Another week, another record

In recent weeks we’ve seen a rotation into cyclically sensitive areas of the market, such as industrials, materials, financials and energy due to signs of a manufacturing revival globally. Historically, small caps rally last. Three-month highs in energy recently hit 80%, reminiscent of the strength the sector showed back in 2021-22. The keen interest in technology continues, however. More than $1 billion per day is being traded in leveraged Nvidia funds, while the five largest firms in the S&P 500 account for more than a quarter of the index. The downside of the broadening of the market is the evaporation of the equity risk premium, the lowest level since 2003 says TrendMacro. But is the market healthy? Fundstrat sees little evidence of frothy speculation. Strategas notes that new highs generally dry up in advance of a market top, something we don’t see today. Operating margins on a forward basis now stand at 16.9%. Other than the post-Covid period, that’s the highest level since 2008. The market tends to stay out of trouble as long as margins are expanding. Insofar as longevity can guide us, the eight previous bull markets have lasted from 132 days to 3,894 days, with an average of 1,228 days. The S&P 500 only regained its lost ground on January 19, so by that standard it could have quite a ways to go.

Please don’t fire me! Former Fed economist Claudia Sahm put forth the rule that a recession has begun when the three-month average of the unemployment rate rises by 0.5% or more above its low point of the past year. As of now, the Sahm rule remains benign nationally. At the state level, though, there are grounds for concern. Twenty states are flashing recession per the Sahm rule, a level unseen except in or near recessions. This is up from just two states one year ago. Of the seven battleground states for the 2024 election, Arizona and Wisconsin are above the 0.5% level and three others (Michigan, North Carolina and Nevada) are somewhat near it, while just Georgia and Pennsylvania currently look safe by this metric. On the other hand, nationwide unemployment claims came in at a very low 210,000 this week. And although the unemployment rate rose to 3.9% in February, it was the 26th straight monthly reading below 4%! The unemployment rate historically goes down until it soars with the onset of a recession. Now, the Fed often hikes “until something breaks,” something that happened a year ago with Silicon Valley Bank, but so far the damage hasn’t been systemic. What will likely be decisive for the bull market to continue is for the Fed’s rate cuts to take hold before something larger breaks or before the labor market collapses. 

Will inflation ruin our party? With the exceptions of China and Turkey, global core CPI rose 0.3% on the month in February. Given the uptick in energy, the headline figure is 0.4%. On a 12-month basis, core is at 3.6% and global headline CPI is at 3.3%. J.P. Morgan sees global inflation settling at about 3% in the first half of this year, with China remaining deflationary but the influence of that downward pressure being limited elsewhere. Here at home, AAA says gas will hit $4 this summer, which would increase headline inflation. In recent months, goods inflation has fallen to near or below zero in the developed markets, but services have been stickier—more so in the US than the eurozone. And wages remain a challenge, with the New York Fed’s measure of trend wages remaining stubbornly high lately after falling from 7% to 5%. History suggests, however, that once the Fed starts cutting, we may be out of inflation danger. Only once after the Fed started to cut rates has inflation been higher 12 months thence. Tomorrow’s PCE reading may shed light on the likelihood of that first cut coming in a month that rhymes with soon.  This week, in southern Florida, inflation talk eventually got around to shoes. Displaying my Pradas, I lamented these once cost $600 a pair. At the time, a shocked male advisor asked how shoes could be so expensive. “I’ll tell you what I tell the Mister,” I replied. “You keep buying those Rockports, and we’ll get along just fine.” Today, designer shoes routinely run over $1,000! I refuse to spend this much! (Though I couldn’t admit it last week to the Palm Beach ladies.) A veteran advisor this week insisted I test his Stress-O-Meter. Placing my thumb firmly on the indicator, the black color reading declared me “tense.” I insisted I was just cold. Smiling, he slipped me a business card with a message, “Call me when you turn blue—where and why??”

Positives

Home improvement The Atlanta Fed says residential investment is robust this quarter, something likely to have ripple effects. Supply rose to 8.4 months and now stands above the pre-Covid level. Pending home sales rose by 1.6% in February, beating expectations. Housing prices are moderating somewhat, with the broad FHFA survey down 0.1% on the month for January and a slowing increase in the cities as measured by S&P’s Case-Shiller 20-City index, up 0.1% on the month.

Goldilocks In the US, real GDP growth was revised 0.2% higher for Q4 to 3.4%. Spending by consumers and the government led the charge, with personal consumption up 2.7% and direct government spending and investing up 4.6%. The University of Michigan says consumer sentiment rose in March as shorter-term and longer-term inflation expectations declined by 0.1% each to 2.9% and 2.8%, respectively. The Chicago Fed’s National Activity Index moved to positive territory, surpassing expectations. Additionally, the US Economic Surprise Index has been on an uptrend this year, while durable goods orders rose above consensus.

Global expansion set to begin? The flash Manufacturing PMI for the UK came in at 49.9 for March, the highest in 20 months and just shy of expansion. The Services PMI is at 53.4 and UK retail sales just showed their first year-over-year gains in 10 months. It will be interesting to see central banks begin to cut rates after the manufacturing expansion takes hold—something historically quite rare.

Negatives

Fine for now only Contrary to the University of Michigan (above), the Conference Board’s consumer confidence index dipped slightly in March from 104.8 to 104.7, reflecting views on the economy six months from now. Consumers’ views of current conditions improved, but their expectations for income, business and the labor market decreased.

Trouble regionally The Chicago PMI fell unexpectedly to 41.4 vs. expectations of an increase to 45.9. The Dallas Fed’s business conditions index dropped, continuing a contraction that began in April 2022, as did the Philadelphia Fed’s index of non-manufacturing activity, marking the third straight month of contraction. Joining the crowd, the Richmond Fed’s manufacturing index fell unexpectedly with the broad regional employment measure becoming negative.

A big picket fence Mortgage rates remain elevated and they point to one way that the present day is far removed from the pre-Covid era. Jeffries says the cost of owning a home is now nearly 1.6 times more than that of renting, with California hit particularly hard. In February 2020 renting and owning were at parity.

What Else

Does “irrational exuberance” ring a bell? Speaking to Bloomberg the other day, Ed Yardeni summed up the current state of affairs thus: “This is starting to possibly be reminiscent of the 1990s, and if you ask me where we are in the 1990s, I think we’re at December 5, 1996, where Alan Greenspan asked ‘How do we know if it’s irrational exuberance?’ And I’m concerned that the market would go up too fast. It’s great on the way up. Melt ups are wonderful, but by definition they can lead to melt downs.”

Want bitcoin with that? Chipotle has decided to proceed with a historic 50:1 stock split, subject to shareholder approval. The average price of an S&P 500 stock right now is almost $160, more than four times the pre-crash level in 2008, as Strategas notes. Waves of splits—were one to develop—have in the past been noteworthy signs of increased speculation.

Make politics boring again TrendMacro reports that “Google Trends indices of interest in our esteemed presidential candidates show that there is, in fact, no interest.”