June 8, 2023
Yesterday, the S&P 600 small cap index (SML) managed to close above the upper end of its March-May range, giving us incremental confidence in the durability of the cyclically-led rally. An S&P 500 break above 4310 with continued participation from cyclical sectors and small cap indices is our signal to add broad equity exposure.
However, today’s jump in jobless claims is a recessionary signal that has cyclical sectors and small cap indices a touch lower this morning. Bullish yield curve steepening follows an unexpected jump in jobless claims to +261,000. This is the highest number of claims since 10/30/21 and many economists consider +260,000 as a threshold to indicate weakening in labor markets. We’d expect the probability for a US recession to adjust upward if jobless claims continue to exceed +260,000 for another two weeks.
The EU officially entered a recession today based on revised Q1 GDP data but this may end up as the most shallow recession on record. Investors would likely look through a US recession of the same magnitude, and that might be the template at work in markets today.