With the official kickoff to the summer season now behind us, the markets will transition into what is a traditionally low volume period during the summer months. Low volume can lead to higher volatility due to the lack of liquidity in global markets, as well as domestic. This had led to an old Wall St. saying of, “sell in May and go away.” Seasonal patterns can be identified but they have little to do with longer term investment fundamentals for those of us with long term investment objectives. Despite continued headlines of trade wars, tariffs, economic data, and Federal Reserve commentary, markets found their way to gains for the month, while ten-year treasury rates retreated further below 3% for the month. The best performance came from the Nasdaq, posting a 5.3% gain for the month and now up 7.8% for the year, well ahead of the other major indices. The S&P 500 advanced 2.16%, bringing it back into positive territory for the year and the Dow Jones Industrial Average gained 1.05% for the month, still leaving it in negative territory for the year.
Its all about the economy! According to the National Bureau of Economic Research, the current economic expansion is now 106 months old, making it the second longest expansion in the past 100 years and well above the average of 58 months. Age itself is not a clear indicator of the life of an expansion. The end of an expansion is generally marked by excess, which will show itself in the form of inflation or monetary policy and growth. Although this expansion is long, the economic growth has not been great. According to Yardeni Research, real gross domestic product (GDP) has grown about 22% from the 2009 tough, well below the 50% plus gain at the high end and the second lowest gain in any expansion since 1960. We should therefore continue to use the economy as our guide to see what it tells us about the health of the expansion and the ability for it to continue.
Look no further than Memorial Day weekend travel to gauge the health of the consumer. Even with gas prices at the highest level since 2014, nearly 60 cents higher than last year, more that 41.5 million Americans took to the roads, tarmacs and water, according to research released by AAA. This represents the highest number of travelers in more than 12 years and a 5 percent increase from last year. Higher gas prices are just one piece of the story. Good news comes from the airline industry with airfares 7 percent below a year ago, with an average of $168 for a round trip flight according to AAA. A rental car is about 11 percent cheaper than last year and the lowest it has been in the last 4 years. Consumers have options and it is not yet evident that higher gas prices are deterring their desire and ability to travel. Travel and tourism has a significant impact on the economy worldwide. In 2017, it is estimated that the total direct and indirect contribution of travel and tourism to GDP was over 8.2% and was responsible for over 14.4 million jobs, representing almost 9.5% of total employment. The willingness and ability for consumers to continue to travel has been a growing piece of the overall economy and an important metric to follow.
Workers within this industry have been in the headlines all month. Contracts covering tens of thousands of hotel and casino workers expired and for the first time in 30 years, they threatened to strike. At the heart of the debate were wages, workplace training and job security. Technology threatens to eliminate thousands of jobs and workers are demanding a say in the implementation of new technology that eliminates jobs. Las Vegas is the epicenter of this debate, with a wave of new technology on the way over the next decade. In 1984, the last time there was a citywide strike, the city and workers lost millions. The unions representing the workers have the benefit of a tight labor market to push this threat right now. Similar dynamics are being felt in the airline industry. There is a shortage of pilots to meet the combination of the retiring workforce and the increase in demand. “There’s airplanes sitting on the ground with no pilots to fly them,” according to Rick Rademaker, owner of Arizona Flight Training Center. With salaries that now top $300 per hour, its hard to believe there is a shortage of pilots. With the shortage expected to continue, consumers can expect rising prices and longer lines at the airports. As such a significant piece of the economy, developments in these industries can lead to an impact on the economy going forward.
This type of shortage should not come as a major surprise if you follow the unemployment numbers and some of the detail that comes along with it. In May, the economy added 223,000 new jobs, beating the average Bloomberg analysts’ estimate of 190,000. This brings the jobless rate down to 3.8% matching the rate in April 2000 as the lowest since 1969. In addition, wages increased by 2.7% from a year earlier, also better than expected. According to economist Michael Feroli of JP Morgan Chase, “There isn’t a whole lot to dislike in this report, other than this pace of hiring isn’t sustainable. Job growth is running in excess of the sustainable pace of the demographically determined supply of labor.” Gains were broad based and evidence of shortages are showing up in more areas. The U.S. trucking industry is struggling to find interested and qualified drivers to fill tens of thousands of jobs, despite positions that can offer yearly salaries over $100,000. The Federal Reserve cited the trucking sector as one area where employers have responded to personnel shortages by increasing pay. According to Brian Fielkow, president of trucking and logistics company, Jetco Delivery, “The main flexion point is an increasingly healthy economy, increasingly greater demand for trucking services, combined with retirements, aging driver population and not pulling and attracting enough young drivers in to replace those retiring drivers.”
With rising wages and a robust jobs market, it should be no surprise that consumer confidence ticked higher. Moving to a 17 year high during the month of May, strong consumer confidence could help lead to a better level of growth in the second quarter than we saw during the first quarter. The Commerce Department reported the U.S. retail sales rate at a 0.3% rate in April, indicating that consumers may be back after weak spending earlier this year. This is all spilling over to stocks in the retail sector which has brought renewed interest to this beaten down sector in 2018. The rollout of new technology, along with a consumer armed with more discretionary income, has analysts revisiting not only the online retailers but the traditional brick and mortar names as well. In a note to investors from Evercore ISI in regards to upgrading Macy’s, they wrote, “In a nutshell, we are convinced that old-world brands and retailers are figuring out how to manage inventory and market to consumer in the digital era, a critical turning point for the sector.”
There are signs in many parts of the economy that we are still in the midst of a recovery. Some will argue we are in the late innings, while others believe we are just at the beginning of a strong recovery still in front of us. Timing the market is not what we attempt to do. Understanding why we remain allocated to the market and specific pockets of the market will continue to drive our decision making. While the headlines can be challenging to process, the underlying economy continues to give us the best indicator of where we are most likely headed. The market doldrums of summer will come and go… before you know it, we will be closing the books on another year.