“It is only through failure and through experiment that we learn and grow.” ~ Isaac Stern

Good evening,

We hope our readers in the U.S. had a happy and safe Independence Day.  U.S. markets were closed on Wednesday afternoon and all day on Thursday, but despite its abbreviated nature, this was an eventful trading week for investors, with the S&P 500 once again setting a new all-time high close on Tuesday.

On the macroeconomic front, arguably the most significant data of the week was released on Friday, with the U.S jobs report. Perhaps more important than the June numbers, however, were revisions to May and April numbers that translate into 111,000 fewer new jobs in the last two months than previously calculated. “That is a big number,” said Fundstrat Head of Research Tom Lee, “and to us it shows that the labor market is slowing.”

The U.S. jobs report for June was in line with expectations, with slightly higher unemployment balancing out a headline beat on jobs added (206,000 jobs versus consensus expectations of 190,000). However, the government sector accounted for most of the upside in jobs this month. In the private sector, the numbers came in far short, at 136,000 versus consensus expectations of 160,000 – as our Chart of the Week shows.

Speaking of the Fed, the minutes from the June 12, 2024 meeting of the Federal Open Markets Committee were released this week. The minutes showed that FOMC members continued to lack confidence that inflation is declining sustainably, requiring still more evidence of tanking inflation. Yet a number of officials appear concerned that years of elevated rates could be taking its toll on the economy, stressing that the Fed needs to be ready to respond quickly to any “unexpected economic weakness.” 

Such sentiments are consistent with remarks made by Fed Chair Jerome Powell this week in Sintra, Portugal. Speaking at the annual forum hosted by the European Central Bank, Powell noted that the respective risks of cutting too early (risking a resurgence of inflation) or cutting too late (thus weakening the economy) had become more balanced. 

In the view of Head of Technical Strategy Mark Newton, we remain in a “bad news is good news” regime for investors. In that light, evidence of a softening labor market could be a positive for stocks. In addition to Friday’s jobs report, this week we saw continuing unemployment claims hit multi-year highs.

“The rally to SPX-5650-5750 seems to be underway, as large-cap Technology continues to press higher,” Newton told us this week, and his cycle composite suggests further gains are possible heading into mid-July. So does seasonality: The first two weeks of July are typically strong, and a look at election years suggest that a long bias could be appropriate until August.  

“Technology’s outperformance has successfully carried SPX and the Nasdaq back to new high territory,” Newton noted. Tech stalwarts like Apple (AAPL 0.64% ) and Microsoft (MSFT 1.07% ) each touched new all-time highs on Friday.

Newton pointed out that “while many investors have been understandably concerned by lack of participation by other sectors amidst Technology’s dominance in the U.S. equities market, we seem to be seeing a sector rotation into Industrials, Materials and Consumer Discretionary.” From a technical standpoint, he noted that “interestingly, momentum has been positively diverging on weekly Summation index charts [a widely used gauge of market breadth]. McClellan’s Summation index has fallen to new lows for the year, but momentum gauges like MACD have held up in much better shape and are on the verge of making a bullish crossover of the signal line.” Although uncertainty remains on this matter, Newton suggested that “this very well might coincide with the start of a bounce in market breadth.”

Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the July 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere 

Keir Starmer is set to become the next prime minister of Britain after his Labour party scored a landslide victory. The Conservatives, led by outgoing PM Rishi Sunak, suffered a bruising defeat that will leave it with the fewest seats in Parliament in the party’s history. Notable Conservative losses including former PM Liz Truss, who lost her seat in Parliament. Expected to take over as Chancellor of the Exchequer in the wake of Labour’s ascent will be Rachel Reeves, a growth-focused centrist whose CV includes six years as an economist at the Bank of England and education at Oxford and the London School of Economics. She will be the first woman in that role.

Hurricane Beryl claimed at least 10 lives as it devastated large swaths of the Caribbean including Grenada, St. Vincent, the Grenadines, and Jamaica, generating sustained winds of 160 mph and dumping torrents of rain for as many as 12 straight hours. No Category 5 hurricane on record has ever materialized in the Atlantic this early in the hurricane season – such strong storms normally do not emerge until August.

Japan’s Nikkei 225 index hit an all-time high close on Thursday, at 40,913.65, breaking a March 22 record. Gains in the overall market were driven by buying in shares of export-oriented companies including automakers. 

The parent company of Saks Fifth Avenue has reached an agreement to acquire Neiman Marcus in a deal valued at $2.65 billion. Amazon and Salesforce will each take minority stakes in the combined company, to be named Saks Global. 

The People’s Bank of China announced it would engage in open-market bond transactions in response to recent buying activity on Chinese debt that has pushed 10-year yields down as low as 2.18%. Domestic investors apparently see the bonds as a safe haven amidst China’s recent economic weakness. China’s central bank said it would borrow bonds from primary traders on the open markets to counter such activity.

And finally:  Japan’s Digital Minister Taro Kono on Wednesday declared that his country had "won the war on floppy disks!" The government has completely phased out its use of the antiquated technology, with plans to also halt the use of fax machines. A tougher objective might be the elimination of the carved personal seals known as hanko – stamps that have historically and traditionally been used in place of signatures to authenticate important documents. The Digital Ministry was founded in 2021.