State of the Stock Market Analysis for the Week Ending on June 3rd, 2018 Market Closes Week Out with Win, As June Begins 6-3-18)

All You Need Is Jobs

Tariff worries and Italian elections may have weighed on the stock market this week, but the government jobs report helped the stock market close out the week with an impressive win. We saw 223,000 new jobs for May, which topped estimates of 200,000 as well as April’s 159,000. The unemployment rate fell to an 18-year low of 3.8% versus economists’ estimates of holding steady at 3.9%. We all know that the market did meltdown following the 2000 low unemployment numbers, but there does not seem to be any forces in place that would cause a repeat in this new era.

For the week, though, we did see some volatility, but the major indices held up well, especially with Friday’s bounce. For the week, the Dow declined 0.5%, the Nasdaq rose 1.6% and the S&P 500 gained 0.5%. The worries about longer-term rates have subsided, and we saw the yield on the 10-year U.S. Treasury close out at 2.89%, which seemed to take a lot of the worry away for investors. The Volatility Index (VIX) had popped up this week, but it closed out the week at 13.46, and that showed that investor fears have retreated quite a bit. The jobs report was the key to Friday’s rally, so hopefully we can continue to see positive economic reports.

In other economic news, construction spending for May rose 1.8%, which topped economists expectations of 1.0%, as well as April’s 1.7% decline. It was yet one more report that says the economy remains strong, and it is another plus for the economy as we head into the last half of the year. Average hourly wages rose 0.3% for May, and that beat estimates of 0.2% and April’s 0.1%. This might raise worries about inflation, but a little wage inflation might be a good sign for the broader economy. Wage increases show that regular workers continue to benefit from the strong economy, and that could actually help consumer spending for the rest of the year.

The Federal Reserve has historically worried about wage pressures, but these increases seem necessary and normal. These wage pressures seem unlikely to make Jerome Powell and the Fed over-react with multiple rate hikes, and it looks as though the stock market has already priced in the three or maybe four rate hikes for the rest of the year. With employment levels so low right now, it is clear that the economy is in a great spot, so maybe wages need to be at a higher level. Inflation rates have been so low for so long, that maybe the economy and corporations can handle higher pay for workers.

The stock market is in a great position as we head into the summer months, and investors and strategists are wondering what might go right or what could go wrong. This past week’s first-quarter GDP number of 2.2% versus expectations of 2.3% is a little worrisome, but there are strategists optimistic that this number will rise for the second quarter given the strong earnings and economic numbers we have recently seen. This would give a “thumbs up” to the stock market gains we have witnessed this year, so we will see what happens in the days and weeks ahead.

As for the political picture, it looks as though the “summit” between North Korea and the United States is back on, and that is a plus for peace on the Korean Peninsula. As for domestic Washington DC, the drama continues, but it might cool off as we head toward midterm elections in November. It is a complicated mess to say the least, but amazingly enough, the stock market is unfazed, and it rarely reacts in a negative way to all of those “collusion” issues. That said, the Gorilla wishes each and all a relaxing June weekend, and we will be back in action on Monday. Have a great weekend!

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