Midlife crisis

Off to lush Seattle, for a visit to my beloved daughter and two advisor presentations. “The Revenge of the Baby Boomers” is a favorite, obviously depending on who’s in the audience. Revenge #1 is the survey of “rate your well-being,” which shows ages 70+ the happiest by far. The worst? Ages 50-53, which a gentleman in the group attributes to the dreaded crisis of middle-age. April sure was a midlife crisis of a month! Sentiment remains very bearish, a good thing from a contrarian point of view, and this may be the best feather in the market’s cap right now. But breadth and momentum are not as supportive. The market is well below its February highs, but it’s right in line with pre-Liberation Day levels. The S&P 500 has rallied about 800 points from its April 7 lows, but it could be getting stretched at the moment given the resistance it faces. For instance, all but one of the stocks in the bellwether Semiconductor industry is trading below its 50-day moving average even though the group is up 23% from the lows. The 50-day moving average for the S&P 500 is 5,613 and the 200-day is at 5,746. Renaissance Macro thinks the market could have a tough time breaking through the 200-day and cautions that the risk-reward at these levels is not great given the potential for a retest of the lows. Tariffs have not spoiled the earnings party so far, with 78% of firms beating estimates versus 77% last quarter. Forward earnings have been rolling over some, however, keeping recession worries alive. Everyone from the retail investor to the Fed Chair is wondering whether inflation or a growth slowdown is the greater risk. The market is happy to let its concerns be heard if anyone’s truly listening—just look at the sinking price of oil, the strength of staples and weak yields on the 2-year.  

It was a strange April indeed. The sky fell, but the tape at month-end showed the S&P 500 off just 0.7% while Treasurys rose 0.6%. Among the sights obscured by those ho-hum full-month returns were the market down 13.8% on the month intraday on April 7, and some superlatives: the best day since October 2008 and the worst day since March 2020! The VIX also saw a close above 50, a rarity which had only happened in the 21^st century during the Global Financial Crisis and Covid. It appears Trump’s team misjudged China, thinking the US market was so essential that China would fold. De-escalation will happen but perhaps not soon enough. We must brace for supply chain disruptions. The Fed has powerful tools to drive recovery from a recession should one arise, but the big question is whether it can prevent one if trouble comes quickly. Growth over the medium term is much at the mercy of the Fed’s read on inflation. The tax bill could keep the economy above water—so Congress needs to pass it this summer. Wolfe Research remains a recession doubter, but they worry stagflation may be setting in with the Fed behind the rate-cutting curve. Some of the auto-related tariffs have been eased, but roughly two-thirds remain. There has been talk of de-escalation, anyway. Meanwhile, if there’s one thing that can keep this economy from rolling over, it’s the consumer. As Yardeni likes to say, Americans shop when they’re happy and, if anything, they shop even more when they’re sad. As long as they’re employed, consumers will shop.

If the wheels truly were coming off the bus, you’d think mergers and acquisitions would be dead, but this is not so: 41 deals are pending or priced so far this year, expected to raise $7.7 billion. And there are other causes for hope if not quite cheer. The banking industry’s separation from riskier loans, which nowadays increasingly move into private credit rather than onto banks’ balance sheets, serves as potential protection against a financial crisis in the event of a downturn. Airlines have suffered the largest downward earnings percentage revisions in the S&P 500, but there are indications that ridership may hold up better than analysts fear. Unlike many times in recent years, the Fed has significant room to ease. And despite much anxiety, capex in AI remains strong. Remember, the economy was humming along on Liberation Day, which should buffer whatever disruption comes. Job openings and hiring plans have not collapsed and credit card spending is solid. In the name of tariffs, potential price hikes are a common theme in earnings calls this quarter. If tariffs get walked back further, these price hikes might give occasion for margin expansion. And where do the tariffs themselves stand? Likely the resulting “agreements of understanding” will be vague. It’s hard to imagine that many deals at all will be reached before the July 8 expiration of the 90-day grace period. Ugh. For what it’s worth, shoe shopping totally smoothed over my own midlife crisis.

Positives

• The Fed’s got to like this The PCE price index was unchanged in March, meeting expectations, after a 0.4% increase in February. On a y/y basis, PCE inflation cooled to 2.3%, while core PCE inflation decelerated to 2.6% from 3.0% in February, now at its lowest level since March of 2021 at the start of the inflation surge. The Q1 Employment Cost Index (ECI) came in-line with expectations at 0.9%, bringing annualized wage inflation to 3.6%—well within the Fed’s preferred range of 3.5% to 4.0%. 22V Research notes that consensus finds the ECI to be the authoritative measure of wage growth.
• Everybody’s shopping! Real GDP contracted 0.3% annualized in Q1, matching consensus but a stark reversal from Q4’s 2.4% gain. On closer inspection, there was quite a bit of strength in the GDP report. Real final sales to private domestic purchasers rose 3.0% during the quarter as imports of goods and services soared, with wholesalers and retailers scrambling to front-run tariffs. (Indeed, the March advance goods trade deficit widened to a record high of $162 billion.) Business capital spending rose 9.8% during Q1, led by business equipment (up 22.5%), especially information processing equipment, which soared 56.3% (likely datacenters). As to consumers, personal income increased 0.5% m/m, a bit above consensus (0.4% m/m) in March. Personal spending accelerated significantly, up 0.7% m/m (consensus 0.6%), the fastest monthly pace since October 2021 after adjusting for inflation, with real consumer spending also jumping 0.7% m/m (consensus: 0.6%). The surge was primarily driven by goods consumption, as consumers rushed to purchase vehicles ahead of anticipated tariffs.
• Housing has stalled for the moment US house prices edged up 0.1% in February, according to the FHFA Home Price Index, suggesting a continued but decelerating growth trend. The y/y increase of 3.9% further underscores this moderation. The S&P Case-Shiller index, a broader measure, also reflects this trend with a 0.4% increase and a 3.9% y/y gain. As to home buying, the pending home sales index rose 6.1% in March, above consensus (1.0%). On a y/y basis, the index is little changed. Pending home sales are often looked upon as a leading indicator of existing home sales, as homes typically go under contract a month or two before they are sold. Looking ahead, the sales outlook in the National Association of Homebuilders survey has been downbeat of late.

Negatives 

• Hints of stagflation in manufacturing The ISM manufacturing PMI deteriorated 0.3 points in April, to 48.7, better than consensus (47.9). The details paint a more somber picture, with major components (new orders, production and employment) now all well into sub-50 territory. The prices component rose further, up 0.4 points to 69.8 to its highest level since June 2022. Comments from respondents overwhelmingly pointed to tariffs as a source of uncertainty and risk. Elsewhere, total construction spending declined 0.5% in March, worse than the 0.2% gain expected; the FRB of Dallas manufacturing activity index plummeted 19.5 points to -35.8 in April, the lowest reading since May 2020, and the Chicago PMI fell 3.0 points to 47.6. 
• All good so far, although … April headline and private payrolls came in well above expectations at +177k (though the prior two months were revised down 58k) and +185k, respectively. The unemployment rate was unchanged at 4.2% and the labor force participation rate rose 0.1% to 62.6%. At this point, the economy has stuck the post-Covid soft-landing. But looking ahead, job openings (JOLTS) fell for the third time in four months, to 7.2 million (consensus 7.5 million). The job openings rate stood at 4.3%, with openings down by 901,000 y/y, suggesting excess labor demand is rapidly cooling off. The ratio of job openings per unemployed person, at 1.0 (vs pre-pandemic readings of 1.2) deteriorated further. Renaissance Macro notes that the Beveridge Curve relationship shows we are now at a critical point where continued declines in job openings will likely translate directly into rising unemployment rates.
• Can the mood get worse? The Conference Board's index of consumer confidence declined for a fifth consecutive month in April by 8 points, to 86, the lowest level since May 2020, marking the longest losing streak since 2008. The expectations index cratered to 54.4, the lowest point since October 2011 and well below the 80 threshold that often foreshadows a recession. Net income expectations turned distinctly negative for the first time in five years. Even more concerning is the surge in pessimism about future employment prospects, with 32.1% of respondents expecting fewer jobs in six months—approaching levels last seen during April 2009. Inflation expectations surged to their highest level since November 2022. 

What Else

Can Xi outlast Trump? Yardeni Research posits that one ace up Xi’s sleeve is a pain threshold that would be unthinkable in the US. Mainlanders call it “chiku,” a Mao Zedong-era ethos meaning to “eat bitterness.” It’s helping Xi rally public support, painting China as a victim of US aggression. By the end of 2023, China was the biggest trading partner of 60 countries, about twice as many as the US, according to the Lowy Institute. Ironically, the Trump 1.0 trade war saw Beijing prodding state-owned enterprises to diversify income streams globally in case of another US trade war.

Calm before the storm? Nielsen scanner data from grocery, drug and convenience stores (with data for two weeks ending April 19) currently show little sign of policy-induced price pressures. Within food prices, egg prices continue to come down, while there is no sign of unusual price increases in fruits or vegetables, which might be expected if farm labor was an issue. Other categories where prices might rise from the tariffs (pet toys, art & office supplies, small appliances and non-electric cookware) are not showing notable price increases.

Wither the American dream? Zillow recently reported that half of all states have at least one city where a starter home costs over $1 million. These include California and New York, of course, but also states like Texas and Wyoming. For context, the real median household income was $80,610 in 2023, per Census data.