Bubbles, bubbles and bubbles!

If I had a nickel for every time I heard or read “bubble” this week, I’d probably have about two bucks. We had quite a number of advisor and end-client meetings in San Antonio and Dallas this week. A key border state, Texas, facing the immigration crisis, which has catapulted to the top of voter concerns (along with inflation) in recent surveys. I heard an earful—from both sides of the issue. To wit: “All Texans want immigration; we just need a process.” “Immigrants are the hardest working people I know; only a small percentage of them are in criminal gangs.” In Dallas, “The immigrant children are overloading our city’s school system.” But the paramount concern was a market bubble a la the late 90s that burst spectacularly. Wolfe Research says we’re not in one yet, adding that the key conditions for a bubble forming are liquidity and a strong growth outlook. Trahan says the AI rally is following the bubble playbook of a “this time it’s different” mentality together with easy monetary policy. The latter does not hold right now, yet. Indeed, it was not rate hikes that killed the tech boom; rather, weakening economic growth and tech spending outlooks did it in. This after tech capex soared above trend due to the internet buildout and the Y2K problem. At present, we remain at trend for tech spending. Yes, momentum is up near 90% and investor optimism is high, but the percentage of Russell 3000 stocks trading at more than 10 times sales is 8.3%, well below 2019 levels and also below the tech boom. 

The Magnificent 7 is starting to look more like a Magnificent 5, with the formerly sacrosanct Apple breaking down and Tesla’s share price decline demoting its CEO to world’s second richest man. A bubble without these guys?! Still, the Russell 2000 is trading at its highest level in two years, gold is blowing up to new all-time highs, February was the strongest February in nine years, the equal-weighted S&P 500 is now at an all-time high of its own—have I forgotten anything? Bubblicious? Noting that the 10 largest companies today have better characteristics in terms of valuations and ROE than at peaks in the tech boom and the Nifty 50 era of the early 1970s, Goldman Sachs opines that we are more likely to see the laggards catch up than the biggest stocks fall to earth. Though the U.S. has been on a roll, in some sense it’s the dirtiest clean shirt in the laundry, with Japan up 20% on the year and European stocks up 9%, vs. the S&P’s 7% gain. How long can this keep going on? Leuthold, noting the unusually high valuations and interest rates with which this rally began, two features that may limit its extent and duration, sees no signs of the bull’s demise yet. 

With Haley dropping out of the race, we have our two candidates. This being the week of the State of the Union, Texans were ready to talk politics! There is plenty of bipartisan venom to go around, with assertions ranging from “I’d vote for a doorknob over Trump,” to an investor correcting a like-minded individual at a dinner event, “You mean WHEN Trump comes back, not IF.” This tension was broken by unparalleled Texan charm, as a gentleman wearing cowboy boots and a 10-gallon hat showered me with compliments for my speaking ability, another called me “cute,” and a young lady invited me to go designer shoe shopping. So, what’s the mood of the electorate? Nationally, the Covid money is largely gone. Consumption is now being funded with the help of savings and credit cards. The consumer will spend if employed, and this morning’s labor report was still pretty solid. Also helping consumption has been the general trend of disinflation, and Strategas notes consumer stress continuing to recede from a cyclical peak of mid-2022.  Except the stress of missing out! In both San Antonio and Dallas, I heard fresh tales of FOMO clients. The calls are increasingly “I want to take more risk.” Advisors I met in Texas fear another late 90s bubble is brewing, wondering “What catalyst will hit this market?” In true Texas rodeo lingo, the quote of the week—the dismount is difficult. 

Positives

The Fed will like this mixed jobs report The economy added 275,000 jobs, vs. 200,000 forecast, though last month’s blockbuster job numbers were revised down, and the job categories seeing the biggest gains were not from particularly dynamic sectors—health and social assistance and low-paying leisure and hospitality. The unemployment rose above consensus while wages rose a tame 0.1% over the month and 4.3% year-over-year. 

The resilient consumer The Fed’s Beige Book report showed economic activity picking up, with most districts reporting modest growth. In contrast to recent Beige Books, consumer credit was not flagged as a concern.

Bodes well for inflation Unit labor costs rose 0.4% in the fourth quarter vs. an expected 0.7%. Also, labor productivity rose at a 3.2% rate in the quarter, bringing 2023 productivity growth as a whole to 2.6%. 

Negatives

U.S. slowing as rest of world turns around? The ISM Services Index fell a bit more than expected to 52.6. If this moderation indicates a slowing due to interest rates, it may serve as a precursor to rate cuts. But it could just be mean reversion after an outlier reading in January. S&P Global’s PMI U.S. Services Index rose more than expected in February to 52.3, with the report showing signs of inflation firming in February. 

Factories are cooling, but trade is booming Factory orders ex-transportation disappointed, falling 0.8% while last month’s reading was revised downwards. Elsewhere the trade deficit rose more than expected in January, as both the imports of capital goods and motor vehicle parts/engines as well as the export of services reached new highs.

Small businesses could use some help from the Fed Per the recent NFIB survey, interest costs for small businesses on short term loans have nearly doubled, from 5% in January 2022 to 9% in January 2024. Some 6% of respondents said their most recent loan was harder to get than in previous attempts. 

What Else

Almost as many CRE concerns as bubble worries Regional banks’ commercial real estate loans are concentrated in the less badly hit suburbs and smaller cities. Loans for downtown office towers tend to be held by the largest banks, who are better able to weather a hit to the balance sheet. Further, with office delinquency rates near Global Financial Crisis levels, perhaps the worst is already behind us.

Make politics boring again Congress has now passed six of its 12 appropriation bills. If they finish the appropriations process by March 22, sequestration will not be triggered. And that would mean discretionary spending would continue rising ahead of the election.

Right on schedule Back in the late 1980s, the Nikkei 225 was at an all-time high and Michael Keaton played Batman and Beetlejuice. More than 30 years later, the Nikkei has once again hit a fresh high … and Michael Keaton is playing Batman (2022) and Beetlejuice (2024)!