On Friday, the jobs report came out very strong showing that 317,000 jobs were added to the economy last month. That’s a really good number but why are jobs so important? Jobs will be how we get to a soft landing. For the economy to continue to grow, we need to go to the areas where there is slack. We are currently in an inflationary environment so growth across the board might be overly inflationary and could actually be negative. If you look at the chart shown in the episode, you will see the current labor market compared to February of 2020. There are still 524,000 jobs that need to be filled in order to get us back to where we were two years ago. That’s not even on trend with the growth rate that we normally see. The areas where we see the most slack is leisure and hospitality. We’ve talked about this the last few months and talked about where we can see jobs being added that wouldn’t necessarily cause inflation. Adding jobs to the leisure and hospitality sector could cause the economy to grow without causing inflation. The Federal Reserve is watching closely to see if we can get to a soft landing, where we slow down the economy but not crash into a recession, and then grow into the money supply that we created to fight COVID. We saw 67,000 jobs added last month in leisure and hospitality. That’s a good number but we definitely want to see that stronger. There’s still optimism in the economy, potentially growing into all of the stimulus that we that we produced in 2020 and 2021. That may give the Fed the option for orchestrating a soft landing. The next big data point this week is CPI, which is the inflation number that we’re all fighting and watching. Can we see a good jobs report and a slower inflation number? Those two data points are what we’re watching closely. It is also what we feel like the markets are watching, as well as the Fed. The Fed is meeting this month on July 26th and 27th. There’s a lot of data from last week and this week that we think will be very important going forward.
We have a really important week for the market coming up. We will see the updated reports on inflation, housing, retail sales, and the consumer. This week also starts the second quarter of corporate earnings reports. Estimates reflect a 5% year over year increase in S&P 500 earnings in the second quarter. However, guidance for Q2 was slightly weaker than the long-term average but not by much, which is important. Somewhat soft guidance, along with slower economic growth suggested second half estimates will likely have to come down a little bit, but not dramatically. That’s the good news, but the most important part of earning season for second quarter is to see what the corporate leadership says about the current economic outlook. We will be listening closely to see what the executives say about how sticky inflation is believed to be. Something that we are really focused on, is reserves and the cash that firms have on the balance sheet. How much cash are they are reserving will say a lot about the confidence level they have in the future economy. The reserves will be very telling and is something that analysts and investors, like us, will be watching carefully.
We are going to try to stay on top of the M2 money supply report, which is a report that we get once a month. Over the pandemic the money supply growth was around 27%. The average is 6%, but how does this affect the consumer? This is a leading indicator for inflation. It typically leads inflation by about 2 years. We had 27% growth with money supply about two years ago and now we’re seeing record inflation. There’s a pretty direct correlation between the two. However, over the last 12 months we’re down to 6.6%, which is on par to the average of 6%. Even more encouraging, year to date we’re down to 3% growth. A way to think about it is to imagine that there’s $10 in the economy and we have 10 apples with each one costing $1. Now imagine that we have $15 but still only 10 apples. That makes each apple now cost $1.50. This year, it seems like we have $15 but we’re only making five apples because of the supply chain issues on top of the money supply. Groceries, cars, and everything ese has been hit with supply chain issues. When you add the money growth issue and supply issues, it really expands inflation. The good news is that we are starting to ramp back up. If we can stay around 6% or below, that would be very good thing for the economy.
Last week, despite a four-day trading week due to the holiday, we saw the S&P 500 finish on Friday at a closing price of 3,899. That gives us a new short term resistance level of 3,960, and a new short term support level of 3,840. In addition to that, we’re currently tracking the 50-day moving day average of the S&P 500, which is currently sitting at a price of 3,972. We think that’s an important number, especially from an intermediate standpoint, that could potentially become our new resistance level. However, if we cross through that level, it could become our new long term support level. This is the number we really want to focus on this week, and the weeks coming up.
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