'April is the cruellest month...'

Travel this week took me to serene Conneaut Lake, home to Pennsylvania’s largest natural glacier lake, to speak at the annual Iroquois Club seminar. Lifetime membership means that many in attendance have come for decades. The waiting list approximates seven years. A serene gentleman has been investing regularly since 1958 and now has “many millions.” The longest attending (now a member) originally came as her husband’s guest before women members were allowed. “We just kept complaining, and here we are!” Indeed, I am their first-ever woman speaker—and they want me back. This week’s set of attacks in the Middle East served to warn that not every place, alas, is as peaceful as that lake. Major geopolitical events often lead to a selloff (average drawdown of 6%) but this is generally of brief duration—with a mean of about three weeks for the selloff followed by three weeks of recovery. UBS looked back to 1962 and found that three months after a geopolitical shock, the S&P 500 was generally higher. For Gavekal, in the inflationary environment of today we should expect gold and oil to play the role government bonds have played in the recent, deflationary past—as the flight-to-safety asset class. Citi speculates that semiconductors, as “the new oil,” might play a similar role in the case of China-Taiwan unrest. In any case, it typically pays best to move early or else not at all, as the play is often of brief duration. UBS points out that a sustained increase in energy prices (a real possibility, in their view) might put a damper on already-stretched consumer spending, with the result that higher headline inflation today might lead to lower core inflation tomorrow.   

The consumer has been holding up, however. Retail sales rose (more below) thanks to strong jobs growth. Wages for upper-income households are growing at their fastest rate since January 2023, and tax refunds are up by 5% y/y. Rent inflation is easing in nearly all cities, which will give tenants more money to spend. Inflation expectations, which are very important for the future path of inflation, remain anchored within reach of the Fed’s 2% target. Since the cost of gas at the pump is among the most visible of prices, a spike in oil could, in principle, change this. Absolute Strategy sees real consumer spending returning to its 2-2½% long-term growth trend but notes the asymmetric effects of monetary policy, with the more affluent feeling the wealth effect the strongest, while the less well-off are most exposed to variable rates and the stubbornly high cost of core goods and services. But the news is not all bad, with Bank of America noting that the gender pay gap is narrowing and that women’s workforce participation rate is rising as the sectors with the highest level of female employees have recovered more rapidly than others. You go, girls!

Are we slowing down or speeding up? Depends on who you ask. Much as the consumer has seen a parting of fortunes between those at the top and the bottom, so also in business, with big firms enjoying glory days while small firms struggle. Big firms have seen strong cash levels, CHIPS and IRA grants from Washington, capex and hiring booms, and narrow credit spreads. Their smaller counterparts face widespread pessimism, high costs, and tight credit. We’ve previously seen such a divergence between large and small business in 1978-79 and 2006-07, and both occasions preceded rate hikes (and recessions). Hmm. Whether the cause be geopolitics, the impermanence of rallies, bond yields threatening to go to 5%, the strong dollar, election-year seasonality or all of the above, the stock market has been indisposed of late. Some 45% of the S&P 500 fell to a one-month low last week, Strategas says, but that’s not yet quite at the 50-60% area where lows are often tradeable. This week, half of the S&P was at a 20-day low, while less than 10% of the index was at a 20-day high. ISI sees a test of the S&P 500’s 200-day moving average this quarter of around 4,700, which they note would be broadly in-line with the average election-year correction of 13%. Yardeni agrees that that’s possible, but he sees nothing worse than that based on current data. Though April historically is the Dow’s favorite month, this year it's been pretty cruel (with apologies to Eliot) and the next month or so could be rough, too. Remember, we have been looking for a correction. Renaissance Macro says that election-year seasonality is hostile to stocks until Memorial Day, but the summer is usually solid.

Positives

• CVV number by heart Retail sales rose sharply in March, up 0.7% on the month vs. consensus of 0.4%, with ex-autos up 1.1%. Breadth was weak outside of e-commerce and gas prices, though, with non-store retailers and gas sales up by 2.7%. Wolfe suggested that the early timing of Easter may have pulled online purchases forward into March. 
• Made in America Industrial production was up 0.4% in March, in-line with expectations (though February was revised higher too), as the manufacturing sector continued to show signs of strength. Production is unchanged y/y having contracted 1.9% in Q4 of last year and 1.8% in Q1 of 2024. 
• Made in China China’s recovery gained steam, with real GDP in Q1 at 5.3% y/y. The country’s growth, however, remained heavily focused on production alone, while consumption lagged. China delivered fewer exports than expected while their drop in imports indicated that demand is still soft. Producer prices fell 2.8% y/y while consumer prices dropped 0.1% y/y.

Negatives

• The hunt for shelter Permits for single-family homes fell by 59,000 in March to 973,000. Poor weather was a factor in the news. Apartment starts have fallen to half what they were a couple of years back but from record levels last year. By contrast, single-family construction is at a low but rising level. Some good news: shelter inflation may weaken per readings such as the BLS’s new-tenant rent index, which fell to 0.4% y/y vs. 5.4% y/y for the all-tenant index.
• Higher for even longer Fed Chair Powell indicated that persistent inflation meant the Fed would need “to allow restrictive policy further time to work.” Strategas takes that to mean no cuts until September at the earliest. For now, the Fed can wait, but if unemployment creeps higher (it’s nearly half a point higher than a year ago), Powell will be forced to choose. The Fed’s Beige Book recorded a “cautiously optimistic” outlook for the rest of 2024.
• Mid-Atlantic swoon The New York Fed’s Empire State Manufacturing Survey gained slightly but remained in contractionary territory as it has all year. The outlook from here? “Subdued.” The Philly Fed also rose but remained contractionary (as it has been since August 2022). Respondents to the Philadelphia survey expect wages to go up by 3-4% while total compensation goes up by 4-5%. 

What Else

The subcontinent rises The IMF says India’s GDP will grow at a 6.1% rate over the next five years and that it will soon be the world’s third-largest economy, passing Japan in 2027. The country’s GDP is set to double to $7 trillion by 2030. India has many advantages: a youthful population, government support for industry, growing consumption and urbanization, structural reforms and supply chain relocation. 

Big Fiscal One thing that’s keeping inflation from falling is ongoing stimulus from Washington. The federal deficit is projected to run $1.8 trillion this year, roughly 6.5% of GDP. The Wyden-Smith tax cut plan, Employee Retention Credit payments and $300 billion remaining in Covid-era grants to the states are all examples of largesse keeping the economy stimulated and inflated. 

All that glitters As noted in these pages last week, the recent strength in gold appears to derive mainly from EM central banks and retail investors with local concerns unrelated to inflation here. Indeed, flows in gold ETFs have mostly been quite weak outside of Asia. One area of strength here in the States: Costco’s one ounce gold bar offering, which yields $200 million per month, such robust demand that the retailer has since added a silver coin program.