Economic Hostage Plot Fails

Congress passed the debt ceiling compromise and sent it to President Biden for his signature, averting a catastrophic credit default at the 11th hour. Hardliners on the right and left of the political spectrum got bupkis. It’s as if these ideologues stormed into a diner brandishing weapons and demanding hostages, but were ignored so they sat down and asked for menus instead.

Wall Street heaved a collective sigh of relief. Now all eyes have turned to the Federal Reserve, which meets June 13-14. The latest data show cooling inflation and a slowing economy; oddsmakers say the Fed is likely to “pause” its interest rate tightening.

The latest U.S. employment data, released Thursday and Friday, eased fears of a wage-price spiral. Initial jobless claims rose modestly from the previous week but came in less than consensus expectations. Private sector employment grew by 278,000 in May, higher than the 170,000 expected, led by seasonal hiring in leisure and hospitality.

Job growth spiked in May. U.S. employers added 339,000 jobs, far exceeding expectations of 195,000 and representing an increase from a revised total of 294,000 in April. The unemployment rate edged up to 3.7%.

However, despite the healthy job gains, ADP’s private sector report showed decelerating wage growth, including another drop in pay growth for job changers. Although the unemployment rate hovers at a 54-year low, countervailing forces are keeping inflation from running amuck.

The latest Fed minutes indicate that the central bank’s officials were divided in May on whether to pause their rate hikes at their forthcoming meeting in June.

But we’re seeing a risk-on rally, in the wake of dovish remarks on Thursday by Philadelphia Federal Reserve President Patrick Harker, who asserted that it was “time to at least hit the stop button” on rate hikes.

Global investors have been cheered by the U.S. debt ceiling deal, as well as the Fed’s apparent softening. The major U.S., European, and Asian stock indices closed higher Thursday and again Friday.

The main U.S. stock market indices closed sharply higher Friday as follows:

  • DJIA: +2.12%
  • S&P 500: +1.45%
  • NASDAQ: +1.07%
  • Russell 2000: +3.56%

According to the latest numbers from FactSet, corporate earnings results are holding their own. For first-quarter 2023, the blended year-over-year earnings decline for the S&P 500 is -2.1%, which is a substantial improvement from previous forecasts.

On March 31, the estimated earnings decline for Q1 2023 was -6.7%. Ten sectors are reporting higher earnings today, compared to March 31, due to positive earnings surprises.

As of this writing, 99% of S&P 500 companies have reported earnings for the first quarter. Among these companies, 78% have reported actual earnings above the mean estimate.

A mixed May…

Bullish sentiment is spreading, but May was a mixed bag for the major equity indices. Enthusiasm over artificial intelligence (AI), as well as better-than-feared Q1 earnings, pushed the tech-heavy NASDAQ higher and helped the S&P 500 to finish essentially flat.

WATCH THIS VIDEO: The Rise of Artificial Intelligence, Algorithms, and “Robo-Trading” on Wall Street

FactSet searched for the term “AI” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through May 25. Among these companies, 110 cited the term AI during their earnings call for the first quarter. This number is well above the five-year average of 57 and the 10-year average of 34 (see chart).

The tech sector is soaring, but we’re seeing troubling signs of bad breadth. For the month of May, the less tech-intensive Russell 2000 and Dow Jones Industrial Average declined.

The market is being led by a handful of mega-cap tech stars that have heavily invested in AI. For the stock market rally to have legs, we’ll need to see broader participation. The current divergence could be a set-up for a rout, but the two-day broad-based surge that closed out this week was a good sign.

It’s also a bullish sign that the CBOE Volatility Index (VIX) has fallen below 15, its lowest level in 18 months. Since 1990, the historical average of the VIX is 19.66. It’s also positive that the S&P 500 is well above its 50- and 200-day moving averages.

But if you’re still nervous about the risks I’ve just described, consider the time-proven advice of my colleague, Dr. Stephen Leeb.

As chief investment strategist of The Complete Investor, Dr. Leeb has produced a special report on how to survive the tectonic shifts facing the financial world.

Amid the upheavals he sees ahead, he says the most profitable investment opportunity won’t be found among conventional assets. His research indicates it will be a tiny under-the-radar play, as revealed in this report.

John Persinos is the editorial director of Investing Daily.

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