CWS Market Review – July 11, 2023

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The U.S. Economy Added 209,000 Jobs in June

On Friday, the government released the big June jobs report. According to the Labor Department, the U.S. economy created 209,000 net new jobs last month. That was a little below Wall Street’s estimate for a gain of 240,000. June was the slowest month for job creation since December 2020.

The figure for May was revised downward by 33,000. April’s was reduced by 77,000.

The unemployment rate dropped by 0.1% to 3.6% but that’s still close to a multi-decade low. The broader U-6 rate fell to 6.9%. Importantly, the labor force participation rate for prime working age people (ages 25 to 54) increased to 83.5%. That’s a 21-year high. This suggests that people have largely returned to the workforce, undoing the mass exodus we saw during Covid.

The weak spot continues to be wage growth, although that’s improved a little. Last month, average hourly earnings increased by 0.4%. Over the last year, average hourly earnings are up by 4.4%, but there are some key details in the jobs report.

Job growth would have been even lighter without a boost in government jobs, which increased by 60,000, almost all of which came from the state and local levels.

Other sectors showing strong gains were health care (41,000), social assistance (24,000) and construction (23,000).

Leisure and hospitality, which had been the strongest job growth engine over the past three years, added just 21,000 jobs for the month. The sector has cooled off considerably, showing only muted gains for the past three months.

The retail sector lost 11,000 jobs in June, while transportation and warehousing saw a decline of 7,000.

Friday’s report was a mild disappointment especially after the very strong ADP payroll report from last Wednesday. Still, the overall signs look quite good.

The next test for the economy and markets comes tomorrow when the government releases the CPI data for June. Inflation has consistently trended lower for the last year. We’ll find out if that trend continued.

The consensus for Wednesday’s report is that inflation increased by 0.3% in June and prices are up by 5% over the last year. This could be the first report in several months where inflation accelerated.

Fed officials think that getting inflation below the current rate could prove to be a very difficult job. Chairman Powell has consistently stated his intention to get inflation down to the Fed’s goal of 2% per share.

So far, the Fed’s hawkish stance seems to be justified. The central bank won’t meet for another two more weeks, but it appears that another 0.25% is virtually a certainty. As of Tuesday, traders said there’s a 92% chance that the Fed will hike. This would bring the target range for the Fed funds rate up to 5.25% to 5.50%. After that, traders think the Fed will be on pause for the next eight months. The CPI might change that outlook.

The fact is that the forecast for the economy has improved. Not that long ago, Wall Street fully expected the economy to be off the rails by now. That hasn’t happened. Actually, the stock market has been signaling a stronger economy for a few weeks, for those willing to pay attention. For example, the S&P 500 Industrials Index has rallied quite nicely since early June.

It’s interesting to bring this up because Industrials are a key component in the cyclical sector. In our issue from June 6, I told you about the then-recent downturn in cyclicals. I even said that cyclicals would regain their leadership before the end of the year.

Apparently, I was too pessimistic because cyclicals have been acting much better, basically since the day I mentioned it to you. It’s not just Industrials, but Energy and Materials stocks have also rebounded quite well.

The chart below shows that Industrials, Materials and Energy stocks have all been leading the S&P 500 (black line) since early June. Financials have as well.

Take this as a signal that Wall Street is growing skeptical of the recession hypothesis. If pricing pressures remain in the economy, the Fed’s job may not be done. It’s as if everyone was prepared for a recession except the economy.

The Nasdaq 100 Is Due for a Rebalance

The Nasdaq 100 is a stock index of the 100 largest nonfinancial companies on the Nasdaq. It’s basically become a good proxy index for the large-cap tech sector. The ETF for the Nasdaq 100 (QQQ) became one of the first breakout stars in the ETF universe. It now has $200 billion in assets under management.

The problem the index has is that it’s grown too far too fast. The three largest stocks now make up 30% of the index. The index has largely become an index of Amazon, Apple, Nvidia, Microsoft and Tesla.

Earlier this month, Nasdaq said it will do a special rebalance to address this. They already rebalance the index once a quarter just for mechanics, but this will be a special rebalance. In other words, they’re actively tinkering with a passive strategy.

The top five stocks make up more than 40% of the index, and the top 10 make up 59% of the index. QQQ has been crushing it lately.

This brings up an important issue that I think many investors don’t realize which is how distorted by size Wall Street is. A small group of stocks comprises a very large part of the market while many hundreds of stocks barely make a peep.

To be sure, I’m not advocating for a different kind of distribution. After all, we have to deal with the market we have, not the one we wish to have. But there are a few important lessons to be drawn.

For example, it’s fairly easy to build a “good enough” index fund by yourself. I’ve run the numbers and you can track the S&P 500 reasonably well with as few as 10 stocks. You’ll need to rebalance every six months or so to be close.

Conversely, you can build a large portfolio of stocks that have little to no correlation with the rest of the market. On the Nasdaq in particular, there are hundreds of little banks that are barely noticed. If these banks theoretically all merged together, they still wouldn’t be as powerful as JPM.

Stock Focus: Farmer Mac

This week, we’re going to look at a stock known officially as the Federal Agricultural Mortgage Corporation (AGM) but it is better known as Farmer Mac. Farmer Mac was chartered by Congress in 1988, and five of the 15 members of the Board of Directors are appointed by the President.

The idea of Farmer Mac was to create a secondary market for agricultural loans like mortgages in rural areas. The company has a close working relationship with the Department of Agriculture. AGM was founded after the farm bust of the 1980s. The idea was to build an alternative source of credit for farmers, and it would be in the mold of Fannie Mae.

While Farmer Mac’s debts are not guaranteed by the federal government, much of the farm sector is protected by the government. In fact, farming may be one of the most state-protected industries in America.

Fannie Mae, of course, was thrashed by the big Financial Crisis of 2007-08. Farmer Mac got hit hard as well. The company owned a lot of shares of Fannie Mae before Fannie was taken over by the Feds.

In a 15-month span, shares of AGM fell from $37 to $2.28. Since then, AGM has been a huge winner. Last month, the stock reached a new high of $153 per share.

One side note: I don’t like to cherry-pick numbers, which is easy to do in finance, but I’ll note that AGM has grown at a steady clip since its low. The chart above begins after AGM plunged in 2007. I didn’t think including it added much. A steady chart often a good sign of a strong underlying business. Thanks to its close relationship to the government, Farmer Mac is able to have far lower interest-rate-risk than many major banks.

Farmer Mac’s quarterly dividend has steadily increased from a nickel per share in 2011 to $1.10 per share in 2023. The stock currently yields 3.1%.

This is a cool little stock to watch. Only two Wall Street analysts follow AGM and it has a market cap of just $1.5 billion. That’s tiny in Wall Street’s eyes. JPM is about 300 times the size of AGM. Still, you can’t argue with success.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on July 11th, 2023 at 6:53 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.