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Market Overview: U.S. Small Caps, Job Market Dynamics, and Tech Industry Shifts

I hope you had a good holiday weekend if you celebrated.   Congratulations to my nephew and his new wife on their beautiful wedding.   Now that I’m parsing the news let’s start with the high-level review.  

Axios noticed what I have been tracking about the Russell 2000, noting that while the S&P 500 has outperformed other major stock markets, the recovery from the 2020 crash has been global. As measured by the Russell 2000, U.S. small caps are underperforming France and Germany and barely outperforming Britain. Japan’s Nikkei has impressive local currency returns but less in dollar terms. Overall, major stock markets have healthy five-year returns despite the 2020 recession.

On July 5th the jobs data was released.  The U.S. job market shows signs of life with an unexpected bump in job postings and hiring in May, easing concerns of a cooldown.  In May, job openings increased by 221,000 from the previous month, raising the openings rate to 4.9%. Employers hired 141,000 more workers, while quits and layoffs remained essentially unchanged.   The labor market remains gradual and uneven, indicating a floor for labor demand and supporting income and growth.

According to CompTIA analysis, the tech industry added 7,540 net new jobs in June. However, there were slowdowns in other tech employment measures. While technology services and software development occupations continue to lead new hiring, there was a loss of 22,000 tech occupations throughout the economy. This unexpected loss has resulted in a significant shift in the tech industry’s employment landscape, leading to an unexpected jump in the tech unemployment rate to 3.7%.

Office vacancy rates reached a record high of 20.1% in the second quarter, the highest since at least 1979. This is unusual as vacancy rates typically rise during economic downturns. The increase in vacancies is attributed to the permanent changes in work patterns due to the pandemic. Moody’s projects that vacancy rates will continue to climb until the end of 2026.

According to a Bank of America Institute report, job switchers may be disappointed as the median pay raise for job-to-job movers has cooled. Job switching has slowed from its Great Resignation era highs, and middle- and higher-income job seekers may have less leverage in negotiating a raise. The median pay gain for job switchers has moderated to around 10% as of May 2024, compared to around 20% during the Great Resignation. The report suggests that the desire to move jobs may be outpacing the demand from firms.

Why do we care?

My focus on the US Small caps is to ensure the noise about quote the stock market quote is not clouding the perspective on typical customers – who are not S&P 500 companies.    Diversify your customer base as much as possible.  

The shift in office space is happening slowly over time.   This shift presents opportunities for IT service firms to provide consultancy on optimizing hybrid work environments and reducing physical office dependencies, as organizations will be looking to end or reduce lease commitments.  

IT service companies should also re-evaluate their talent retention strategies. Competitive benefits, professional development opportunities, and fostering a positive workplace culture can become more critical in retaining top talent as the job switching advantage diminishes.