Investment Read Time: 3 min

Five for Friday - June 7, 2024

Job Openings, Utilities Outperforming, Momentum, Concentration, and Lithium 


1. Openings

With more signs that the U.S. consumer is slowing after a torrid post-Covid spending spree, all eyes turn to the swath of labor market data that came out this week. This data is important for the future path of interest rates because the Fed views a hot labor market (and the consumption it fuels) as inflationary. One useful indicator is job openings, which fell more than expected in April to 8.1 million, lowest since Feb. 2021. This brings the “job openings-to-unemployed workers” ratio to 1.24, which is back to its pre-Covid level, reflecting a solid – but not overheating – labor market. Further, the number of quits as a percent of employment is below pre-Covid levels, indicating a lowered confidence in the ability of workers to quickly secure a new, better-paying job. This should help wage cost pressure to further abate for U.S. employers, but should also be a red flag for the Fed that the labor market is cooling quickly.

2. Power

Through May, the best-performing area of the S&P 500 was not the AI-centric Tech sector or the resurgent Financials sector, but the lower growth, defensive Utilities sector. Interestingly, however, this comes a) without similar performance from other defensive areas like Consumer Staples or Healthcare, and b) in a pretty strong bull market. So, if it’s not a narrative of defensive leadership emerging as a sign of market weakness, then what? One answer comes from AI enthusiasm. As it turns out, AI requires a gargantuan amount of power—the IEA estimates that electricity consumption from data centers, AI, and cryptocurrency could double from 2022 to 2026 (the equivalent of adding a country the size of Germany to the grid). This has led to a much different bull case for Utilities as the power source of the new, AI-centric world. This tailwind could last decades, but, as a word of warning, it could also make the sector more volatile and cyclical.

3. Strength

Through the first five months of the year, the S&P 500 is up 11%. Since 1950, there have been 19 other years when the S&P 500 was up double digits through May. For that group, the average return over the next seven months (through year-end) was 9%, and the average full-year return was 25%. The market finished positive for the year every single time (and only 1987 ended with a sub-10% return). Bull markets are good times to be invested, and a strong start to the year is not alone a sufficient reason to want to get more defensive in your portfolio.

4. Concentration

While there is a lot of teeth-gnashing over concentration in U.S. markets, the phenomenon is common (and usually more pronounced) across the globe (h/t Strategas). U.S. markets are narrow relative to their own history, but in a global context, still quite diverse.

5. Lithium

As the global economy transitions from a fossil fuel-based system to something more renewable, a different class of raw materials will take on increased importance. Lithium is a good example, with the lithium-ion battery being a critical piece of future electric transportation and energy storage infrastructure. Lithium demand has shot up in recent years, and could grow by over 40 times by 2040 under the IEA’s sustainable development scenario. This brings into question sourcing the mineral. The U.S. is currently a net importer (most of the mining is in China and South America) but is rushing to uncover better sourcing options. In September, scientists discovered what could be the world’s largest deposit of lithium in a super volcano on the Nevada-Oregon border and more recently scientists discovered that wastewater from fracking can contain a stunning amount of lithium from ancient volcanic ash. Both developments are early stage, but the opportunity to ramp up domestic lithium production (as we’ve done with oil) should be celebrated.


MSCI Country Indices:

MSCI (Morgan Stanley Capital International) manages indices that track the large- and mid-cap segments of each country’s stock market. Read more about the index for each of the countries in the table at https://www.msci.com/equity-fact-sheet-search.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

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Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.

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