Published June 7, 2024
After surprising to the upside in the first half of the year, and taking stocks to new highs, economic data has begun cooling off. This cooling has been moderate and pushed interest rates lower – supportive of the “soft landing” narrative, a happy recipe for stocks.
Think about those two sentences a bit. The market went up on better economic data in the first half of the year. Now, it’s continuing its climb because the economic data has become a little weaker. That is the definition of a bullish stock market environment where almost all news is perceived positively, any pullback in stocks is bought, and new highs keep getting achieved.
Here are some tidbits behind the above statements:
Recent economic data is beginning to cool.
The Atlanta Fed’s Q2 GDP estimate…
Has dropped to 1.8 percent — June 03, 2024
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 1.8 percent on June 3, down from 2.7 percent on May 31. After recent releases from the US Census Bureau and the Institute for Supply Management, the forecasts for annualized second-quarter real personal consumption expenditures growth and real private fixed investment growth declined from 2.6 percent and 3.1 percent, respectively, to 1.8 percent and 1.5 percent.
While core inflation continues to trend downward:
As Costco’s CFO confirms:
Costco remains one of the best reads on inflation and last week they confirmed that it has flatlined…
“As inflation has leveled off, our members are returning to purchasing more discretionary items and growth in the category was led by toys, tires, lawn & garden and health and beauty aids…On the inflation front, it’s more of the same from last quarter. Across all core merchandise, inflation was essentially flat in Q3. And with Fresh foods close to 0 and slight inflation in food and sundries being offset by some deflation in nonfoods. The deflation in nonfoods was led by hardware, sporting goods and furniture all still benefiting from lower freight costs year-over-year.” – Costco CFO Gary Millerchip
The Transcript
As inflation comes down, many consumers are in very good, and improving, financial shape:
Goldman Sachs reports that 95% of mortgage borrowers have interest rates below the current market rate; and 30% of homeowners own their home outright. For current homeowners, these are good times. Watching wages and interest income rise while physical housing cost stays flat.
Goldman Sachs
Many U.S. households are flush these days, with equity from higher housing prices and rising stock markets adding to rising wages and much higher interest on cash balances.
Even with ignoring household investment portfolios and savings accounts, the average household is quite flush right now…
American households have:
$32 trillion in home equity
$6 trillion in money markets
$4 trillion in checking accts
$2-3 trillion in CDs
The piggy banks are full if & when we finally have a slowdown
@aweathofcs
The U.S. consumer, controlling 70%+ of the U.S. economy, remains in great shape.
Given that data, why do we keep hearing that consumer sentiment is rather weak?
We think there are a few longstanding factors behind that:
1) people tend to separate their “local” view from their “country” view. A good example is the oft-repeated statistic about Congress. Americans almost universally like their own congressional representative (the “local” phenomenon) while they have an extremely poor view of Congress overall (a body composed, of course, of these “outstanding” representatives). Similarly, polling usually indicates that people feel much better about their own personal financial situation while believing that “elsewhere” things are not going well. Of course, if almost everyone’s personal financial situation is good, then obviously the overall situation must also be pretty good.
a) Another related factor here is that the U.S. economy is quite split with the vast bulk of the economy driven by spending from consumers in the so-called middle and upper wealth classes. The aggregate of lower income consumer spending is not a substantial piece of the economic pie. So, you can have a significant number of people saying they are struggling while the economy overall (and markets) zoom upward. We know that wages have been increasing in the past couple of years for the first time in decades (a key reason why inflation has remained high). That should improve the economics for workers across the board, though higher inflation bites harder for those in the lower income distribution.
2) media’s negative bias. It’s no secret that the media generally skews heavily toward negative reporting. In short, fear sells. And reporting just data alone is quite dry and uninteresting. People are generally attracted to negative stories, much more than positive ones. So, it’s no surprise that a negative datapoint gets quickly and often repeated while middling, “going just fine” data doesn’t generate much interest.
3) the internet and pervasiveness of small silos of information have created a self-reinforcing loop of suspect information. There is so much information available now that people are overwhelmed by it all. In response, people gravitate to their chosen news source, usually to the exclusion of other inputs, with seemingly little concern about the accuracy of that source’s reporting. News outlets tell their viewers what they want to hear as that drives ratings and ratings equals money from advertisers and subscribers. You get a self-reinforcing loop where people come to believe what they are told and see the world through that information silo prism, regardless of whether they actually experience that out in the world.
4) Finally, economics is messy and often unclear. We are talking about a massive economy in the U.S. There are always plusses and minuses. If a person decided to ignore media inputs and just receive a set of data every month about the economy, it would quickly become clear that almost all of the time the economy is growing well, sometimes higher, sometimes lower. Upward and to the right almost without exception. The U.S. is fortunate to have built an extremely diverse economy which provides for such steady growth. The stock market generally follows that path upward as well, just not so steadily.
The trouble for investors comes from their own greed and fear, leading markets to get grossly overvalued then grossly undervalued. Those swings create opportunities, of course, and our models seek to take advantage of that.
Market Update
3) the internet and pervasiveness of small silos of information have created a self-A volatile week for interest rates and a couple of international stock markets. But the U.S. stock market was unfazed. Monday brought a flat session for stocks as an afternoon rally recovered a morning dip. Interest rates tumbled on a couple of weak economic reports. A slowing economy is viewed as leading to a Federal Reserve rate cut. Energy stocks fell as oil prices were lower after an OPEC+ announcement on production targets. Nvidia’s stocks added another +5% on an analyst price hike. Tuesday brought another positive afternoon reversal for stocks with indexes closing higher by +0.2%. Elections in Mexico and India sent those markets sharply lower as investors fretted about the ramifications despite wins for ruling parties in both cases. Wednesday found Nvidia shares bid higher again while bond yields continued their fall. This time the falling interest rates lit a fire under stocks sending indexes up +1-2% to new highs. A flat day Thursday with investors staying put ahead of Friday’s release of the monthly jobs report. That report showed a surge in jobs along with strong wage gains. The good economic news reversed the six day plunge in interest rates sending bond yields and the U.S. dollar sharply higher. But the higher rates had little impact on stocks Friday. After being fractionally higher much of the day stocks closed lower -0.2% while metals slid on the jump in the dollar.
3) the internet and pervasiveness of small silos of information have created a self-Stocks turned in another positive week and found new high territory. The S&P 500 (SPY) closed the week higher by +1.25% while the Nasdaq 100 (QQQ) rose +2.72% on a +10% surge in shares of AI darling Nvidia. Smallcap stocks (IWM) reflected the weakness in metals and cyclical sectors falling -2.21%.
Warm wishes and until next week.