Robertson stephens Investment Commentary June 10, 2024

Overview

Last week, May non-farm payrolls data came in above expectations. This type of robust employment report puts pressure on the Fed to hold off on cuts and push them later into the year. However, there are three recent signs that the tight employment picture is loosening. First, unemployment ticked up from 3.9% to 4.0%, breaking a streak of over 27 months below 4%. Second, the number of job openings declined in April. Finally, the number of available jobs per job seeker declined to their lowest level since June 2021. So what does this all mean – as we follow the Fed running around the track with the baton we continue to monitor labor market conditions and economic growth. We believe investor focus is increasingly watching for the Fed handoff to company fundamentals, which are encouraging per the recent quarterly earnings reports. The Investment Office base case does not have the Fed holding rates “too high for too long,” creating a mistake of tilting the US into a recession.

Equities

The S&P 500 returned 1.4% for the week. During the week, rates fell initially as the JOLTs survey showed the labor market cooling, which in turn had traders increasing expectations for rate cuts from the FED and triggered a rally in technology stocks. However, a stronger-than-expected jobs report at the end of the week had traders quickly dial those bets back and saw the stock market rally fizzle out as all megacap stocks other than Apple fell on Friday. The stock rally remains confined to large cap stocks as both midcaps (-1.2%) and small caps (-2.1%) suffered losses. Information technology (+3.8%) and communication services (+1.7%) were the best performing sectors in the S&P 500; utilities (-3.8%) and energy (-3.4%) were the laggards. EAFE markets returned 0.6% with gains in Europe (+0.8%) offset by losses in the U.K. (-0.2%) and Japan (-0.2%). EM markets returned 2.4% with gains in Korea (+5.9%) and India (+3.6%). India was volatile trading as initial gains on the expectations of a strong showing forPrime Minister Modi’s BJP party quickly fizzled when actual results came in substantially lower than anticipated. From a valuation perspective, most markets are within ±1 standard deviation based on historical forward P/E ratios, though the S&P 500 is at +1.6. For the next 12 months, EPS growth for S&P 500 is expected to be 10.7% (vs. 7.2% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 30.2% (vs. 12.7% annualized over the last 20 years). The S&P 500 (US Large Cap) and NASDAQ trade above their 20-year averages based on forward P/E ratios, as does the MSCI EM (EM Equities), while the Russell Midcap (US Midcap), Russell 2000 (US Small Cap) and MSCI EAFE (Non-US Developed Market Equities) all trade below.

Fixed Income

Investment grade fixed income sectors had positive returns as rates fell at the long end of the curve. Municipals saw a strong bounce back from recent negative performance, returning 1.1%, while US AGG returned 0.4% and US IG returned +0.4%. HY bond returned 0.4%, while bank loans rose 0.2%. EM debt returned -0.5% as the US dollar rose 0.2%.

Rates

Rates fell at the long end of the curve in a volatile week as traders first rallied based on the JOLTs survey but then reversed some of the gains on the back of the strong jobs report on Friday. The recession-watch 3M-10Y spread widened 6bp and closed the week at -97. The 2Y-10Y spread widened 8bps and is now -46. Rates rose in other developed economies as well. The BTP-Bund spread is at 1.34%. 5-year and 10-year breakeven inflation expectations fell slightly and now sit at 2.29% and 2.30% respectively; the 10Y real yield was flat at 2.14%. The market now expects the Fed to cut between one and two times in 2024, with the first cut now expected in September (45% probability) or November (46% probability) vs the Fed’s guidance of three cuts. At year-end 2024, the market expects the Fed Funds rate to be 4.8%.

Currencies/Commodities

The dollar rose 0.2%. The commodities complex fell 1.4% as energy prices fell 1.0% for the week. Brent prices fell slightly to $80/bbl. US natural gas rose 12.8%, while European gas fell 3.7%.

Market monitors

Volatility was higher for both equities and bonds (VIX = 13, MOVE = 91); the 10-year average for each is VIX=18, MOVE = 76. Market sentiment fell to 7 from 12 showing investors are a little more cautious with recent volatility.