Confusion and fear

The first book ever written about the market was called Confusion of Confusions (1688). This week’s datapoints are puzzling! Sector performance has been at odds with the widespread narrative of a soft landing, with Utilities strong and cyclicals weak since the April pullback. A change in leadership like that is unexpected at a time when the market is near new highs. Where are we in the cycle, even? Weakness in Discretionary and Transports suggests we aren’t early, while breadth, Financials and credit conditions are all saying it’s not late either. The weakness in Transportation stocks is especially noteworthy as a central tenet of Dow Theory is that fresh highs in the Dow Jones Industrials Average, like last Friday’s 40,000, require confirmation from the Dow Jones Transportation Average (which remains 10% below summer 2023 levels) in order to be sustainable. Perhaps Dow Theory is less applicable, though, in a world where services matter more than goods? It’s not just cycles and sectors that are puzzling, the consumer is too. Mortgage delinquencies are currently low even as auto and credit card delinquencies are flirting with recessionary levels. Or consider copper and other industrial metals. They’ve enjoyed a surge in pricing normally associated with a manufacturing recovery. China has yet to shine, however, and it is confusing that we see such strength in industrial metals without a robust Chinese manufacturing sector.

Confusion! It’s unusual to see other central banks leading the way while the Fed awaits further clarity from the data. Nonetheless, that’s what looks to be happening now, with June cuts in the sights for some developed market peers while the U.S. seems to be looking at September at the earliest. Fed Governor Waller said this week that he’d want to see several months of good inflation readings before thinking it’s time to cut rates, implicitly ruling out July. Waller added that the Fed should not begin cutting until it expects to deliver a series of cuts. Inflation should be ripe for a slowdown, with shelter inflation and auto insurance normalizing and core goods coming down. More than half of excess CPI can be attributed to owners’ equivalent rent and tenant’s rent. The U.K.’s headline inflation rate declined to 2.3%, largely thanks to energy costs, while services inflation came in hot at 5.9%, suggesting that a June cut is now unlikely there. In Canada, inflation fell to 2.7% y/y in April, down from 2.9% so a June cut looks likely there. Markets currently give a 96% chance that the European Central Bank will begin cutting in June even though hourly labor costs in the euro zone rose to 4.8% y/y in Q1 from 4.1% the quarter before.

FOMO! The fear of missing out that haunts investors returned as bullish sentiment rose, though it remained below the alarm-ringing 90th percentile. With so much bullishness, not just in equity, but also industrial metals, crypto and gold, it seems investors right now have no fear except the fear of missing out itself. Equity flows YTD are +$186 billion, a lot more than last year. The recent high on the S&P 500 featured 68% of constituent stocks trading above their 200-day average. This is bullish and Oppenheimer sees the Russell 2000 showing signs of finally joining the rally. Fourteen of the world’s 20 largest stock markets traded at all-time highs this week. China is not one of them, but it’s up 31% since January. Some of the strength in Utilities and copper noted above may be assigned to the FOMO trade and tied to the energy needs of AI. Nvidia’s robust earnings underscored the fact that AI is no flash in the pan—the Magnificent One, as the equal-weighted S&P 500 has fallen each day this week. Speaking of AI, I delivered my AI Revolution presentation from home this week. On Q&A, deep fakes and “Can we believe what we see/hear anymore?” were met with a suggestion by the advisor to share a code word among your family to ensure the AI image is not pretending to be you. Remembering the 1993 Tom Cruise movie The Firm, I suggested that the meeting to set the code should be done outside. “I’ve got Siri, Alexa and Google in this room,” I said. To which Siri responded: “I’m not sure how to help you with that.” I responded to Siri as I always do in these instances: “Did I ask you anything?!” She never responds to that.

Positives

Signs of cyclical growth Durable goods orders rose 0.7% in April vs. expectations of a 0.8% decline. In other bullish news, the Conference Board’s CEO Confidence survey rose slightly in the quarter, from 53 to 54, with readings above 50 indicating optimism. Only one-third of CEOs anticipates a recession in the next 12-18 months, down from three-fourths at the end of 2023. The Kansas City Fed’s manufacturing index rose in May, with a sharp rebound in capital spending intentions. ISI notes that U.S. vehicle production is set to increase significantly this summer. S&P Global’s U.S. manufacturing and services PMI both rose above 50, indicating expansion.

Still-strong labor market Unemployment claims fell to 215K (vs. 220K consensus) for the week ending May 18, far from the 300K that signals recession. On the other hand, the Q4 2023 Quarterly Census of Employment and Wages indicates that real wage growth last year was negative and that 2023 payroll growth was 1.5%, not the 2% the BLS previously reported.

Europe continues to recover The eurozone’s composite PMI rose to 52.3, the area’s highest level in 12 months, with manufacturing making the difference. New orders and business expectations improved, and the report as a whole suggests that the recovery from contraction is continuing.  

Negatives

More than two is various The minutes of the latest FOMC meeting show that the Fed is frankly uncertain about just how restrictive its policy currently is, though members expect to see GDP growth slow this year as rates continue to bite. Whereas Chair Powell said at his post-meeting press conference that the Fed’s next move is unlikely to be a hike, we can see now that that sentiment was not universally shared, with “various participants” willing to hike further if appropriate. How many is various? Still, if the Fed’s view was more hawkish than Chair Powell allowed, data since that meeting has been more benign.

Bittersweet home Sales of existing homes and of new single-family homes fell in April. The supply of existing homes grew for the 10th straight month, but the level remains very low and median sales prices rose to a new all-time high. In a survey of markets, mortgage costs are 1.68 times the cost of rent; it was at parity in February 2020.

Consumers are worried The University of Michigan’s survey of consumer sentiment beat expectations but still fell to 69.2, the lowest level in five months. Inflation expectations over the next year rose to 3.3.% vs. last month’s 3.2%. They continue to expect long-term inflation of 3%.  Respondents believed unemployment would rise over the next year while income growth would slow.

What Else

It isn’t just here The world as a whole has an unusually senior set of leaders. Biden is 81 and Trump, at 77, is a few months older than Bill Clinton, whom we elected 32 years ago. Brazil’s Lula is 78, India’s Modi is 73, Russia’s Putin is 71 and China’s Xi is 70. In the Middle East, King Salman of Saudi Arabia is 88, Iran’s Ayatollah Khamenei is 85, and Palestinian Authority leader Mahmoud Abbas is 83.

It’s an election year State and local governments still have nearly $240 billion in Covid funds granted by the Federal government. This money must be spent within two years, which could boost nominal GDP by a cumulative 0.8 %.

Summer begins Some 52% of Americans will be grilling on Memorial Day, with 72 million hot dogs consumed. The price of ground beef is up 15% vs. last year, so hamburgers will cost a bit more. In all, the average cookout is set to cost $30 this year, up 10% from one year ago.