Market Commentary: The Summer Rally Continues Amid Strong Job Gains

The Summer Rally Continues Amid Strong Job Gains

The Summer Rally Continues

Another week and more new highs for the S&P 500. As we’ve noted before, summer rallies are actually quite normal in an election year and we didn’t think this year would be any different. In fact, the three summer months are up more than seven percent on average in an election year and higher more than 75% of the time, the best out of any three-month period.

  • The summer rally continued last week, the S&P 500 gaining 1.4% and hitting a new all-time high.
  • Stocks are in the middle of a strong three-month seasonal period for an election year.
  • Strong May gains historically suggest more gains to come.
  • May job growth surprised to the upside with the economy adding a robust 272,000 jobs.
  • Job gains are the key to consumer spending, which is the foundation of the U.S. economy.

We know that earnings sparked much of the rally this year, as corporate America has continued to report very strong earnings across the board. There are many worries out there, but if investors were forced to focus on only one thing, we’d suggest keeping an eye on earnings. One-year forward expectations for S&P 500 earnings continue to rise and as long as that can continue to happen, as we expect it will, it’s good news for markets.

What else could spark a stock rally? Better inflation data could be the next thing to watch. We see many clues inflation should continue to slow, including prices paid on manufacturing and services both coming in lower than expected last week, as did unit labor costs after a strong downward revision. This week we have both consumer and producer level inflation data due out, which could help extend the rally.

MAYbe May’s Strength Is a Bullish Clue

The S&P 500 just missed a 5% gain in May, but 4.8% is pretty darn good, especially considering April lost 4.2%. So what tends to happen after a big May you ask? June, which is historically not a good month, gained eight out of 10 times for a very solid 1.0% average, while the rest of the year was up more than 10% on average, more than double what we typically see over the final seven months of the year. Even more impressive is the past four times this happened (1997, 2003, 2009, and 2020) all saw at least double-digit returns. “MAY”be we have a positive signal from the strong May. Did you see what I did there?

2024 is one of the better starts to a year ever, but you’d never know it if all you looked at were the headlines. All we hear about is how bad things are. How the consumer is tapped out, the economy is headed for a recession, only a few stocks are going up, and so on endlessly. Well, investors should be smiling through all the dour calls and outlooks, as stocks have gained double digits after the first five months this year and the good news is more green could be coming.

We found that returns after previous 10% or more year-to-date gains at the end of May tended to be quite impressive, with June up 1.0% on average (and even more for the median), and the rest of the year up 16 out of 19 times (84.2%) with a solid 8.8% gain on average.


The last bullet point for the bulls is a 4% or greater monthly gain in May suggests continued strength, with the S&P 500 up a year later 81.3% of the time and rising a very solid 12.2% on average. This compares to the average year higher 73.0% of the time and up 9.0%. But it doesn’t end there, as I looked at all 12 months and would you believe that historically the very best returns after a 4% or greater monthly return take place after a big gain in May? A year later stocks have never been lower (10 out of 10 higher) and are up more than 20% on average.


May Payrolls Tell Us the Consumer Is Not Weakening

Job growth continues to catch most people by surprise, rising 272,000 in May. That was well above expectations for a 180,000 gain. In fact, “whisper” expectations (as much as one can glean from online chatter amongst economists and strategists) seemed to be tilted to a downside surprise, perhaps close to 150,000. Expectations were low mostly because we had received some disappointing April data recently that suggested the consumer may be weakening, including retail sales, disposable income, and services consumption. Well, the May payroll report upended that narrative. We didn’t even see significant revisions to March and April payroll numbers, and the 3-month average now sits at 249,000. A year ago, it was 242,000. In 2019, average monthly job growth was 166,000. There’s some perspective for you.

Now, the unemployment rate did rise to 4%, breaking a streak of 27 straight months in which it was below 4%. Not that 4% is some magic threshold. The unemployment rate data actually comes from what’s called the “household survey,” which is a survey of about 60,000 households. The payroll number comes from the “establishment survey,” which is a survey of about 119,000 businesses and government agencies (about 629,000 worksites). So, the household survey is noisier, with the confidence interval around employment about 600,000, versus 130,000 for the establishment survey.

Over the last year, the unemployment rate has risen from 3.7% to 4%. That’s not too alarming. We prefer to look at the “prime-age” (25-54 years) employment-population ratio,” since it gets around some issues that crop up with the unemployment rate. For example, when calculating the unemployment rate, someone is counted as being “unemployed” only if they’re actively looking for a job. An aging population, with more people retiring and leaving the labor force every day, can also make the numbers noisier.

The prime-age employment-population ratio is a steadier measure and it was unchanged at 80.8% in May. That’s only slightly below the high from last summer, and above anything we saw between 2001 and 2019 (when it peaked at 80.4%). In fact, the prime-age employment-population ratio for women hit a record high of 75.5% in April, and it rose to a new record of 75.7% in May. This by itself should tell you the labor market is strong, with more people participating in it.

One narrative we’ve seen is that these numbers are good for a bad reason — more people are working part time. But we need to separate the reasons for why people are working part time. Some people may be working part time because they (or their partners) are earning enough, and so they can scale back. What would be worrisome is if more people started working part time because they couldn’t find full-time work. The Bureau of Labor Statistics (BLS) actually measures this, via a metric called “part-time employment for economic reasons.”  As a percent of the labor force, this measure is now at 2.6% — matching its level in February 2020 and a tick below the 2019 average of 2.7%. It’s increased over the past year, but that’s likely just the normalization of a labor market that is no longer red hot. As you can see in the chart below, it remains at historically low levels.

What Matters for the Economy: Consumption (and Incomes)

Consumption runs on incomes, and the picture there is positive. If you look at overall income growth across all workers in the economy (a product of employment growth, hourly wage growth, and hours worked), that’s running at a 6.0% annualized pace over the last three months. It’s been steady at that level for a few months now.

This pace is stronger than what we saw pre-pandemic, when aggregate income growth averaged about 4.7% annualized, but well off the red-hot levels of 10%+ in 2021-2022 (when inflation surged), so the Fed should have little concern that the current rate could drive inflation higher. The 6% aggregate income growth we’re experiencing provides a good first estimate of nominal GDP growth, and that’s above the 2010-2019 trend of about 4%. That’s important because nominal GDP growth is directly related to corporate profit growth.

The big picture is that the consumer isn’t really weakening. That also means the economy isn’t weakening, since consumption makes up close to 70% of the economy. While strong job and aggregate wage growth may mean it will take longer for Fed rate cuts to materialize (perhaps only in September now), it also means profit growth remains strong, and that’s ultimately good for the stock market.


This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

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