Market Update: June 5, 2017


Last Week’s Market Activity

  • Solid Friday and holiday-shortened week for stocks… and more record highs. S&P 500 gained +0.36% on Friday, +0.96% for the week to end at a record high (2439.07). Nasdaq led major averages Friday (+0.94%) and for the week (+1.54%). Small caps beat mid and large (Russell indexes).
  • Tech drove Friday’s gains, led by semis and software. Financials hit by lower rates and yield curve flattening post jobs miss. Energy was the biggest decliner on falling oil prices.
  • Weaker dollar helped COMEX gold Friday (+0.8%) but not WTI crude oil (-1.4%)
  • 10-year yield dipped 0.06% to 2.15%, lowest closing level of 2017 and lowest since just after the election
  • Friday miss on U.S. nonfarm payrolls unlikely to sway Fed next week (details below)
  • Defensive tilt to weekly performance. Telecom topped weekly sector rankings, followed by healthcare. Oil fell > 4%; 10-year Treasury yield dropped 0.10%.

Overnight & This Morning

  • Stocks in Asia mostly lower amid relatively light news
  • In Europe, shares down (Euro Stoxx 600 -0.2%), continuing Friday slide
  • Weak sentiment after more terrorist attacks in London over the weekend
  • Euro up 0.3% to $1.12
  • Commodities – Mostly lower, led by weakness in industrial metals and energy, with WTI oil near $47/bbl. COMEX gold (0.3%) adding to Friday’s gains at $1283, copper (-0.7%)
  • U.S. stock, Treasury yields up slightly.
  • U.S. dollar mixed vs major currencies


Key Insights

  • Goldilocks environment. Steady but not booming job gains and inflation leveling off suggests economy is not too hot, not too cold. Wage gains are benign-average hourly earnings +2.5% YoY in Friday’s May jobs report. We’ve seen a mixed set of data recently: soft Q1 GDP, Q2 tracking near +3%, and earnings looking good. The Fed Beige Book cited most Fed districts continue to expand at a modest or moderate pace. Sounds like Goldilocks.
  • Any concern that the Fed may be behind the curve are misplaced, at least for now. The market is only pricing in a 44% chance of another rate hike in 2017 (after one in June), and just one hike in 2018.
  • An expensive stock market can stay expensive. The 17.7 times forward price-to-earnings (P/E) multiple, where it stood in early 2015, is more reasonable than the trailing PE (20.7) for the S&P 500 but is still at the high end of the historical range. We reiterate valuations are not good predictors of near-term stock market moves, an important message for clients.

Macro Notes

  • Jobs miss doesn’t mean Fed pause. The economy added 138K new jobs in May, well below consensus expectations of 185K, with additional downward revisions for March and April; unemployment rate edged lower to 4.3% from 4.4% on lower labor participation rate. The report may give the Fed some pause, but given the overall backdrop a June hike remains far more likely than not.
  • The China Caixin Manufacturing PMI index was below 50 when reported last week, but overnight the services PMI was 52.8, much better than last month’s 51.5. The overall composite number of 51.5 suggests a continued, but slowing, expansion in the Chinese economy. We expect the government to continue to try to reduce leverage in the economy, but not to engage in any major reforms until after the Communist Party meeting this fall.


  • Politics and central banks highlight the week ahead. Politics and central banks highlight the coming week, with Thursday, June 8 of particular importance as it brings the U.K. general election, the European Central Bank (ECB) meeting, and testimony of former FBI Director James Comey. Data of note in the U.S. includes durable goods and Services Institute for Supply Management (ISM). Overseas, Eurozone and Japan Gross Domestic Product (GDP), and Chinese inflation and money supply data are due out.


  • Nonfarm Productivty (Q1)
  • Unit Labor Costs (Q1)
  • ISM Non-Mfg. Composite (May)
  • Factory Orders (Apr)
  • Durable Goods Orders (Apr)
  • Cap Goods Shipments & Orders (Apr)
  • UK: Markit/CIPS UK Services PMI


  • Eurozone: Markit Eurozone Services PMI (May)


  • Eurozone: GDP (Q1)
  • Japan: GDP (Q1)
  • Japan: Current Account Balance (Apr)
  • Japan: Trade Balance (Apr)


  • Germany: Industrial Production (Apr)
  • UK: General Election, 2017
  • ECB: Draghi
  • Japan: Machine Tool Orders (May)
  • China: CPI & PPI (May)


  • Wholesale Sales & Inventories (Apr)
  • France: Industrial Production (Apr)
  • UK: Industrial Production (Apr)
  • UK: Trade Balance (Apr)
  • China: Money Supply and New Yuan Loans (May)






Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC

Idled Workers Return to U.S. Labor Force

Michael Mulvey of USA Today

Hundreds of thousands of Americans are streaming back into an improving labor market as employers raise wages and hire less skilled job candidates to cope with an intensifying worker shortage.

The portion of the U.S. population working or looking for jobs — known as the labor force participation rate — has risen to 62.9% from 62.4% since September, Labor Department figures show. The rate had been falling since 2008, mostly because of baby boomer retirements, and that’s still expected to be the long-term trend.

Yet part of the decline was caused by a bruising post-recession job market that prompted discouraged workers to drop out of the labor force and many other unemployed Americans to retire, go on disability or return to school.

At least some of those idled workers are returning to work or looking again now that the jobless rate has fallen to 4.9%, a level many economists consider full employment. They’ve been drawn back by employers who are raising pay or becoming less selective..

“We’re just hearing a lot more openness” from employers, says Tim Gates, of staffing firm Adecco.

Wells Fargo said recently the rebound appears to be driven by the less educated, including discouraged workers who had been on the sidelines. Since September, the participation rate for college graduates with at least a Bachelors degree has dropped to 73.8% from 74.4%. The rate for other groups, including high school graduates and those with less than a high school diploma, has climbed at least half a percentage point.

Even so, their unemployment rate has declined, indicating that many of those returning are landing jobs despite increased competition from their peers.

Other groups are also coming bac, including retirees, the disabled and people in school, according to a Goldman Sachs analysis. Many are enticed by rising wages. Although average wage growth across the economy has been tepid at about 2% nationally, average earnings for private-sector employees in the same job at least 12 months jumped 4.1% in the fourth quarter, according to payroll processor ADP.

Companies are also getting creative. Adecco’s Gates says some manufacturers unable to find experienced workers are splitting jobs into two positions and hiring less skilled candidates for the simpler tasks. Others are bringing on unskilled workers and training them, a strategy rarely deployed when unemployment was elevated after the recession, says Becca Dernberger, of Manpower’s Northeast division.

Written by Paul Davidson of USA Today

(Source: USA Today)

Three Financial Facts of the Week: March 10, 2016


Fact #1
Growth in “labor quality,” a measure of the skill set of the average worker, has declined in the last few years, according to a recent research note from J.P. Morgan Chase. In 2015, the growth in overall workforce skills contributed less than 0.1 percentage points to GDP growth, the smallest contribution of labor quality to growth since 1979.
Source: Wall Street Journal

Fact #2
Among industrialized economies, only the U.S. and Japan are growing at similar rates compared with their pre-financial crisis growth rate, after adjusting for changes in the working-age population, but both economies have still grown more slowly than expected.

Fact #3
As tighter border controls are continuously put into place across Europe, the European Union could face up to 18 billion euros, or $19.6 billion, each year in lost business, steeper freight costs, and interruptions to supply chains, according to a recent report by the European Commission.
Source: New York Times

Study: Wages are growing faster than believed

The entry Into the workforce of new employees earning below the median wage has held down earnings growth, a study says.
Ted S. Warren/AP

Wages aren’t growing so slowly, after all.

A new study by the Federal Reserve Bank of San Francisco found growth in the median weekly pay of workers continuously employed in full-time jobs picked up sharply in 2015 to nearly 4% on an annual basis.

By contrast, the 12-month rise in average hourly earnings reported by the Labor Department has hovered around 2% for most of the nearly seven-year-old recovery. Annual wage growth accelerated to 2.5% in January but slipped back to 2.2% last month.

The report blames the sluggish aggregate gains on changes in the makeup of the labor force, particularly the entry of low-wage workers as the recovery gained steam and the retirement of higher-paid baby boomers.

“While high-wage baby boomers have been retiring, lower wage workers sidelined during the recession have been taking new full-time jobs,” study authors Mary Daly, Bart Hoblin and Benjamin Pyle wrote.

USA Today reported similar findings last fall based on data from payroll processor ADP, but this marks the first formal report of the trend by a government agency.

The tepid overall pay increases have puzzled economists because the sharp drop in unemployment to 4.9% from 10% in 2009 should have led to faster pay hikes as employers competed for a shrinking pool of available workers. From 1983 to 2015, the study notes, yearly wage gains averaged 3 ¼%. With monthly job growth averaging well over 200,000 the past couple of years, the failure of worker paychecks to swell more rapidly has been considered the chief missing element of the labor market’s recovery.

The report separated the median weekly wage growth of full-time workers who stayed employed from changes in earnings due to movements into and out of the labor force. The median pay gains of the full-time workers spiked from about 2% in 2010 to 4% in 2012, then edged down to about 3% in 2014 before gradually rising to nearly 4% by the end of 2015, the study shows.

By contrast, many other Americans enter or exit the labor force each month. Those outside the labor force — including many in school as well as laid-off workers who stopped looking because they grew discouraged — have returned in greater numbers as the labor market has improved. About 80% of those new full-time employees started “at below-median wages,” the study says.

Similarly, the number of part-time workers switching to full-time jobs has increased as well, with about 80% doing so at below-median wages.

At the same, several million Baby Boomers have been retiring each year. The departure of those older, higher-paid workers also has held down wage growth.

During the recession, the study says, the opposite dynamic occurred. Employers fired low-wage workers first and kept those with higher skills and earnings, tempering the decline in average wages.

The study concludes that the impact of its wage-growth findings on inflation are unclear. Even though raises have been more robust than believed, employers’ ability to keep their overall wage bills low “by replacing or expanding staff with lower paid workers” still could keep a lid on inflation. The Fed, which raised its benchmark interest rate for the first time in nine years, is looking for inflation to pick up to move ahead with further hikes.

Written by Paul Davidson of USA Today

(Source: USA Today)

Three Financial Facts of the Week: January 13, 2016

Chris Potter/Flickr

Fact #1
47.2% of the jobs added by the U.S. economy in 2015 came from low-paying sectors including retail, professional services and food services, leading to wage growth to rise at a slower pace than the overall jobs number would indicate.
Source: CNBC

Fact #2
According to a report by the Institute of International Finance, from 2008 to mid-2015, corporate debt in the BRIC countries (Brazil, Russia, India, and China) jumped from $8.9 trillion to $24.5 trillion.
Source: Investor’s Business Daily

Fact #3
The Labor Department announced that the number of job openings and hires both rose in November, indicating the highest worker confidence in the jobs market since the start of the recession.
Source: MarketWatch

Company Ordered to Pay Back Wages for Bathroom Breaks

Stuart Dee/Getty Images 

A publishing company near Philadelphia has been ordered by a judge to pay back wages – possibly up to $1.75 million — to more than 6,000 employees after it neglected to pay for bathroom or other short breaks, according to a statement released by the Department of Labor Monday.

American Future Systems, also known as Progressive Business Publications, violated the Fair Labor Standards Act by docking its telemarketers’ wages “for virtually all time not spent making sales calls, sometimes bringing their wages below the federal minimum wage,” the DOL said. The federal minimum wage for nonexempt employees is $7.25 per hour for all hours worked, plus time and a half for hours worked beyond 40 per week.

While the exact amount has not been determined, the DOL estimates that Progressive and its president, Edward Satell, “are liable for at least $1.75 million in back wages and liquidated damages to more than 6,000 employees who worked in 14 call centers” for violations occurring through June 2013.

“Our company has a liberal break policy of allowing our telemarketers to choose unpaid breaks anytime, for any reason, for as long as they want,” Satell said Tuesday. “This flex work policy was greatly valued by many of our employees to handle their personal needs.”

Satell said he will appeal the decision, issued by a judge in the U.S. District Court for the Eastern District of Pennsylvania on Dec. 16, 2015. “If upheld, we’d have to discontinue this generous policy,” Satell said. “We have very good legal reasons to be hopeful that the court will reverse the ruling.”

“For far too long, American Future Systems penalized its employees for taking breaks to meet the most basic needs during the work day — stretching their legs, getting a glass of water or just using the restroom,” said Jim Cain, district director for the department’s Wage and Hour Division.

Investigators from the division found that PBP telemarketers had to clock in and out for every break, “even those as short as two to three minutes,” the DOL said. PBP deducted the break time from the total hours worked each week.

The Fair Labor Standards Act does not require lunch or coffee breaks. “However, when employers do offer short breaks (usually lasting about 5-to-20 minutes), the law considers the breaks compensable work hours that must be included in the sum of hours for the work week and considered in determining overtime,” the DOL said.

Progressive Business Publications, founded in 1959 and based in Malvern, Pa., publishes and sells primarily business newsletters.

Written by Roger Yu of USA Today

(Source: USA Today)

Weekly Market Recap: December 7, 2015

Screen Shot 2015-12-07 at 2.57.31 PM

The week in review

  • Unemployment rate at 5.0%
  • ISM mfg. PMI down to 48.6
  • Light vehicle sales 18.1 M
  • Unit labor costs +1.8% q/q saar

The week ahead

  • Job openings
  • Retail sales
  • Consumer sentiment
  • Producer prices
  • Import prices

For more information please visit the Source below.

(Source: JPMorgan)

Chipotle Broke The Law When It Fired A Fast-Food Striker, Feds Find


 The National Labor Relations Board ruled in a decision released Thursday that fast-casual chain Chipotle broke labor law when management fired an employee of a Missouri store who’d taken part in fast-food strikes.

The ruling from the board affirms a decision issued against Chipotle by an administrative law judge earlier this year. As a result, Chipotle has been ordered to reinstate the worker with back pay, and to post a humbling notice of employees’ labor rights inside the store.

The notice pledges that workers will have the right to “form, join, or assist a union,” and that Chipotle “will not discharge or otherwise discriminate against any of you for engaging in protected concerted activities.”

A Chipotle spokesperson said the company does not comment on litigation.

According to the ruling, a worker named Patrick Leeper was fired in 2014 after missing a staff meeting at his store in St. Louis. Leeper had worked at the burrito chain for three years and earned $8.80 per hour, a little more than a dollar over the minimum wage. He had joined a local worker group that’s part of the Fight for $15, a union-backed campaign aimed at raising wages in the fast-food industry, and taken part in three strikes shaming Chipotle and other chains over low pay.

Healy was reprimanded after discussing with his co-workers how much they earn, even though such discussions are protected under the law, according to the decision. Healy was allegedly told that “the next time I hear you speaking about wages in the workplace, we will be parting ways.” The judge found that such an admonition violated Healy’s rights.

The judge also found that Healy was treated unfairly when he was canned after oversleeping and missing the staff meeting. Other workers who were discharged for similar offenses hadn’t even worked at Chipotle for three months, compared to Healy’s three years. And another employee who had missed a store meeting was merely given a written warning, according to the decision. Chipotle, the judge wrote, “did not discipline employees as severely, if at all, for missing or being late to all-store meetings.”

The protests in St. Louis involving Healy were spearheaded by a group called the Mid-South Workers Organizing Committee. That group is funded by the Service Employees International Union, which has coordinated the national Fight for 15. The campaign’s periodic one-day strikes in cities around the country have roiled the fast-food industry, shining a spotlight on the plight of workers earning as little as $7.25 an hour.

The SEIU and its affiliates have brought a raft of so-called unfair labor practice charges against Chipotle and other fast-food chains, claiming they trampled the rights of activist-workers like Healy. Late last year, the labor board issued 13 complaints against McDonald’s and several of its franchisees, accusing them of retaliating against workers who joined the strikes.

Written by Dave Jamieson of The Huffington Post

(Source: The Huffington Post)

Should Americans Work More? To Hit 4 Percent Growth, We Would Have To

© Karsten Moran for The New York Times
© Karsten Moran for The New York Times

Jeb Bush said last week that Americans would “need to work longer hours” if we’re going to meet his ambitious target of 4 percent real annual economic growth — nearly double the average growth rate the Congressional Budget Office expects in the future. Then he clarified his remarks to say he was talking specifically about the 6.6 million American workers with part-time jobs who say they would like to work full time.

The narrow idea that full-time jobs should be available to people who want them is uncontroversial. “To the extent that Jeb was saying involuntary part-timers should be able to find the full-time work they seek, I agree!” wrote Jared Bernstein, a former top economic adviser to Vice President Joe Biden, in an email.

But when I asked economists about the 4 percent growth target last month, even the ones who were sympathetic to his aggressive goal said we’d need big increases in the labor supply to get anywhere near it. That is, even before the “longer hours” comment, the implication of his goal was that he would introduce policies to push many of us to work more hours — well beyond the 6.6 million Americans who are officially underemployed.

It wouldn’t be unthinkable for Americans to work more. While the average American workweek is already longer than in most high-income countries, the Irish and the South Koreans show it’s possible for an advanced country’s workers to put in more hours than we do. And while the suggestion that Americans should work harder is being treated as a gaffe, there is a lively debate among economists on the left and right about whether longer workweeks would be desirable.

“It’s no question our tax and transfer system creates distortions against work,” says Michael Strain, a labor economist at the American Enterprise Institute, a right-of-center think tank. One reason is fairly simple: Labor is taxed, and leisure is not. People who would work an extra hour if they got to keep 100 percent of their pay may be working less because they get to keep only 90 or 80 or 60 percent of that hour’s pay after taxes.

Besides tax effects, entitlement programs also discourage work in two ways. By raising people’s incomes, they make it less necessary for people to work lots of hours just to get by. And since programs like food stamps pay out less to people as their incomes rise, they act like a tax on work.

Kevin Hassett, a colleague of Mr. Strain’s, offered a thought experiment about fixing these distortions.

“Taxing labor income distorts labor-leisure choice,” he said, meaning that people will relax more if you tax them for working. “One theoretical approach is to tax complements to leisure, such as a tax on skis, bowling balls and X-Box consoles.”

But as Vox’s Ezra Klein notes, Republicans have a suite of more real-world-oriented policies whose effect would be to reduce distortions against work, lead Americans to work more hours and therefore expand the economy without trying to implement a leisure tax. These include: lower tax rates on labor, especially for top earners who currently face high rates; less generous welfare programs; shorter durations for unemployment insurance; and strengthening the tie between health insurance and full-time employment by repealing the Affordable Care Act. Mr. Bush has also called for raising the Social Security retirement age, which would induce older Americans to work more hours.

Liberal economists acknowledge that taxes and other public policies can discourage work, but they tend to be more skeptical that an undersupply of labor is a significant problem. The fact that workweeks are already longer in the United States than in places like Germany and Britain suggests we’re doing a pretty good job of not discouraging work too much.

Dean Baker, an economist at the left-of-center Center for Economic and Policy Research, also noted that there were offsetting policies that actually distort in the direction of extra work. Fringe benefits like health insurance and pensions are often tied to full-time employment as a result of federal tax and labor laws. That encourages some people to work full time when, absent incentives created by the government, they might prefer to work part time.

But there’s also a much broader issue: Sometimes, more work is a bad thing.

For example, the main point of Social Security is to make it possible for people to retire — that is, to work fewer hours. Cutting Social Security benefits so people have to work farther into old age would increase hours worked and add to the economy, but is it actually something we want to do? Similarly, unemployment insurance benefits induce some people to stay unemployed longer than they otherwise would — especially when the economy is strong and jobs are widely available — but they also provide two offsetting advantages. One, they give people time to look around for the right job instead of the first job they can find. Two, they help people avoid destitution when they are out of work.

Mr. Strain noted that not all policies that promote work promote well-being, and it’s important to find approaches that do both.

“If you gutted the social safety net, I think you would see a significant increase in labor supply,” said Mr. Strain — which was not an endorsement of such a policy. Instead, he suggests increasing the earned-income tax credit (which rewards low-wage workers for working more), removing barriers to occupational licensing (so it is easier to enter occupations that require certification, such as hairdressing) and making it easier for low-paid workers to commute to work.

These policies are carrots for low-skill workers rather than sticks, which might draw Democratic support — though in recent years, Republicans have been more inclined to praise the benefits of the earned-income tax credit than to spend extra money on it. But even with Republican support, it’s not obvious those carrots could induce enough new labor to come close to Mr. Bush’s growth target.

Americans could be induced to work more on a broad scale through big tax cuts — though those would have to come with big spending cuts. Or they could be induced to work more with big cuts to entitlements, and all the costs to standards of living that would entail. The lack of easy options to increase the number of hours — whether through longer workweeks for current workers or through bringing millions more into the work force — is a major reason it hasn’t already been done.

Written by Josh Barro of The New York Times

(Source: New York Times)