Consumers still reign supreme

Travel this week took me to Tampa, with two of my favorite colleagues, and the themes across advisor meetings were remarkably similar—“this is the roaring twenties” (we sampled pricey French butter and bread), “I don’t want to get political but I will,” “we’re getting old,” the Fed, and AI implications. Floridian advisors have many older, conservative clients who wonder where to get “safe” income when the Fed starts to cut rates. Bank of America suggests that investors will look elsewhere for yield once the fed funds rate slips below 5%. Be careful what you root for. In each of the last 11 rate-cut cycles, the S&P 500 has been lower three months after the first rate cut, but that’s because a recession had usually begun. Turns out that in rate-cut cycles with no recession, the S&P 500 has averaged gains of 16% a year after the first cut and 32% some 18 months afterwards. The market is expecting a March cut (we’re not) and a soft landing (we are). This week Fed Governor Waller said the “worst thing” would be for inflation to unexpectedly reappear after rate cuts, forcing them to reverse course, a sentiment echoed by other central bankers around the world. Fed Chair Powell was criticized in 2019 when he cut rates shortly after hiking them. He’s bent on getting it right this time.

Checking in with the technicians, many were concerned earlier in the week about the sluggish start to the year. Even so, Fundstrat argued that the any choppiness was just consolidation so long as the 4,682 January lows held up. Strategas added that the 50-day moving average above 4,600 served as support, noting that it’s to be expected that a surge such as that of late 2023 would need a period of consolidation. Piper suggests the market is undergoing a healthy rotation between large, mid and small cap leadership. Leuthold corroborates, saying that their technical work is “unequivocally bullish.”

That was one quick consolidation. Earlier in the week, Deutsche lamented that it was hard to find any mainstream global assets that are in positive return territory for the year. Strategas told us that it’s been a tough go for high beta relative to low, standing in stark contrast to the start of 2023. This is promising to be a volatile year, but so what? Consumer confidence is up early this year, buoyed by a still-strong job market. Indeed, as we write, the S&P reached a new record high. So, having said all that, as those at my Tampa meetings insisted, this is the roaring twenties. A young advisor is more concerned about AI, asking, “should I worry about my job?” As regards AI, 50-70% of Boomers want the personal touch. Finding the new equilibrium will be a bumpy road. A gentleman in a Chicago Starbucks was told, “I’m sorry, I can’t help you,” and was directed to the kiosks. Chicago also has a fully automated McDonald’s store. A 65-year-old advisor client with AI skills plans to retire in two years but just changed jobs, doubling his salary. Alas, we are all getting older (unfortunately, my AI skills are not marketable). One of my veteran colleagues lamented that he used to work in his home office after dinner, “but these days…” Who cares, he has the best laugh on the planet.

Positives

• The consumer reigns supreme… Retail sales rose 0.6% in December, nicely exceeding forecasts. In nominal terms, sales rose 5.6% from one year before, more than keeping up with inflation. Consumer sentiment jumped in January, also surpassing expectations. Together with December’s positive reading, it’s the strongest two-month sentiment showing since 1991. The survey also showed that inflation expectations are coming down.
• …as long as he has a job Weekly jobless claims dropped unexpectedly to the lowest level of filings since the fall of 2022. Plenty of consumers still have a job!
• Housing out of the woods?… Homebuilder sentiment rose to its highest level since September. 30-year mortgage rates are currently at 6.6%, down more than 100 basis points since the week of Halloween. And mortgage applications rose 10.4% week-over-week from last week.

 Negatives

• …not quite yet Housing starts fell 8.6% in December, roughly in-line with expectations. Building permits rose, however, indicating that homebuilders expect falling mortgage rates to fuel activity. For their part, though, existing home sales declined unexpectedly in December.
• Factories whistling past the graveyard Industrial production edged higher in December. That was better than expectations but just barely, and there are increasing signs of trouble in manufacturing (more below). 
• Regional Feds corroborating The Empire State Manufacturing Survey came in very weak in January, falling much more than expected. New York manufacturing is now at its lowest level since May 2020. The Philadelphia Fed’s January Manufacturing Business Outlook Survey also came in weaker than expected. It was the survey’s 18th month in contraction out of the last 20.  

What Else

This may be getting away from us Strategas suggests that a federal deficit of 7.7% of GDP, as at present, is what you might expect to see if unemployment were at 8%. Historically, such deficits have only been seen in the Great Depression, World War 2 and the Great Recession.

Whip inflation how?! In 1974, President Ford told the public to carpool, turn down the thermostat and start a vegetable garden. His administration handed out much-derided WIN buttons, for “whip inflation now.” Five years later, President Carter came up with some more, including obeying the speed limit and taking the bus.

For now, worry about something else Routing cargo traffic around the Cape of Good Hope sounds expensive. But how much has the disruption of Red Sea shipping increased inflation? Not that much. Per UBS, when you consider that imports are only 16% of consumption, and less than 50% of it comes by ship, just 2 basis points of additional inflation can be attributed to the Red Sea problem.