Should we retire 'sell in May and etc'?

The Dow breached 40,000 as stocks reached new all-time highs this week, curiously dovetailing with frothy meme stocks’ reappearance. Monday was the third-largest one-day move since BofA has been tracking a basket of “retail participation” stocks. On the other hand, though, BofA’s Global Fund Manager Sentiment Survey is up but not yet near the past decade’s four previous peaks. And in a continuation of this bifurcated bull, this Tuesday marked 631 trading days since the Russell 2000 last reached an all-time high (Nov. 8, 2021). Going back nearly 50 years, that’s the third-longest streak, trailing only the eras of the tech bubble and the 2008 financial crisis. Operating margins for S&P 600 stocks have been compressed, which could become a problem given small companies’ role as significant employers. As to the question of whether to buy the dip or sell the rally, Piper Sandler sees breadth as a reason to play defense. The more optimistic view would be that stocks have been consolidating, interest rates and the VIX are falling (in the case of VIX, to the lowest level in nine years), the Fed is somewhat dovish and, last but not least, $6 trillion of cash sits on the sidelines. Strategas argues that with 80% of S&P 500 stocks above their 200-day moving averages, we are not likely to see much further deterioration. With earnings season all but over, seven of 11 sectors beat their January 1 earnings estimates. Indeed, most companies saw their margins rise during the period. Empirical Research adds that each new dollar of revenue last quarter for the S&P ex-Energy generated more than double the base rate of pre-tax profits, one of the best showings in decades.

Inflation remains everyone’s worry, but there’s inflation and then there’s inflation. Real GDP looks to remain positive this quarter, so this is not stagflation. Growth remains intact, cyclical sectors are leading the market higher, and interest rates and inflation seem both to have peaked. TrendMacro says 15 of its 18 proprietary inflation metrics indicate deceleration. Further, the BLS’ reading for increases in new tenant rents (the unsticky edge of sticky shelter inflation) was barely above zero. Fewer small businesses are planning to hike prices than at any time in the past year. Wolfe even suggests that the size and maturity schedule of the federal debt will add to the pressure on the Fed to start cutting rates (that’s some kind of silver lining). When will we get to 2% inflation? Deutsche cautions that, in data going back 100 years, inflation usually goes down slower than it went up.  

Bifurcated policy. Fiscal policy and monetary policy are currently at odds, with the Fed’s rates being restrictive while fiscal policy is adding 0.7% to GDP relative to a 2019 baseline, ISI says. That fiscal stimulus will steadily decline across this year and next but can be counterbalanced by roughly three-quarters of a point in Fed cuts. Bifurcated consumer. Credit card delinquencies are surging among younger borrowers and restaurant sales have slowed down while grocery sales have grown. Visa’s index of U.S. spending momentum fell 4.8% m/m, with particular weakness in discretionary spending. Still, the picture is a complicated one, with the rate of lower-income spending generally outpacing that by higher earners y/y on both necessities and other purchases. If we’re working, we’re spending. The three-month moving average of the unemployment rate has been a reliable sign of a recession’s arrival (with 100% odds); watch out whenever it rises more than a third of a point above its cycle low (uh oh). Piper Sandler sees unemployment rising to 5% at the beginning of 2025, bringing inflation down. (That’s some kind of silver lining.) But this is 2024, and we’ve now had 34 straight weeks where the four-week moving average of initial jobless claims stood below 220,000. Buy in May and seize the day!

Positives

• Inflation marginally moderates Headline and core CPI rose 0.3% m/m in April, with the headline figure being below consensus and the core in-line. This ended a recent trend of disappointing CPI reports without demonstrating progress towards a decline in inflation. Two of the stickier areas, auto insurance and shelter, both slowed a bit. This week, Chair Powell said non-housing services “doesn’t need to go to 2%. It wasn’t 2% before the pandemic.” What’s needed, he said, is for goods, housing and non-housing services “to come out in some way that they are (together) 2%.”
• Small business bounce The NFIB Small Business Survey rose unexpectedly, to 89.7 from 88.5. Also, the percentage of firms planning to hire rose slightly from 11% to 12% in April, a welcome retracement of a downward trend. Respondents said the biggest problem they face is inflation, but an increasing number of them said poor sales is their chief difficulty.
• Europe begins to rebound Hiring, service-sector growth and industrial production are all picking up in Europe.  Inflation has eased, and the ECB looks set to cut rates as soon as next month. Still, in the view of BCA, global growth would need to strengthen to make the appeal of euro zone equities durable.

Negatives

• Producer inflation up PPI was much stronger than expected and y/y metrics are now trending up. But there was a downward revision to the headline PPI for the prior three months and the core was revised down too. Importantly, PPI final demand for personal consumption was flat on both a headline and core basis at 2.4% and 2.6% y/y, respectively.
• Housing woes The NAHB housing market index declined for the first time in six months, with potential buyers looking to wait until borrowing costs decline. Future and current sales dropped, with the traffic of prospective buyers falling to the lowest level since January. Housing starts rebounded in April after March’s adverse weather. However, permit issuance declined for a second-straight month to the lowest level since 2022.
• Regional manufacturing still soft etc. The Empire State manufacturing index and the Philadelphia Business Conditions index both eased in May. However, New York’s survey has been volatile in recent years, and manufacturing firms across the Philadelphia Fed district are upbeat on the outlook. In separate news, retail sales remained unchanged in April vs. expectations of 0.4% m/m growth. Industrial production was unchanged, slightly below consensus. Capacity utilization declined and is now down 1.5% on the year. Retail sales have been weak YTD, indicating deteriorating consumer fundamentals as households tighten their belt on discretionary items.

What Else

It’s an election year The Biden Administration continues to seek out ways to stimulate the economy: student loan forgiveness, Supplemental Security Income expansion and encouraging the use of second mortgages. Furthermore, the IRS has a backlog of one million applications for the Employee Retention Tax Credit, a Covid-era policy, which could yield as much as $100 billion in refunds in the months ahead.

A sea of red ink Federal expenditures are set to reach $6.5 trillion this year, and the annual budget is likely soon to eclipse the Covid-era record of $6.8 trillion. The federal deficit rose to $1.7 trillion in fiscal 2023, and the Congressional Budget Office sees it regularly surpassing $2 trillion in the coming years.

Who buys gold? More than three-fourths of physical gold is bought in emerging economies: China (30%), India (25%), the Middle East (20%) and roughly 10% in Russia and Commonwealth of Independent States members. So far, the gold boom has mostly been missed by Western investors, with shrinking share counts of gold-based ETFs in both New York and London.