Wall Street Brunch: Labor Day After Independence Day (NYSEARCA:SPY)

Listen below or on the go on Apple Podcasts and Spotify

Nonfarm payrolls are expected to rise by 200,000. (0:17) Why Apple may be the place to be. (3:12) Wall Street myth busting. (6:40)

The following is an abridged transcript:

Independence Day will mean low volume and a largely quiet week for Wall Street.

But there will be some fireworks on Friday as well as Thursday for Fed nerds like me (while I’m not watching fellow colonials New Zealand take on England in cricket with the great commentary of Franke MacKay.)

The stock and bond markets will close early on Wednesday, July 3 and be closed July 4. But Friday July 5 brings the June employment report.

The consensus is for payroll growth to drop to 200,000 in June, down from 272,000 in May, with the unemployment rate sticking at 4%. Average hourly earnings growth is expected to taper to +0.3% on the month.

Because of the holiday, we get JOLTS and ADP a little earlier, on Tuesday and Wednesday.

Bank of America says the U.S. labor market is gently cooling as Americans continue to see jobs as broadly easy to get, while the recent spike in young adult unemployment has shown signs of subsiding.

Seth Carpenter, global economist at Morgan Stanley, says: “One unusual aspect of this cycle is the fact that we have witnessed a downward trend in nonfarm payrolls lasting over two years.”

He added: “I often hear clients fret that when the labor market softens, it will slump, but so far that has not been the case. We have had two years of slowing but not slump. The surge in labor supply from immigration has afforded even a bit more slack. We think that job creation is likely to slow but stay positive.”

“While the unemployment rate has already risen from its lows to 4%, we expect it to keep climbing, heading toward 4.5% in our forecasts. In other cycles, investors would think a 0.5-1pp rise in unemployment spelled doom, but 4.5% unemployment is still a far cry from a hard landing.”

Still, that rise in the jobless rate could bring the Sahm Rule recession indicator into play. That is triggered when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months.

Turning to stocks, reviewing the first half of the year it’s been a boon for equity investors, but there were some concerns at the end about breadth.

Still, the S&P 500 (SP500) (NYSEARCA:SPY) notched an all-time intraday high of 5,523.64 points, and a record closing high of 5,487.05 points. The index posted 32 all-time intraday highs in the first half of 2024, making it the sixth-highest number for any H1 since 1928.

The S&P hit 5,000 points for the first time ever on February 8. It then took out the 5,100 and 5,200 levels in quick succession. Following a brief respite, the S&P scaled 5,300 in May and then 5,400 in June. It surpassed 5,500 last Thursday.

February was the best month, with the benchmark index up 5.17%. April was the cruelest month, for bulls at least, falling 4.16%. That was the only month stocks ended in the red.

What’s up net for stocks? Alex King, who heads Seeking Alpha’s Growth Investor Pro Service, spoke to our Rena Sherbill:

“You can construct a scenario technically and fundamentally where the market’s going to go up for the next 10 years. I mean, it’s possible to construct that argument and that might happen, but that’s not a very useful plan.

So, let’s say that we’re in the later stages of this bull phase, which I suspect we probably are. And if you sit back and think about, well, what’s likely to happen next?

I think what’s going to happen next is, you’re going to see some late money arrive. Again, long money should have been in tech 18 to 24 months ago. And if it wasn’t, you have to ask yourself, well, if it’s going to come in now, and this is both institutional and advised money and individual retail money, where is it going to go?

The minute rate cuts start, and I’m assuming they do, then I think a whole lot of money is going to come out of money market funds as you start to get lower rates on your cash. People start to think about, well, I’ve noticed the market’s going up, my cash rates are coming down, I think I’ll get back in the market.

And I think that alone tells you we’re probably in the later stages of this current bull phase. And again, I can argue against that, but just as a cautious plan, let’s say that’s true.

Where’s the money going to go? My own view is the first place it’s going to go is, Apple (AAPL). That’s not a very exciting idea. It’s not an under-covered stock. It’s not a microcap that’s going to explode 10x tomorrow. It’s not NVIDIA. It’s not any of those things. But for that reason, I’m pretty bullish on Apple. I own the stock personally.

I think that technically, if you look at the chart for Apple, again, it’s been under institutional accumulation for some time, I think. And I think that’s because if you were a large account player whose job it is to walk a little bit ahead of everyone else and see what’s going on, you could have seen Apple’s engagement with AI and late entry into AI, but probably very effective entry because as is the phrase used by everybody now it could be the on-ramp for most people onto AI services.”

The earnings calendar is really light given the holiday.

On Tuesday, MSC Industrial (MSM), Polestar Automotive (PSNY), and Simulations Plus (SLP) report.

Constellation Brands (STZ) weighs in on Wednesday.

In the news this weekend, Microsoft (MSFT) said it had been telling its customers that emails exchanged between them had been accessed by the Russian state-sponsored hacking group Midnight Blizzard.

The company did not specify how many customers were affected or identify them, but said they are in the middle of an ongoing investigation after first disclosing the hack in January.

MSFT told Seeking Alpha: “As our investigation continues, we have been reaching out to customers to notify them if they had corresponded with a Microsoft corporate email account that was accessed. We will continue to coordinate, support, and assist our customers in taking mitigating measures.”

“We have found no evidence that any Microsoft-hosted customer-facing systems have been compromised.”

Bloomberg said some of those customers were more than a dozen state agencies and public universities in Texas. The agencies that Microsoft warned include the Texas Department of Transportation, Texas Workforce Commission, Texas Department of Motor Vehicles, Texas General Land Office and the Texas State Securities Board.

For income investors, CubeSmart (CUBE) goes ex-dividend on Monday, while Progressive (PGR) goes ex-dividend on Wednesday.

On Friday, Cisco (CSCO) goes ex-dividend with a payout date of July 24 and JPMorgan Chase (JPM) goes ex-dividend with a July 31 payout date.

And in the Wall Street Research Corner, the quant team at BofA securities is out to bust a few Wall Street myths.

False: buybacks drive performance

The “relationship between S&P 500 buybacks and index performance since 1986 is a near-zero R-squared.”

They also found that BofA corporate client buybacks appear to have little effect on index performance, saying: “What we can validate is that companies that repurchase shares at inexpensive valuations tend to outperform.” Over the past 12 months through April, cheap buybacks outperformed expensive buybacks by 12.5 percentage points.

False: retail investors are a contrary indicator

Equity client flows suggest returns following periods of retail inflows have been above average and returns post-retail selling have been below average, with a similar spread to hedge funds. BofA’s Low Institutional Ownership factor – which includes high retail ownership stocks – has more consistently outperformed during market drops.

And false: during periods of wage disinflation, labor-intensive companies outperform

They say: “Investors shouldn’t own labor-intensive companies under almost any circumstances.” Companies with the highest ratio of number of employees per dollar of sales have been almost constant laggards relative to their labor-light counterparts.