Drumbeat

Spent the week in Tampa and Clearwater, visiting lots of astute advisors with strong opinions. Most agree that investors and advisors are impatient for whatever we’re experiencing to be over with. Remembering 1994, a Tampa veteran asserts that “no one in institutional money management today knows how to navigate this environment.” Echoed in Clearwater, “nobody really knows.” As for how to right this ship, “instruments are off” and “the Fed will destroy this economy.” Indeed, consensus on my travels this week is that cash remains king to both advisors and their clients. Sounds dour, but life is fabulous on Tampa’s Bayshore Boulevard with spectacular homes along the waterfront and lunch with advisors in T-shirts. Next, enjoying my ride’s seat massage, which also adjusts to cushion each turn, and arriving at the spa-like office of a Clearwater advisor, all agree that trying to get dinner reservations is “insane” and “I refuse to pay $16 for a Manhattan!” Indeed, with services inflation proving sticky, the economy going strong and Powell sounding unusually hawkish before Congress, the 6% drumbeat grew louder this week. This morning’s jobs report and collapse of Silicon Valley Bank (more on both, below) calmed that particular chorus. At this writing, fed futures are putting the highest odds on a 5.50% terminal rate, with 5.75% still in play and 6% a fading possibility. As we’ve seen before, these odds can change quickly.

Putting aside skepticism about historical tendencies given Covid and stimulus-related disruptions, March through April typically represent the strongest 8-week period for stocks. With the S&P 500 P/E ex-big tech stocks at 14.8x, and Energy at 10x, a case can be made valuations are reasonable if not attractive, particularly relative to bonds. Bearish sentiment has begun to reemerge, even as weekly momentum and breadth remain quite positive. Post-Covid performance argues against reading too much into this. The market’s complex, Evercore ISI says, with the “normal distribution” of outcomes flattening to a pancake of probabilistic left and right “fat-tails.” Take the “Golden Crossover” signal (50-day moving average above 200-day), traditionally a bullish intermediate-term trend indicator. The last two signals that flagged more than 90% of stocks above the 50-day average (August and late November ’22) failed to produce positive forward returns. It doesn’t help that the S&P is just above support at the 200-day moving average. A 6% terminal rate could spell bigger trouble for Big Tech, which even after selling off is trading at a 39% premium to the market, vs. an historical 25% average. The range of possible outcomes (“soft,” “hard” or “no” landing) is equally puzzling.

History, for example, shows the labor market is typically at its strongest on the eve of recession. And while the underlying trajectory of inflation looks to be improving, it’s doing so slowly. It’s a long road to the Fed’s target.  Meanwhile Empirical Research reckons: “It’s not quite nobody knows nuttin’, but it’s close.” Well, advisors I met with this week aren’t patient: “People don’t care if the Fed goes to 6%, otherwise why isn’t anybody worried?” Another conversation around jobs, “I don’t believe the unemployment statistics,” devolved into complaints about young workers who “just graduated, know nothing, and got $100K plus bonus.” “They look for the next opportunity and quit within months anyway. Why, my daddy told me that even if you got a job in hell, you’d at least stay for a year!” A boomer advisor sent us off with a joke, I think-. “There are three great things about getting older. The first one is that you forget things. The second one is … uh … um…”

Positives

• Drumbeat to 6% February posted another big headline payroll beat. However, the jobless rate did inch up to 3.6%, as residential employment growth slowed and labor force participation increased modestly. Wage pressures also eased, with hourly earnings rising less than consensus expectations. This likely was due to a surge in lower-paying leisure and hospitality jobs, which are catching up after lagging early in the Covid recovery.
• Drumbeat to 6% The ratio of job openings to unemployed remains in the stratosphere, just below the 2.0 peak of last March. With openings declining at a 120K monthly pace since then, the openings-to-unemployed rate won’t normalize until the fall of 2024. Because of an upward revision in December, January openings came in about 300K higher than consensus expectations.
• Drumbeat Bank of America sees little evidence of a disproportionate financial strain among lower-income households, which according to its card data are outpacing upper-income households in year-over-year spending in several categories. These blue-collar consumers are using debit cards for most of their card spending, a sign they are not facing liquidity constraints. With job growth robust and raises proportionately falling more on the lower end of the pay scale, they continue to support GDP growth.

Negatives

• To the contrary Job sites LinkUp and Indeed don’t show the labor market anywhere near as tight as February jobs and January JOLTS data suggest. Their January listings ran 1 million below JOLTS openings, a record gap, and “core services” openings declined in February. Openings tend to be a lagging indicator of labor market cooling—in ’07-08, they remained high even as job growth decelerated sharply. Challenger tallies on hiring plans and layoff notices also are spotting deterioration.
• Crisis canary? The collapse of Silicon Valley Bank, which catered to venture capitalists and tech entrepreneurs, illustrates what can happen when the economy shifts rapidly from a low-rate to high-rate environment. Such shifts can expose issues that low rates hide, creating the potential for broader financial shocks. Do such shocks make the Fed ease? Sometimes yes, sometimes no, Piper Sandler says. Orange County mortgages in ’94? No. And not initially for Continental Illinois in ’84 or 2000’s Nasdaq collapse. But yes after ’87’s Black Monday and, obviously, during the global financial crisis.
• Cold Wars can be inflationary Despite efforts toward amelioration after last fall’s elections, U.S. relations with China are deteriorating rapidly, with national security taking precedence over economic efficiency for the first time since the fall of the Berlin Wall. Across the pond, Russia’s brutal war on Ukraine has puts its ties with the U.S. and West in a deep freeze. Together, the tensions could mark an end to a generation of strengthening—and disinflationary—financial ties between the countries.

What else

A drumbeat of Tampa/Clearwater advisors inquired about small cap value Small caps are the only asset class to outperform inflation in every decade going back to the 1930s. Indeed, Strategas Research says small caps handily outperformed their large-cap peers by 500 basis points on an annualized basis during the inflationary ’70s. All that said, since the ’80s, small caps on average have underperformed their large-cap peers heading into recession.

Smoke ’em if you got ’em Tampa’s Ybor City is the only neighborhood on Florida’s West Coast designated a National Historic Landmark. Once known as the Cigar Capital of the World, it was the world’s leading rolled cigar maker at the turn of the 20th century.

Sponge bath I had an evening event at Tarpon Springs, considered the “Sponge Capital of the World” because of its natural sponge beds. Every January 6, the local Greek Orthodox Church holds the largest epiphany festival in the Western Hemisphere, with 20,000 visitors and featuring the Cross Dive, during which the archbishop tosses a cross into the waters and teenage boys jump in to find it.

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