Is that Santa I see?
Market momentum & fundamentals are keeping the rally going.
I started this week with annual holiday meetings in Scottsdale, Ariz., where my colleague welcomed our breakfast guests to our “50th Hermosa gathering.” Not quite, but it’s been a great tradition. The group always appreciates my shoes and travel schedule, cheering my “heels on the ground.” The property market there continues to boom, as a gentleman shared his friend selling a home one week ago “named his price.” Prices in Phoenix were among the fastest-rising in the latest Case-Shiller survey (more below), reflecting a housing market where buyers who can find a home are still quickly snapping them up. It's just one sign of an economy that, while perhaps slowing (more below), is doing so grudgingly. Indeed, Evercore ISI is quick to dismiss all the talk about the Sahm rule. It argues that whenever the 3-month moving average of unemployment rises five-tenths of a point above its cycle low, a recession ensues. It’s up almost four-tenths now. The problem is that like so many other historical regularities that this post-pandemic recovery has defied, the empirical evidence begs to differ. With payroll growth still abundantly positive and only slowly declining, the probability of a deep recession seems limited. Especially since the recent rise in joblessness mostly reflects inflows from outside the labor force, not workers being laid off.
Until there’s evidence to the contrary, the consumer still reigns supreme (more below). Not hard to understand why. With the majority of outstanding mortgage debt (which comprises 70% of all household debt) at fixed rates 300 basis points below current rates, consumers are far less sensitive to higher rates than they used to be. True, revolving credit debt is making new highs, fed by balances compounding at record-high rates. But as a percentage of household disposable income (6.3%), this debt is still below the 6.6% average from 2012 to 2019. Corporations also have taken advantage of low pandemic-era rates and termed out their debt; 60% of maturities at larger companies won’t come due until 2030 at the earliest. Smaller companies have less flexibility and thus are more vulnerable to higher rates, as are millennials, GenZers and lower-income cohorts. An Empirical Research analysis shows under-45 households that tend to carry large card balances and/or have auto and student loan payments are driving a run-up in revolving-debt delinquencies off rock-bottom lows. The good news is Covid stimulus and the pandemic’s zero-rate setting helped drop their debt service and debt-to-income ratios to 30-year and 20-year lows, respectively. This bottom 80% of the income distribution accounts for 60% of consumption. Still, while continued job and real wage growth has lessened the sting of high rates and high inflation, millennials are the still the losers in this environment. On the other hand, their baby boomer parents have been winners, receiving income gains on cash holdings and price gains on their homes. Sorry (not sorry!).
While in Scottsdale we discussed AI, and an advisor noted, “Change has never been so quick as now, and will never be this slow again.” I borrowed this quote in West Palm Beach later in the week. There I delivered my “AI Revolution” presentation at the Barron’s Advisor Women Summit. I lamented only 50 slides, which I had to narrow from 150 originally in this deep and broad topic. An advisor suggested I find the other 100 slides, as “we are craving this kind of knowledge.” I’m peppered by queries about AI, and the productivity boom it may bring, in my travels. But what’s notable in the market’s run of late is that it isn’t just AI names that are having a day. The S&P 500 is up 11% from its correction low of 4,117 on Oct. 27, and the Dow was up 9% in November alone. The question is whether Santa may need to take a break. With AAII bears at alarming lows and the percentage of bulls at 6-month highs, Fundstrat finds technical reasons to expect some consolidation. But Barclays notes second-decile historical observations on the VIX often skew positive for equities over the following six months, and that breadth remains far from any “distributive” threshold. Credit also continues to behave, with IG spreads hovering near fresh lows. Resistance at 4,590 on the S&P could mark a test, and the market could maybe use a break. Santa too. Lots to do these next few weeks. But not much reason to think the rally’s done.
- Immaculate disinflation October PCE was flat at the headline and up 0.2% at the core level, with the y/y core rate the Fed prefers at 3.5%, the lowest since April ’21. For Q3, the annualized core rate was 2.3%, and Fed Powell’s so-called supercore was below 2% y/y for October. Overseas, November flash eurozone inflation fell to 2.4% y/y, the lowest since July 2021, a big downside surprise.
- The consumer reigns supreme While Q3 revisions and October reflected moderating spending, discount stores reported their best y/y sales growth in a year over the long Thanksgiving holiday weekend, Redbook sales rose 6.5 y/y and online sales were especially strong— up 7.5% y/y on Black Friday and 9.6% on Cyber Monday, according to Adobe Analytics. Air travel, a key indicator of discretionary spending, soared, with Nov. 26 passengers setting an all-time high.
- Anyone watching gold? It’s within 2% of an all-time high and nearing resistance at $2,080 on a deteriorating dollar and contracting real rates. Yet the trade isn’t crowded as inflows remain muted. Gold typically finds itself higher 6-12 months out from the final Fed rate hike.
- Housing is making a bottom October new home sales fell more than expected. Pending sales also slumped. High (though declining 10 straight weeks) mortgage rates and home prices (FHFA and Case-Shiller gauges rose) kept buyers at bay. Still, y/y new home sales rose 17%, and the median sales price was just fractionally above its level 20 years ago as builders work to build new homes—supply is at 2022 highs, and existing home inventories are starting to loosen, too. They’re at their highest since 2020.
- Manufacturing is making a bottom November ISM and PMI manufacturing gauges slightly disappointed, holding at contraction levels. But underlying components hinted at improvement, with new orders better than expected and improvements in both unfilled orders and expectations. Overseas, the German Ifo index indicated growth momentum has troughed while the Baltic Dry index rebounded 63%, a sign global activity is picking up.
- Beneath the headlines The government’s second estimate of Q3 GDP looked impressive—up 5.2% annualized. But Piper Sandler found reasons for concern as government spending related computer chips stimulus that will fade next year drove the increase. Consumer spending was revised down and gross domestic income, which measures wages, profits, rents and interest income, i.e., fuel for spending, continues to be negative y/y. Not a great setup for 2024.
Cognitive dissonance The claim that real wages of workers have stagnated for decades is disputed by the data, which shows real growth has been picking up since the mid-’90s after being flat from the early ’70s through the mid-’90s, and recently has set record highs. So why is Michigan sentiment so depressed? Yardeni Group thinks consumers are suffering from “money illusion” as consumer prices remain much higher than before the pandemic. What they aren’t realizing is that their wages also have risen.
It’s beginning to look a lot like Christmas In the first week of the 5-week season, Christmas trees sold at a 5.6% pace, in line with historic norms, Evercore ISI says. No surprise, big trees are in heavy demand—but short supply. Shortages already have been reported, and the average price has risen too, about $1 per foot, or an extra $5 to $15 depending on the size.
Whew! A respiratory epidemic in Northern China that rattled Asian markets last week may be overstated. Citigroup’s pharma analyst found the Mycoplasma pneumonia outbreak, second to the seasonal flu as the severest infectious case for people 5 to 14, already is showing signs of declining.