April experienced a rare event. For only the fourth time in the last two decades, April posted a negative return for the S&P 500. April 2005's S&P loss was due to underwhelming corporate earnings, and April 2012 was negative due to ongoing concerns within the European Union and Greece. It wasn't until ten positive years later, in April of 2022, that the S&P dropped more than -8%, primarily due to two significant issues that, coincidently, we also experienced again last month:
1. Record high tax payments.
2. Extremely aggressive move higher in the 10-year Yield.
Based on the 2021 tax filings, April 2022 saw the highest monthly tax receipts on record, with over $863 billion paid to the IRS for 2021 payments. Although the final numbers for April 2024 tax receipts still need to be published, tax payments are highly anticipated to post a NEW tax record. This mattered since tax payments can negatively impact the stock market. First (and the most obvious), investors sell investments to raise cash to send to the IRS. Second, due to the large amounts of cash being pulled from the banks to pay the IRS, the banking system has a temporary liquidity drain that puts pressure on financial conditions.
In 2022, we discussed how difficult it was for the market to remain positive when there was a sharp upward thrust in the 10-year treasury yield. These thrusts in treasury yields are a drag on market liquidity since higher anticipated yields will draw money out of equities and into the fixed markets. In 2022, we saw four of the largest month-over-month increases in the 10-year treasury yields in the last half-century, including April 2022, when the 10-year yield increased by more than 24% from the previous month. This past month, the 10-year yield increased by more than 11% and was within the top 5% of month-over-month moves since 1963.
It’s difficult for the market to handle two large liquidity-draining events in such a short period, but thankfully, these two issues tend to be one-off events and short-lived for the market. While we could continue to see some slight upward movement in bond yields, it’s much more difficult for bond yields to increase substantially during this late stage of the Fed’s rate cycle. So, the good news is that both issues should be behind us now. We don’t have to worry about tax receipts for another year now, and we can assume that bond yields are close to "a top" after their recent run, which should allow liquidity to flow back into the market.
Unsustainable Employment
One of the indicators that we rely upon when looking at recessionary data is the monthly job reports released by the Bureau of Labor Statistics (BLS) on the first Friday of each month. Each month, the BLS releases a massive amount of data pertaining to the previous month’s job market and often provides revisions for the last two months’ releases. While these monthly releases from the BLS
offer a massive amount of detail about the overall composition of the job market, most of the time, investors are only concerned about the total non-farm payroll number, which shows the total number of jobs gained or lost vs. the previous month.
Until Covid hit in 2020, most of the trends in the job market (for the most part)remained pretty constant over the last few decades. The spectrum of the various sectors of the economy that were hiring was pretty diversified. Any changes in these trends would traditionally happen over several years and could be attributed to specific economic changes (i.e., the Internet). But since Covid, there has been a major trend change in the monthly employment data, which is unsustainable and a real head-scratcher.
The Government is on a hiring spree. Since the start of 2023, we have seen a period of hiring within the government sector that is unprecedented compared to any other period in our history. These hiring numbers cover not only the federal level but also at the state and local levels combined. As with all industries, hiring statistics accelerated between 2021 and 2022 when jobs were added back from the COVID shutdowns. The rapid increase in government ‘new’ job numbers in those years was primarily a result of previous workers returning to work. However, since then, the pace of government hiring has only strengthened while just about every other sector has slowed their hiring. Outside of the Leisure and Hospitality industry (which did not regain all of their jobs lost due to Covid until January 2023), all other industry sectors recovered their 'jobs lost due to Covid' well before the end of 2022. So, while 2023 marked a year where most industries hired less, implemented hiring freezes, or had some layoffs, the government sector expanded its workforce.
To put into perspective, we can review the pace of Government hiring over the last year and a half compared to previous years going back to 2010, but not including 2020 due to the Covid shutdowns.
Average Monthly Government Hires - this is the average monthly gain or loss within the industry group from 2010 but not including 2020:
The Government averaged around 58K new hires per month in 2023, far surpassing both 2021 and 2022. Considering those were years mostly comprised of returning workers, the recent growth is significant. The average monthly gains in 2023 were about five times that of the average monthly gain between 2010 and 2022 (ex-2020). And for the first three months of 2024, government hiring has averaged 64,000 new hires per month so far.
Another way to look at this data is by comparing the total number of new government hires as a percentage of all total Non-Farm Payrolls in a calendar year:
23% or almost 1 in 4 new hires were government jobs in 2023.
Historically, the Government has been responsible for around 2%- 4% of all new hires in a calendar year. So far in 2024, the accelerated hiring pace has continued, with 23.4% of all new jobs created being government jobs. This raises the question of where the employment numbers would be today had the previous government hiring pace continued on-trend. We would argue that it is difficult to call the current jobs market 'strong' without the private sector participating.
May Market Outlook
We are moving closer and closer to the home stretch of the Presidential Election and a seasonally bullish period for the stock market. Historically in election years, where the first quarter of the year was strong, the market traditionally experienced a dip in April and May and then averaged higher returns over the next few months leading into the election. Based on our technical indicators, we can make a case that the market is set up to follow a similar pattern this summer.
Even with the weakness in the market during the month of April, our Money Flow Indicator remained positive, meaning stocks still had plenty of money chasing it. Although there was some temporary destruction of overall liquidity due to taxes and bond yields, this indicator exited the month of April, with more than 64% of all S&P 500 equities having positive daily money flow. A strong Money Flow indicator tells us that any pullback in the market should be well-contained and not the start of a new bear market. Not yet, at least.
The economy received a major liquidity boost last week with the announcement of the Fed’s reduction of their quantitative tightening program and also the announcement that the Treasury will use its Reverse Repo Facility to fund the Government through Q3. Based on our calculations, these changes should produce roughly a $275 billion boost of net liquidity to the market through October. This boost to liquidity should help lower bond yields and the dollar over the next few months, which we view as a market positive.
In conclusion, we expect better returns for the stock indexes in May market outlook than in April. Based on our money flows and other data, we anticipate any market weakness in May will be contained, and this month will likely mark the start of a new bullish period in the short term. However, current economic trends continue to worry us in the intermediate term, and we anticipate a more defensive recommendation later this year.
Stay tuned,
Brad Tremitiere CIO