap tech-related winners have seen their combined fwd. earnings multiple increase over 30% while their earnings remain virtually unchanged. For the market to take another leg higher, the equity market will need to broaden out. As result, we continue to remain patient and a bit defensive within allocations while waiting for better opportunities to present themselves.
“The greater our knowledge increases, the more our ignorance unfolds.” – John F. Kennedy