Strong Labor Market Keeps Pressure on the Fed  
with Adam Phillips, Managing Director, Investments 

The U.S. economy continues to demonstrate resilience, with recent employment data reinforcing a trend that has been in place for much of the year.

The May jobs report showed employers added more than 350,000 jobs over the past two months, with job growth averaging approximately 190,000 per month on a three-month basis. That marks the strongest sustained pace of hiring in roughly three years and suggests businesses remain confident despite ongoing concerns about inflation, geopolitical uncertainty, and the potential impact of artificial intelligence on the workforce.

This week, investor attention turns to inflation data. Markets will closely watch the Consumer Price Index (CPI) and Producer Price Index (PPI) reports for signs of whether price pressures are easing or remaining stubbornly elevated. Inflation remains a key challenge for policymakers, particularly as higher energy prices and global tensions continue to influence the economic outlook.

The timing is especially important as the Federal Open Market Committee prepares to meet next week. While the Federal Reserve is not expected to adjust interest rates at this meeting, investors will be listening carefully for signals about the path forward. Earlier this year, markets anticipated multiple rate cuts in 2026. Today, expectations have shifted dramatically, with many investors now pricing in the possibility of a rate hike before year-end.

Markets reacted to those changing expectations last week. The S&P 500 posted its first weekly decline in more than two months, ending a streak of nine consecutive weekly gains. Technology stocks led the pullback, with semiconductor companies experiencing particularly sharp losses after months of strong performance driven by enthusiasm surrounding artificial intelligence.

While periods of volatility can be uncomfortable, they also serve as an important reminder of the value of diversification. Investors can maintain conviction in long-term themes such as artificial intelligence while recognizing that leadership within the market can shift quickly. A diversified portfolio remains one of the most effective tools for navigating changing economic conditions and market rotations.

As always, investors should remain focused on their long-term objectives rather than reacting to short-term market movements. Economic fundamentals remain solid, but the coming weeks may provide important clues about inflation, interest rates, and the direction of markets for the remainder of the year.

 Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio. 

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Video Transcript: 

Adam Phillips:

Hi, everyone. Welcome to this week's market update. So this week, I want to talk about a theme that we've been discussing for the last several months, and that is the resilient economy. So last week, we got the jobs report for the month of May, and it showed that the labor market continues to be very resilient.

In fact, we've seen over three hundred and fifty thousand jobs being added to the US economy over the last two months. On a three-month moving average, we're looking at a hundred and ninety thousand jobs being added every month. So for context, that means we are seeing the most job growth on a three-month basis that we've seen in three years.

So for all of these concerns about labor displacement as a result of artificial intelligence, we're just not seeing broad evidence of it just yet. This means that companies, broadly speaking, are still hiring, so definitely a good sign. As we shift our focus to data that we're scheduled to receive this week, our focus really turns to inflation.

We're going to get a lot of good information this week as it relates to inflation in the US economy. It starts on Wednesday with the consumer price index. So here, consumer prices, the headline figure as we call it, which includes food and energy, is expected to be up four-point two percent from last year.

What that means is price levels, including food and energy, are expected to be four point two percent higher than they were this time last year. For context, the Fed has a two percent target for inflation. We're more than twice that. This is all the more relevant today because we are recording this on June eighth.

Yesterday, June seventh, marked the one hundred-day anniversary of the start of the war in Iran. So inflation continues to be top of mind. It's making the Fed's job very, very difficult right now. So we'll see where this data ultimately comes in. That'll be followed by the producer price index the following day on Thursday.

So a lot of good inflation data coming this week, and then next week we get the Federal Reserve Open Market Committee meeting to discuss monetary policy. This will be the new Fed chairman Kevin Warsh's first time leading a FOMC meeting. So the, the pressure is on. There's going to be a lot of eyes on this.

They are not expected to make any decisions there, but it's really going to be interesting to hear how they're viewing this current environment. We know that inflation is still an issue, and with the strong economy and the strong job market, it really makes their job difficult. And so because of that, we have seen that expectations for the next policy move have actually changed quite a bit in recent months.

Now, we came into this year, and the market was expecting between two and three rate cuts coming after three rate cuts last year, so they were expecting a few more this year. So the equivalent of about seventy-five basis points of cuts. Now, as time has gone on, we've seen the war cause a spike in energy prices.

We've seen a resilient economy. We have seen expectations have actually shifted in the other direction, where now expectations are for the Fed's next move to actually be a rate hike. And so last week on June 4th, we saw that expectations were for approximately one hike of twenty-five basis points between now and the end of the year.

Expectations increased a little bit more following that strong jobs report that came on Friday, June 5th. So this is what we're looking at right now. What does this mean when it comes to the market and, and, and the impact of higher rates on the equity market? I think it's really interesting to note and worth highlighting that the S&P five hundred broke the streak of nine consecutive weekly gains last week with a decline of about two and a half percent.

Now, the weakness here was really caused on Friday and led by a sell-off in technology stocks. The technology sector on Friday lost about six percent. And if we look a little bit more deeply at underlying performance, we see that the semiconductor index, what they call the SOX, actually declined about ten percent on Friday alone.

Now, you need to go back to COVID and the dot-com bubble bursting to see one-day performance of ten percent or worse in the semiconductors index. So really, that tells you that it was quite concentrated in terms of the sell-off. And sure, a lot of it, I think, can be justified because we've seen such strong performance across semiconductors, across the broader artificial intelligence plays.

But I think what it speaks to the investor is that in this environment, you need to maintain diversification, and that's what we are doing across client portfolios. We say that you can always... You can have conviction in the artificial intelligence theme. You can certainly play it in, in a number of ways, but don't get over your skis.

We will see volatility here. We expect to see rotation beyond just these technology plays going forward, and I think that diversification is going to be key from here on out. Now, before we wrap up here, I'll just highlight the fact that the other thing that's on our radar this week is the fact that SpaceX is scheduled to go public on Friday.

That is June 12th. In case you missed it, we recorded our views on the SpaceX IPO in last week's market update, so please be sure to go and check that out if you haven't seen that already. And I'll look forward to talking to you soon. If you have any questions, as always, please don't hesitate to reach out to your advisor.

Thank you.