Narrow and narrower

I traveled this week to New Hampshire and Massachusetts, where the weather was great and the audiences were pleasant (though I may have lost a few Bostonians to the previous night’s Celtics celebrations). I also did two Bloomberg appearances this week where I discussed our 5,200 year-end target for the S&P 500. That’s already been surpassed, but we’re holding there as we expect there could be some volatility ahead. Like the oft-triumphant Celtics (18 national championships!), the market flirted with fresh highs this week, but the percentage of stocks at their 3-month lows also increased. Wolfe says 49% of stocks are now in a downtrend versus 29% at the outset of the second quarter. Strategas notes how rare it is to see the S&P 500 externally overbought, or stretched, at the very same time that it’s internally oversold (in that the 10-day advance/decline spread is down near the 5th percentile). Conditions were similar in August 2020, with the S&P consolidating before going higher. Even if the market is stretched, there’s nothing to say it can’t get more stretched. July, historically, is the Nasdaq’s best month, up an average of 3.5%. This narrow rally has been painful for small caps, which continue to struggle versus large caps due to worries that the Fed might just grant one cut this year. Only at the height of the dot-com bubble and during the Covid lockdowns have we seen such underperformance by small caps.

The Atlanta Fed’s GDPNow tracker has Q2 real GDP at 3.0%. That’s good news for the market if it holds, as the highest returns since 1929 have typically been found when real GDP growth is in the range of 3-4%, not above and not below. If nominal growth continues to slow, Strategas thinks it’s still possible that the Fed will cut rates in September, catching up to the rate-cutting central banks abroad. One of those early cutters may be the U.K. The Bank of England did not lower rates at its June meeting, but the dovish wording indicated a cut in August. The Swiss National Bank cut rates for the second time this week. But it's not just that the Europeans need to cut; they’ve seen real progress on inflation, too, with natural gas prices down 90% from their peak. In the U.S., historically, it’s been the unemployment rate and jobless claims that have most precipitated cuts. Though the unemployment rate has drifted higher over the past year, concern has not yet been widespread on the FOMC. Tell that to new entrants to the labor force—their job finding rate is now quite low. 

Speaking of jobs, the labor market looks to have returned to its pre-pandemic balance. Readers may recall that in May’s jobs report, the household survey, from which the unemployment rate derives, came in weak. Goldman Sachs accounts for this by saying that the household survey missed the surge in immigration and had difficulty measuring the age 16-24 cohort. Goldman thinks that we’re at about 200K new jobs per month, well above the 125K breakeven level. Is it a coincidence that we’ve seen a softening in retail spending at the very time the unemployment has risen to 4% or are consumers just stressed? Household debt service payments as a percentage of disposable income remain below the long-term average. But rampant inflation has driven personal savings as a percentage of disposable income down to 3.6%, nearly a record low and well below the long-term average of 8.3%! This at a time when excess savings from the Covid era are nearly (completely?) depleted while credit card rates are once again lofty. Mortgage rates are at 1.7 times the cost of monthly rent versus parity as recently as February 2020. First-time homebuyers will have to wait. For them, and young job seekers, opportunities are narrow and narrower.  

Positives

Economic engine revs up Industrial production rose 0.9% m/m in May, versus 0.3% expected, with all major components showing gains and particular strength in utilities, which rose 1.6% m/m. Capacity utilization rose to 78.7% 

PMIs rise in the U.S. but not in Europe Per S&P Global, manufacturing and services PMIs each improved in June in the U.S., with both indexes rising further above the 50 level that indicates expansion. This comes even as euro zone PMIs weakened unexpectedly in June, the ECB’s recent rate cut notwithstanding. 

A mixed bag of Fed surveys The New York Fed’s Empire State manufacturing survey rose 9.6 points to -6.0, versus the expected -12. While still negative, it has improved over the past four months. The Philadelphia Fed’s manufacturing survey fell by 3.2 points. 

Negatives

Consumers appear stressed May retail sales including food services rose a mere 0.1% m/m, less than the expected 0.3%. The weakness in housing has taken a toll on housing-related merchandise. On a real basis, though, and excluding food services, sales rose 0.3% m/m. Real retail sales remain on their pre-pandemic uptrend.

Real estate stays silent Lofty mortgage rates continue to hamper the housing market. Existing home sales declined 0.7% in May m/m while the median price rose to $419,300, a new record. Mortgage applications are depressed, builder sentiment is down and single-family permits fell in May for the fourth month in a row. 

Expensive paper The Congressional Budget Office now says this year’s federal deficit will run to $1.9 trillion, versus February’s estimate of $1.5 trillion. The increase is owing to student debt forgiveness, FDIC expenses, Medicaid and outlays for Ukraine and Israel.  

What Else

That’s what a bear market will do The Chinese IPO market raised 80% less capital in the first four months of 2024 than in the same period a year ago. 

Retirement made somewhat easier The difficulty of juggling retirement saving while also repaying student loans will soon be made easier for employees at some firms. A new student loan 401k matching program approved by legislation signed into law in 2022 lets firms use loan repayment, rather than employee contributions, as the basis for a 401k match.

After you Those who think the FDA is too cumbersome are working on a new approach. Biohackers and longevity enthusiasts are looking to set up “longevity states” where they can experiment on life-lengthening medicines far from the prying eyes of government oversight. Still an idea, not a reality, it was discussed at Zuzalu, a pop-up city established (and later disbanded) last month in Montenegro.