Magic Fountain Philosophies

Solid & Steady 

The Fed held its monthly policy meeting this week and decided to leave rates unchanged. Policy members pointed out that overall and core inflation have been recently declining (remember just last week we saw CPI decline to 1.7%) and running below the Fed’s 2% target even though the economy is growing at a steady rate. However, Fed officials believe this weakness in pricing will be “transient.”

Moral of the story: Based on the upbeat commentary from the FOMC and their belief that inflation might return, the Fed effectively erased any hopes of a rate cut. Bad news is that markets were probably hoping to hear a tone that would suggest an impending rate cut to help boost profitability for companies. Good news is that this means the Fed is fairly confident the economy is going to be picking up steam in the near future.

Magic Fountain of Growth 

For a while now, we’ve continued to see an incredibly strong labor market. The latest jobs report for April further supported this as 263k jobs were created in the month and unemployment ticked down to 3.6%, which is a 49-year low. But this was driven by almost 500k people dropping out of the labor force. This jobs report exceeded expectations and the only real weakness was in the retail sector, where employment fell for the third straight month. Yet somehow, this isn’t translating into wage growth as expected as the increase in pay over the last 12 months remained unchanged. The answer here might be productivity, which increased 3.6% in the first quarter, the strongest gain we’ve seen since 2010. 

Moral of the story: Rising productivity means rising profitability, which generally results in higher wages without significant pressures on inflation. Productivity has hovered close to 1% for a few years so this recent run up in productivity is great to see, but I question the sustainability of these numbers given much of it was driven by a one-time stimulus to the economy last year. 

Earnings are here (Part 4) 

Over 1,150 public companies released earnings this week, including a mixed bag of earnings from some big names like Google parent company Alphabet, McDonalds, and Apple. Google released a disappointing report with revenues that came in short of market expectations, primarily driven by a deceleration in the growth rate of YouTube clicks (to clarify, they’re still growing revenues at 17%, so it’s not like the world is ending). Earnings from Apple and McDonalds, however, came in ahead of expectations with bullish commentary on the state of affairs today versus at the end of last quarter. 

Moral of the story: At this point, over half of the S&P 500 companies have reported earnings and 75% of them have reported earnings ahead of market expectations. Granted, expectations were about as high as they are for those massage places with neon signs, but the fairly optimistic commentary from management and strength in recent economic indicators are making it seem like the recessionary scare has subsided.