June 4th, 2021
Stocks added to their year-to-date tally this week as the positive reaction to May’s healthy jobs report offset mid-week volatility from the meme stocks. Theater chain, AMC managed to garner substantial attention as bulls coordinated a squeeze on short-sellers. Despite some volatility in pockets, the broader market was focused on the health of the economy heading into what is expected to be a busy summer travel season. The May jobs report showed 559,000 hires added to the payrolls. Although the report missed estimates, it hit the sweet spot for investors by showing that the labor market has not overheated and thus allows the Federal Reserve to maintain its low interest rate policy. The Institute for Supply Management also released its latest figures on the manufacturing and services sectors, showing continued strength. For the week, the Dow Jones Industrial Average added 0.66%.
Jobs Report Hits the Sweet Spot
Traders were eagerly awaiting the May jobs report after a weak showing in April. The May nonfarm payrolls report showed 559,000 were added to the payrolls. Although that was higher than the 278,000 new hires added in April, it is far below economist estimates of 671,000. May’s payroll gains however helped pushed the unemployment rate to 5.80% from the previous month’s 6.10%. Gains were broad-based with the pandemic battered leisure and hospitality industry leading the way with 292,000 new hires. Wage growth, which many have followed for signs of growing inflation was modest, up a mere 2.00% year-over-year. Overall, markets cheered the report as it suggests businesses are taking a more measured approach in making new hires despite increased consumer demand and the relaxation of Covid-19 operating restrictions. Their measured pace should help keep the Federal Reserve from raising interest rates sooner than expected.
Manufacturing Sector Surges Ahead
It remained full steam ahead for the manufacturing sector as demand for goods remained strong in May despite a year-long pandemic buying spree. The ISM Manufacturing Index rose to 61.2 in May from 60.7 in April. Numbers above 50 indicate expansion in the manufacturing sector while numbers below 50 indicate contraction. Demand remained robust with the forward-looking suborders index jumping to 67 from 64.3 the previous month. Although demand is strong, businesses have highlighted a number of concerns that could hinder continued expansion in the manufacturing sector including rising raw material costs, supply bottlenecks, and labor shortages. The degree to which they can navigate these challenges will determine if the manufacturing sector can maintain its momentum into 2H2021.
Service Index Hits Record High
The U.S. services industry also continued to roar now that Covid-19 restrictions in much of the country have been rolled back. The ISM Services Index hit a record high in May, rising to 64. The reading is encouraging for U.S. GDP given that it accounts for more than two-thirds of U.S. economic output. The strong figure was driven by pent-up demand, pushing the backlog orders index to 61.1 in May from 55.7 the previous month. The services industry looks primed to continue to break records as Americans look to increasingly socialize this summer.
Markets notched yet another gain on a shortened trading week. Investors took comfort that the data, while strong, was not too strong. The primary focus was on the jobs picture, which showed unemployment declining, but with total employment still roughly 7 million below its pre-pandemic level, the Federal Reserve is not expected to deviate from its accommodative position. This came as a relief. Aside of some peripheral noise from the meme stocks, the theme emanating from the week’s reports was that conditions remain “steady as she goes”.
The Week Ahead
We’ll see if it will be a hot American summer for inflation as all eyes will be on the consumer price report. The U.S. Bureau of Economic Analysis also releases the latest figures on international trade. In overseas action, China releases import and export numbers.
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Back to Basics
As states begin opening up following months of restrictions, people are eagerly starting to open their wallets as well. Many individuals curbed their discretionary spending over the past year and are ready to resume travel, dining out, and other activities they may have missed out on during the pandemic. Nearly two million passengers flew on U.S. commercial flights on the Friday before Memorial Day weekend which was the highest total since the pandemic began. The restaurant industry is slowly getting back to normalcy as well with sales forecast to jump 10.2% in 2021.
Now is a good time to revisit your budget, prior to unleashing any pent-up spending, particularly if your spending habits, expenses, and/or your income have changed over the past year. One aspect of personal finance that became critical was the importance of emergency savings. If you had to dip into your savings or if you had to reduce your contributions to your 401k or other retirement plan, make sure you set it back to normal. This applies to debt as well. If you suspended student loan repayments or reduced the amount you typically paid toward your credit cards, revisit your pre-pandemic contributions and payments.
Advisors recommend that individuals and families budget the way that works best for them. Below are some popular household budgeting systems that can help keep you and your family finances on track.
1. The envelope system: This is a method of budgeting that works well for those who might tend to overspend or overuse credit cards. Traditionally, with this system, cash is portioned into different pre-labeled envelopes for variable expense categories such as groceries, entertainment, clothing, etc. When it’s gone, it’s gone. Spreadsheets instead of envelopes can be used to categorize and track spending as well.
2. The 50/20/30 method: This is a simpler version of the envelope system above because you allocate income into just three categories: (1) needs, (2) savings and debt repayment, and (3) wants. The 50/20/30 budget means that you pay all of your bills with 50% of your income, put 20% of your income towards savings/debt reduction, and 30% towards personal spending. If you can’t do 50/20/30, then you can try 60/20/20.
3. The zero based budget: The zero based budget method is a detailed spending plan where your income minus your expenses equals zero. With this system, you account for every dollar that comes in – assigning it to something important to you, which includes not only all of your expenses, but also budgeting for larger financial goals. One client we work with who uses the zero based budget approach carries around a spending log to keep track of where every penny goes and to help govern his spending habits from month to month. It is particularly useful to him given that he has variable income and is able to still meet his monthly saving and investing goals in months where he earns less.
4. The save first spend later strategy: This option prioritizes saving above all else. It begins with figuring out how much you need to be saving to meet your future financial goals, and then saving that amount first and spending whatever is left.
5. The big sweep: We have one client who, at the end of every month and after covering her monthly expenses, sweeps any unspent money remaining in her checking account into a separate savings account that is not tied to her debit card. The idea here is that if it isn’t in your bank account or if it’s a little harder to access, you may be less tempted to spend it. Furthermore, it provides an extra cushion for any unexpected expenses that may arise in future months.
Our advisors suggest thinking of a budget as a spending plan. It shouldn’t feel like you are limiting your freedom, but rather it should give you the freedom to spend money with purpose and intent and help your money go farther.