There have been numerous occasions when bad economic news has triggered a positive market reaction. This pattern repeated with the latest report from the U.S. Bureau of Labor Statistics. On June 4th, the JOLTS data was released, detailing job openings among other metrics.

The anticipated number of job openings was 8.35 million, but the report revealed only 8.039 million openings, falling short by approximately 300,000. The chart below illustrates the number of job openings compared to available workers, a metric frequently cited since 2022 when companies faced challenges filling positions.

(Source: Fundstrat)

The labor market remains robust by any standard, yet this data suggests a decline in hiring needs. Ordinarily, this wouldn’t be favorable for the economy since new hires drive economic growth. However, the market reacted positively, rallying after the report. This raises the question: why?

The reason lies in the Federal Reserve’s stance. The Fed has repeatedly noted that the labor market is extremely tight, which is one reason they are hesitant to cut interest rates. Fewer job openings than expected indicate the labor market may not be as tight as the Fed believed, increasing the likelihood of future rate cuts. Consequently, as more key economic reports are released, we might continue to see bad news interpreted as good news in the short term.

Summer Market Performance in Election Years

As we kick off summer, we wanted to review how the summer months have historically performed during election years. The chart below presents the average performance of the S&P 500 in election years since 1950.

(Source: Carson Wealth)

Although June is typically a weaker month for stocks, the chart above indicates that the stock market has historically performed well in June, with an average gain of 1.3%. If the market cycle in election years follows historical patterns, we might expect some weakness in the months leading up to the election, followed by a rally at year-end. While every election is unique, including this one, we find these statistics to be a useful guide for anticipating market trends.

Measuring Sentiment – Margin Debt Percentage of Total Stock Market

There are numerous indicators of investor sentiment to determine if people are overly greedy or fearful. One useful tool for assessing market euphoria is the margin debt percentage of the total stock market. Investors use margin to borrow money for purchasing additional stocks. A higher percentage indicates greater market greed. 

(Source: Current Market Valuation)

The chart above illustrates the annual change in margin debt as a percentage of total market value. There have been three notable peaks since 2000, which preceded major market crashes. In 1999, 2007, and 2021, margin levels increased by over 0.50% from the previous year, with a full 1% increase in 2007. This indicator is also useful in reverse: significant decreases in margin were seen at the market lows of 2002, 2009, and 2022.

Currently, the chart shows an increase in margin usage compared to a year ago, but it remains well below the levels preceding past crashes. If we observe a spike in this indicator, it could signal potential market turbulence. For now, the levels are within normal ranges, indicating that investor euphoria is not being driven by excessive margin use.

Articles We’re Reading

India’s Modi wins election despite his party losing outright majority (CNBC)

Algorithmic trading cited as amplifier in oil selloff (Bloomberg)

Massachusetts securities regulator probing Roaring Kitty GameStop trades (Reuters)

United Airlines rolls back 2024 hiring plans due to Boeing delays (Reuters)

Market Snapshot

For the Month Ending 5/31/2024 (Cumulative Returns)1   

1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

Did You Know?

Father’s Day is celebrated in June largely due to the efforts of Sonora Smart Dodd, who is credited with founding the holiday in the United States. In 1909, Sonora Smart Dodd, inspired by the newly established Mother’s Day, wanted to create a similar holiday to honor fathers. Dodd’s own father, William Jackson Smart, was a Civil War veteran and a single parent who raised Sonora and her five siblings on his own.

Dodd initially proposed June 5, her father’s birthday, as the date for Father’s Day. However, the celebration in Spokane, Washington, where Dodd lived, was deferred to the third Sunday in June to allow more time for the churches to prepare their sermons. The first Father’s Day was celebrated on June 19, 1910, in Spokane. This date set a precedent for the observance on the third Sunday of June.

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.