What the New Indexes Mean

FTSE Russell, which operates many of the most-followed mid-cap and small-cap stock indexes will rebalance its suite of indexes at the close of trading today. The changes will reflect several broad trends in equity markets over the past year, including the resilience of large-capitalization companies and the dismal performance of smaller U.S. firms.

The dividing line between the large cap index and the small fell this year, from a capitalization of $3.7 billion to $3.6 billion, as a result of the poor performance of small cap companies, which shrunk in average market capitalization from $2.5 trillion to $2.4 trillion. The Russell 2000 small cap index fell 6.3 percent over the past 12 months, versus a 7.5 percent rise in price for larger companies.

Earnings for Russell 2000 small-cap companies fell 14.5 percent in the first quarter of this year on 3.4 percent of sales growth. Equity analysts expect the second quarter will likely show small-cap earnings falling 11.5 percent, on 3.6 percent of revenue growth.

The Refinery Fire Ramifications

Gasoline futures rose by more than 5 percent yesterday, reaching $1.9787 a gallon, their highest since May 23. That followed a report that the Philadelphia Energy Solutions plant, the largest east coast refinery, is expected permanently shut its oil refinery in the city after a massive fire caused substantial damage to the complex.

Shutting the refinery, the largest and oldest on the U.S. East Coast, would result in not only hundreds of lost jobs but also sharply higher gasoline prices as gasoline supplies are squeezed in the busiest, most densely populated corridor of the United States.

AAA warned that the closure would likely affect retail gasoline prices here in New Jersey very soon. Motorists in the mid-Atlantic region will likely continue to see modest increases in pump prices, AAA said, especially leading up to what is expected to be a high-demand travel period for the Fourth of July.

A Shock to Confidence

What has suddenly happened to American confidence? The Conference Board’s Consumer Confidence Index tumbled to 121.5 in June, dropping from 131.3 in May. This is the lowest consumer confidence has been since September 2017.

The June reading snapped a string of three consecutive months of improvements. That 9.8 point decline is tied with last December for the largest monthly decline since August 2011.

The sudden drop also surprised the experts. June’s results missed consensus expectations for a reading of 131.0, according to Bloomberg-compiled data. The magnitude of that miss relative to expectations was the largest Bloomberg has recorded since June 2010. 

The Cost of Caregiving

Are you taking care of an elderly family member? According to a new GAO study, “Retirement Security: Some Parental and Spousal Caregivers Face Financial Risks,” an estimated tenth of Americans provided care to a parent or spouse for some period of time from 2011 through 2017, with women and minority caregivers being the most likely to be the ones providing care.

And they've paid a hefty price. The study noted that for an estimated 68 percent of working parental and spousal caregivers, offering care took a toll on their jobs. They ended up going to work late, leaving early, or taking time off during the day to provide care.

That played out in the money field, too, with data indicating that spousal caregivers ages 59–66 had lower levels of retirement assets and less income than married noncaregivers of the same ages. Specifically, spousal caregivers had an estimated 50 percent less in individual retirement account assets, 39 percent less in non-IRA assets, and 11 percent less in Social Security income.

One Hot June

The month of June is shaping up to be the hottest one in generations. On Friday, the S&P 500 notched a record close, its first since April 30, while the Dow Jones Industrial Average finished less than 1 percent short of its all-time peak set last October 3.

How rare his this month been? Recent gains have put the Dow in position to ring up its best June gain of 7.7 percent since 1938, when the blue-chip benchmark surged an eye-popping 24.3 percent on the month.

The S&P 500 index is on track for its best June return, with a gain of about 7.2 percent, since 1955 when it rose 8.2 percent. The Nasdaq Composite Index was on track for a 7.8 percent return in June, but that would merely represent its best June since a 16.6 percent gain back in 2000.

A Hot Year for IPOs

Beyond Meat has been the most impressive IPO of the year, with its stock up more than 400 percent since the company went public. But it's not the only winner. The Renaissance Capital IPO ETF, a basket of the 60 or so most recent large IPOs, is up 34 percent this year, more than twice the performance of the S&P 500.

Some of the other big names among this year's IPOs include Zoom Video Communications, which is up 176 percent, and  PagerDuty, which is up 109 percent. The internet craft site Pinterest has also done very well, rising 44 percent.

But two of the hottest names in this year's IPO crowd have also been among the most disappointing. The two ride-sharing stocks have both been unimpressive in their debuts: Uber Technologies is down 6 percent, and Lyft is down 19 percent.

Here Come the Materials

What's been the strongest sector in the market so far in June? It's the little-discussed materials sector, which is by far having the best month of any of the 11 sectors in S&P 500 groups. It's risen 9.5 percent in June.

By comparison, the information technology sector is up 6.3 percent so far in June, which is second best overall. Consumer discretionary shares and consumer staples are both set for monthly gains of at least 5 percent.

The materials group, which tends to be very sensitive to global economic growth expectations, is on track for its best monthly gain since October of 2015, when it rose 13.45 percent. The sector consists of companies most closely tied to production of raw materials used in manufacturing, including steel, aluminum and chemicals.

Trouble Brewing in 401(k)s

A grand total of $1.7 million: That’s how much Americans believe they should save in order to retire, according to a Charles Schwab survey of 1,000 401(k) plan participants between the ages of 25 and 70. Unfortunately, the survey also found that few are likely to attain that goal. 

Almost 60 percent of survey respondents said their 401(k) plan was their only or largest source of retirement savings, but 51 percent are contributing less than 10 percent of their salary to their 401(k), with the average annual contribution totaling $8,788. Only 23 percent of respondents reported contributing the maximum allowed in their 401(k) plans, which is $19,000 for employees under 50 and $25,000 for those 50 and older.

Schwab found that if employees start saving at age 45, they need to invest as much as 35 percent of their salary to reach that goal, but if they start saving in their 20s, they need a 10 percent to 15 percent salary contribution. But one-third of auto-enrollees reported they never increased their contribution level.

Hirings at a Record High

A very positive big-picture look at the employment front: The total number of workers hired rose to a new high in April, according to Labor Department data released yesterday. But despite this, the amount of available jobs still vastly outnumbers unemployed workers.

Hirings increased to 5.9 million for the month, a gain of 240,000 from March, the Job Openings and Labor Turnover Survey indicated. The hiring rate rose to 3.9 percent, an increase of one-tenth of a percentage point. The total hirings was the most recorded in the data series’ history going back to December 2000.

Openings for the month actually decreased slightly, falling 25,000 to 7.45 million. However, workers that the Bureau of Labor Statistics classifies as unemployed declined by 387,000 to 5.82 million, leaving the gap at 1.63 million.

When Bad News Is Good

U.S. stocks closed higher Friday, following a weaker-than-expected jobs report, finishing off the best week of the year for both the S&P 500 and the Dow Jones industrial average. Why is that? The markets could be entering a period in which bad economic news is good for stock markets.

The hope is that data show a decelerating economy will force the Fed to cut interest rates. Lower interest rates are seen as good for stock prices, because they hold down bond yields, making equities a relatively more attractive investment.

For the week, the Dow gained 4.7 percent, the S&P 500 returned 4.4 percent, while the Nasdaq climbed 3.9 percent. The Dow and S&P 500 had their best weekly showing since late November, while it was the Nasdaq’s best performance since the week ended December 28.

May's Jobs Report

Employment slowed down in May, with the economy adding just 75,000 jobs, the Labor Department reported this morning. This was the second time in four months that payrolls increased by less than 100,000, although the headline unemployment figure remained at 3.6 percent.

In addition to the weak total for May, the previous two months’ reports saw substantial downward revisions. March’s count fell from 189,000 to 153,000 and the April total was taken down to 224,000 from 263,000, for a total reduction of 75,000 jobs. Employers have added 164,000 jobs per month on average in 2019, compared with 223,000 jobs per month last year.

Health care and professional and business services were the bright spots in May, and have added nearly 900,000 jobs over the past year. But construction, mining and manufacturing showed little change from April, and retail lost 7,600 jobs.

Oil in a Bear Market

Oil prices plunged on Wednesday, with futures falling to their lowest since January, after the U.S. government reported an unexpected surge in the nation’s crude stockpiles. U.S. West Texas Intermediate crude fell to $50.66 a barrel after the report, its lowest level since January 15.

That means that oil prices have officially entered a bear market, defined as a drop of 20 percent. Prices have settled 22 percent below the most recent high of $66.30 on April 23.

The reason for all this: U.S. commercial crude inventories jumped by 6.8 million barrels in the week through May 31, the U.S. Energy Information Administration reported, even though U.S. crude imports jumped by more than 1 million barrels per day. Meanwhile, weekly U.S. oil production ticked up to an all-time high 12.4 million barrels per day.

The New Direction for Interest Rates

Is the next step for the Federal Reserve an interest rate cut? Fed chair Jerome Powell said yesterday that the Fed was “closely monitoring” the impact of trade developments and would “act as appropriate” to sustain the economic expansion. That came after St. Louis Fed President James Bullard said the Fed may need to cut interest rates soon amid concerns about weak inflation and risks to economic growth.

The markets seemed to think this meant a potential cut in interest rates, and reacted accordingly. After a disastrous Monday, the Dow Jones Industrial Average and the S&P 500 both rose 1.8 percent yesterday, while the Nasdaq was up 2.2 percent.

The last time the Federal Reserve cut its benchmark Fed Funds rate was on December 17, 2008, shortly after the financial markets melted down. That was its tenth rate cut in just over a year, and brought the rate to near zero; the Fed wouldn’t raise rates again until December 2015.

Tough Times for the Giants

A rough day for three of America’s biggest companies yesterday, due to possible antitrust action:

• After a Reuters report saying the Justice Department is considering a probe of the company’s practices, Apple's market capitalization below the $800 billion mark for the first time in nearly four months. That leaves Apple in third place on the list of most valuable U.S. companies, behind Microsoft at $923.4 billion and Amazon.com at $835.3 billion.  
• Facebook shares fell as much as 8 percent following a Wall Street Journal report that said the FTC will be able to examine the effect of Facebook’s practices on digital competition. Facebook’s drop shaved more than $40 billion from its market cap, bringing it to about $463 billion.
• Alphabet shares slipped after a report said the Justice Department is readying an antitrust investigation against its prime subsidiary, Google. Alphabet shares dropped 6.7 percent on  the day.

GDP Slows Down a Bit

The U.S. grew a bit slower in the first three months of 2019 than originally reported, mostly because of weaker business investment, the Commerce Department reported. Gross domestic product grew at a 3.1 percent annual pace in the first quarter, down slightly from an initial 3.2 percent estimate.

Most worryingly, corporate profits also fell for the second quarter in a row in a negative sign for the economy. Adjusted corporate profits before taxes fell at annual 2.8 percent pace, the biggest quarterly decline for that measure since 2015.

Consumer spending rose a mild 1.3 percent, held down by reduced purchases of durable or long-lasting goods such as autos or appliances. But spending on durable goods sank 4.6 percent, marking the biggest drop for that category in 10 years.