VTI - 14 Straight Beats: May US Jobs Report Quiets The Recession Crowd VO A Hold

2023-06-02 09:40:44 ET

Summary

• The May employment report revealed a gain of 339,000 jobs, the best since January, and ahead of the +195,000 expectation.
• Grabbing the media's attention, the unemployment rate rose to 3.7%, the highest level since February last year, much above the 3.5% consensus outlook.
• Despite mixed internal numbers, traders took it all in stride and the looming recession is put off for yet another month.
• The S&P 500 Index rose to fresh 9-month highs while Mid-Caps remain a hold in my view.

The May employment report revealed a gain of 339,000 jobs – the best since January – and ahead of the +195,000 expectation. It was the 14th straight headline jobs beat, a record streak, and marked the 29th consecutive month of employment growth. Private payrolls backed up the strong ADP number from earlier in the week at +283,000.

The stunner, though, was the unemployment rate rising big to 3.7% (3.65% unrounded) the highest level since February last year, much above the 3.5% consensus outlook. Average hourly earnings rose 0.3%, the lowest monthly climb since February’s 0.0% print. On a year-on-year basis, the increase was 4.3%, the weakest since 2021. The average workweek dipped just modestly – key for Fed policy. The labor force participation rate was unchanged at 62.6%, equaling the 2023 high-water mark.

The underemployment rate ticked up to 6.6%. Revisions to prior months were positive, indicating a continued robust jobs market, but the household survey (used to determine the unemployment rate) revealed a steep 310,000 job loss compared to April. Temporary jobs, meanwhile, were negative while URs among some minority groups also moved up.

May Employment Generally Robust

Average Hourly Earnings Declined In May

A Fall In Manufacturing & Tech Employment

Interest rates initially inched higher. But keep in mind the 10yr was at 3.8% at the end of last week, and now rests near 3.6%. The 2-year yield rose a bit to near 4.4% and equity futures remained higher post-NFP.

The household survey revealed a jump in the unemployment rate, indicative of weakness in the labor markets, while the establishment survey showed strength. This duel creates issues for investors, analysts, and the Fed. What is the true state of the employment picture? We might know more in the coming months as the establishment survey gets revised. For now, the miss in average hourly earnings and a 0.3ppt uptick in the unemployment rate helps the Fed’s cause.

The Battle Between The Household & Establishment Surveys

Putting it all together, there was not much change in the Fed rate outlook. There remains a 69% chance of a Fed skip at the June 14 meeting while probabilities suggest a rate increase at the July meeting, taking the Fed Funds target rate to the 5.25 to 5.5% range.

Fed Fund Futures Suggest A June Skip, July Hike

In the equity market, volatility is expected to be muted in the next month. The VIX dipped to near 15 this morning – the lowest since late June 2021.

VIX Falls Under 16, Near 2-Year Lows

Given the still-strong domestic jobs market, let’s home in on a U.S.-centered niche of equities.

The Vanguard Mid-Cap Index Fund ETF Shares (VO) tracks the performance of the CRSP US Mid-Cap Index, which measures the investment returns of mid-capitalization companies, according to Vanguard . VO offers a straightforward way for investors to match the returns of a diversified group of medium-sized U.S. firms. Using a passive approach, a full-replication method, and with a small annual expense ratio of just 0.04%, it can be a core holding for many investors.

VO’s tradability is strong, with a 30-day median bid/ask spread of just 3 basis points and average daily volume of just under 1 million shares. The exchange-traded fund, or ETF, yields 1.6%, near that of the S&P 500 (SP500). VO holds 343 individual stocks and the median market cap is near $24 billion. On valuation, the fund sports an 18.4 trailing-12-month price-to-earnings ratio - that is below the S&P 500’s 21.5 comparable earnings multiple.

According to Morningstar , there is a small amount of large-cap exposure as some of the biggest constituents of the index rally into the large-cap territory, but there’s a good diverse mix of both value and growth with VO.

VO: Portfolio & Factor Profiles

Seasonally, VO tends to follow the trends of the S&P 500 Futures (SPX). According to data from Equity Clock , the ETF has tended to sputter a bit from early June through late in the month over the last 18 years. A second-half rally is then commonly seen.

Mid-Caps: June Consolidations Often Seen

The Technical Take

While the S&P 500 notches breakout highs, climbing ever closer to the August 2022 rebound peak, small and mid-cap U.S. stocks have been left in the dust. "The Magnificent Seven" domestic mega-caps have been responsible for the bulk of domestic stock market returns this year. With a flat 200-day moving average in the below chart, the “SMID” space is nothing to write home about. I see support just under $200 while the $227 to $229 range is resistance.

But keep your eye on the RSI momentum index at the top of the chart – it's in consolidation mode. A rally higher in the RSI could portend a bullish price breakout, which could then lead to a bullish broadening out of the overall stock market rebound that has taken place in recent weeks. VO is one to watch, but I have a hold on it for now, which aligns with my prior June outlooks in earlier articles .

VO: Trendless Price Action, Watch For An RSI Breakout

The Bottom Line

It was yet another strong headline jobs gain. Despite mixed internal numbers and a differing view when comparing the establishment survey to the household survey, traders took it all in stride. In the end, not a whole lot new was uncovered, and the looming recession is put off for yet another month.

While the U.S. SMID space has rallied between today and yesterday, I have a hold rating on Vanguard Mid-Cap Index Fund ETF Shares this summer, as I expect trendless action to continue in this underperforming area.

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