For the past 20 years, June has been one of the worst months of the year with only 40% of the time being positive. Whether this year will follow the trend is dependent on two major economic data: the job report and the CPI.
The job report that was released last week was lower than expected with 559,000 new jobs added compared to 674,000 expected. This slowed job numbers signals delayed tapering and a lower rates environment for longer. This would mean a better environment for growth stocks. In order to form a hypothesis, we need far more decisive job numbers.
Looking at the forward market and comparing it with treasuries, you could see that the market is pricing in a rate hike sooner than what initially was envisioned. The diversion between the forward rate and the 1-3 year treasuries indicate that at least the participants in the bond market, expect a raise sooner than later.
|The Consumer Price Index (CPI) on June 10th is set to be one of the most important dates for June. This is because CPI is one of the most widely watched indicators as it measures the U.S. inflation rate. A high CPI data means a higher inflation rate, and this would result in a faster rate hike. Currently, the consensus for CPI is 4.7% for May. What matters the most here is any surprises in compare to the index.|
As set out in the above chart, as we get closer to the moving averages and the mean, we expect some correction in the market, primarily in the Dow and in cyclicals. In addition, we believe unprofitable tech plays such as Fastly, Spotify, Plug, and many others have even more room to go down.
Looking at our own proprietary index of 10 most unprofitable technology companies with the highest multiple, we can see while the underperformance has been evidence, there is still a divergence happening at a broader level.
How to Invest in this Environment
Weak job number matched with a surprise to the down side on the CPI numbers would mean an ideal situation for many of the growth plays and QQQs in general. Weak numbers matched with surprise to the upside on the CPI numbers mean continued strength in the Dow. What happens at the end of this week will dictate our strategy for the month of June
As always, please email me if there are any questions or concerns.