More Questions than Answers - MMM v6-23

You may have a hard time believing it based on the stock market's reaction, but the May Jobs report was not an overwhelmingly positive development for the stock market. The gains on Friday swung the S&P 500 back into positive territory for the week and has it within a few percentage points of the all-time highs hit in February. What was inside the report that made Wall Street so excited? Does this data point give the Fed the 'all-clear' to cut rates without risking inflation? Will this report create any urgency from Congress to pass the "Big Beautiful Bill?"

Looking at the headline number while it is nice to see a positive 100K+ jobs, the 12 month average is the weakest non-recession level we've seen since 2006.

Breaking the numbers out by sector allows us to see the positives and negatives in the labor market last month.

Another thing that stood out last month was a drop in the Labor Force Participation Rate. It still remains a full percent below the pre-COVID levels, and has also flatlined for nearly 2 years.

This could be due to the issue we've been citing the last few months – if you lose your job, you are having a hard time finding a new one. Last week, continuing claims for unemployment remained at 3 1/2 year highs. Initial Claims also spiked last week, but remain below the peak from last summer.

The Hours Index was still positive, which long-time readers know is a solid leading indicator of the labor market (because employers will reduce hours worked before they start layoffs).

Overall, it was a very mixed report. Here's a summary of what some of the Wall Street firms had to say:

It's clearly not an "all-clear" sign for the economy or the markets. As always, when we have a lot of noise, I prefer to make a list of the positives and negatives. Here's what I came up with:

This brings us to the more important question – what does this mean for SEM's Economic Model?

SEM Economic Model Update

Turning to our economic model, it is not as optimistic as stock investors in believing everything is clicking along. Since July 2024 our model has been "neutral", signaling the DATA is not signaling a slowdown in growth, but also not picking up on any signs of accelerating past the meager 2 1/2 - 3% "average" growth range we've seen the past 14 months. It's been a slow slog, but the last month of data has started to weigh on the economy. Here's a look at our latest Economic Dashboard:

Notice I had to add some double negative arrows as those indicators are not just flashing a "slowing" warning, but are now in "recession" territory. This shift is not due to one bad month, but rather the trend appearing to roll over. We've talked exhaustively about Consumer Sentiment the past few months. It did rebound a bit at the end of May, but still remains deeply negative. Consumers have only been this pessimistic two other times in the history of this survey.

Orders for Consumer Goods have also turned negative once again following the pre-tariff surge of purchases we saw in the first quarter.

Service Business Activity in May also took a hit and is now at the lowest level since the COVID recession.

There really aren't a lot of bright spots in our dashboard or even in our "heat map".

Perhaps "too late" Powell as the President again was calling him on social media on Friday should push to lower rates by 1% (obviously kidding — I hope this statement isn't political, but a Central Bank independent of the Executive branch is important for an economy to keep the trust of the global markets.)

The problem, of course, is the Fed learned the hard way what happens when they ignore FISCAL policies (those set by the White House and Congress) and focus only on their own MONETARY policies. There is just too much uncertainty with too much potential inflation on the table between the Trade War and the "Big Beautiful Bill" for the Fed to cut rates like the President is demanding.

Thankfully, we stick to the data and don't have to guess what the President, Congress, or the Fed will do. Our well-tested economic model is saying trouble lies ahead, and therefore we should take riskier assets off the table.

What this means is our Dynamic models are "bearish" for the first time in 11 months. For Dynamic Income that means removing all dividend stock exposure (down from 20%) and adding more short duration (money market) income. (Our interest rate model is saying rates could still move higher......for now.) For Dynamic Aggressive that means selling our 20% small cap position and also taking on some shorter duration income investments. As the chart above shows, we could reverse course if the data changes, but for now economic growth is likely to be weak, which means earnings growth could be called in for questioning. Typically that means lower stock prices.

Looking Ahead: What to Watch this Week

Not sure if I should add the Trump-Musk break-up to the list, but it certainly captured a lot of attention and cost Tesla shareholders a ton of money. The question is whether Elon will be able to sway enough Republicans to not support the "BBB", while not on the radar for this week, is something that will start catching our attention over the rest of the summer.

Market Charts

The S&P 500 appeared managed to break out of its recent trading range and is now just 2.4% below its February all-time high.

Stocks have staged one of the most rapid reversals in market history, even eclipsing the rally off the COVID lows. Such a steep uptrend both makes this a rally investors may continue to chase but also does not leave much support beneath the surface. In other words, it can be risky to make big bets in either direction until we see some consolidation.

Looking at the broad market, the ABUSA (Anything but US) trade continues to be strong and small caps continue to be the laggards.

Interest rates moved back above 4.5% on the 10-year Treasury last week. This remains the area we need to watch as it will determine the costs of a lot of things the rally is relying on.

For now, there is zero panic in the corporate bond market as illustrated by spreads remaining near their historic low.

SEM Model Positioning

-Tactical High Yield sold high yield bonds on 4/3/25 after 9 weeks in these funds. These models bought back in on 4/24. All proceeds were moved to money market or short-term bonds, with a yield around 4.1% in money markets.

-NEW - Dynamic Models are 'bearish' as of 6/6/25, reversing the 11 month 'neutral' signal. The interest rate model remains 'neutral' (low duration exposure)

-Strategic Trend Models received 1/2 of the trend sell signal on 4/5/25

SEM deploys 3 distinct approaches – Tactical, Dynamic, and Strategic. These systems have been described as 'daily, monthly, quarterly' given how often they may make adjustments. Here is where they each stand.

Tactical (daily): On 4/3/2025 our tactical high yield model sold out of high yield bond into money market.

Dynamic (monthly): The economic model went 'bearish' in June 2025 after being 'neutral' for 11 months. This means eliminating risky assets – sell the 20% dividend stocks in Dynamic Income and the 20% small cap stocks in Dynamic Aggressive Growth. The interest rate model is 'neutral' meaning low duration/money market investments for the bulk of the bonds.

Strategic (quarterly)*: One Trend System sold on 4/4/2025

The core rotation is adjusted quarterly. On August 17 it rotated out of mid-cap growth and into small cap value. It also sold some large cap value to buy some large cap blend and growth. The large cap purchases were in actively managed funds with more diversification than the S&P 500 (banking on the market broadening out beyond the top 5-10 stocks.) On January 8 it rotated completely out of small cap value and mid-cap growth to purchase another broad (more diversified) large cap blend fund along with a Dividend Growth fund.

The * in quarterly is for the trend models. These models are watched daily but they trade infrequently based on readings of where each believe we are in the cycle. The trend systems can be susceptible to "whipsaws" as we saw with the recent sell and buy signals at the end of October and November. The goal of the systems is to miss major downturns in the market. Risks are high when the market has been stampeding higher as it has for most of 2023. This means sometimes selling too soon. As we saw with the recent trade, the systems can quickly reverse if they are wrong.

Overall, this is how our various models stack up based on the last allocation change:

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