Fear of a June Swoon Rattles Investors. Is a Rebound Lurking?

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“And what is so rare as a day in June? Then, if ever, come perfect days.” James Russell Lowell’s poetic words aptly describe some years’ sixth month, but not this one, when, seemingly everywhere, the mood appears as dark as the grayest weeks in February.

The foreboding seems worst in corporate suites. Brace for a hurricane, JPMorgan Chase (ticker: JPM) CEO Jamie Dimon warned this past week. Then

Tesla
’s
(TSLA) mercurial chief, Elon Musk, in an email seen by Reuters, confessed to a “super bad feeling” about the economy, which may have prompted him to call for a 10% staff cut at the electric-auto maker.

That’s after 16,800 pink slips were handed out last month by 66 technology companies, the most since May 2020 at the depth of the pandemic, our colleagues at the New York Post report, based on data from sackings tracker Layoffs.fyi. Many of those cuts came from outfits with much promise, but no profits, that burned through copious amounts of cash bestowed by a once-ebullient equity market.

But even companies not dependent on the markets for funding, such as JPMorgan and Tesla, might feel the effect of their stocks’ slump. That notion was posited by Alan Greenspan decades ago, according to The Man Who Knew, Sebastian Mallaby’s biography of the former Federal Reserve chairman. With their shares off 25% and 43% from their respective highs, the JPMorgan and Tesla honchos (who have big personal stakes in their stocks) understandably might feel less than chipper.

Similarly, the Bull & Bear Indicator tracked by

Bank of America
’s
strategists, led by Michael Hartnett, moved to “extreme bearish,” its lowest reading since June 2020, during the worst of the pandemic when a Covid-19 vaccine was still months away. And Peter Atwater, an adjunct professor of economics at William and Mary, details in his latest Financial Insyghts missive an array of downbeat developments, including the latest cover of the Economist, featuring the unpleasant prospects of nuclear war and a U.S. recession.

Contrarians naturally infer that, when things look this bad, they only can get better. The BofA indicator, which has flashed “buy” since late March, points to a bounce in the

S&P 500
index to 4400, from Friday’s close of 4108.54. Atwater also observes that small-cap stocks’ price/earnings ratios match their nadirs touched in the 2020 pandemic lows and the 2009 bottom following the financial crisis, while “many of the previously exalted have been humiliated,” notably Cathie Wood, whose

ARK Innovation
exchange-traded fund (ARKK) has completed a round trip back to March 2020. A reversal of the current despair could be accompanied by an outbreak of peace, prosperity, and the end of Covid-19 and political polarization in America, he says.

The bounce envisaged by BofA’s strategists should fade once the S&P hits 4200, however, and should be sold short if it gets to 4400. That’s because global central banks are just starting to tighten monetary policies. “No fun ’til the Fed is done,” which won’t be until payroll employment posts a monthly drop, they write.

The latest jobs numbers, released on Friday, indicate just the opposite, a stronger-than-expected 390,000 payroll increase for May, tempered only slightly by a 22,000 net negative revision for the two preceding months. The separate survey of households showed the headline unemployment rate at 3.6% for the third consecutive month, a mere tenth above the prepandemic low.

Average hourly earnings were up 0.3% for May and up 5.2% from a year earlier. But pay for rank-and-file workers is rising faster, with nonsupervisory employees’ hourly wages up 0.6% in the latest month, while smaller gains for supervisors and white-collar workers held down the overall rise, Thomas Simons, a money-market economist at Jefferies, points out in a research note.

Indeed, the overall Index of Aggregate Weekly Payrolls (which covers employment, wages, and hours worked) was up 0.6% in May and 9.9% from its year-earlier reading, adds Steven Blitz, chief U.S. economist at TS Lombard. The bigger pay packets should support consumer spending, he adds. But a lot of that will be absorbed by higher prices.

To think that Fed rate hikes to the 2%-3% range—still far below zero in real terms—will curb inflation is wishful thinking, Blitz adds. After tempering expectations of future increases ahead of the Memorial Day holiday, markets this past week reverted to looking for three half-point rises in each of the central bank’s next three policy meetings in June, July, and September, with fed funds topping out at 3.25%-3.50% in mid-2023, according to the CME FedWatch site.

As a result, the benchmark 10-year Treasury yield rebounded to nearly 3%, and the major stock indexes shed about 1%, the eighth weekly loss for the S&P and

Nasdaq Composite
in the past nine. Contemporary poets may be more inclined to couplets rhyming June and swoon.

Write to Randall W. Forsyth at randall.forsyth@barrons.com