Platinum-locks

Another week, another new high. Some describe the current state of the stock market as “parabolic” and “Platinum-locks”—an even more desirable version of Goldilocks. The Nikkei 225 posted a new all-time high for the first time since December 1989. Recession has arrived in the U.K., Germany and Japan, yet this has coincided with all-time highs for the European and Japanese stock markets. Sort of a headscratcher, although as Strategas notes, by the time a second negative quarter is recorded, the market is often already on the way up. Still—already at a new high? Whether it be 1980s Japan or the Dotcom era in the U.S., bubbles generally expand with the help of central bank easing. As Nvidia set a record on Thursday for largest one-day leap in market cap, investors had to decide whether this was a sign of froth or a party still welcoming guests. BAC notes that 85% (good odds) of prior bubbles have peaked or popped amid rising rates—something we may not see for quite some time. Goldilocks, indeed … With the warning “Don’t be early,” Renaissance Macro says that excessively bullish sentiment is generally not a sufficient reason to sell during a bull market because sentiment tends to be an early signal. Strategas agrees but notes that the ”easy” part of the rally is already over. Still, they see any pullbacks being contained by support at 4,800 or, failing that, at 4,600.

February is historically a pretty tame month, in terms of seasonality, yet this year it has been robust. Goldman Sachs notes several valuation yardsticks that are at about the 85th percentile of their historical range: aggregate index P/E of 20x, equal-weighted index P/E of 16x, and the premium of the S&P 500 vs. the equal-weighted index. Renaissance Macro sees strength and resilience in the Russell 2000 and discerns signs of a breakout. As to fundamentals, most of the S&P 500 has now reported, and earnings have been stronger than forecast, with 80% of companies beating expectations. Still, the market has not rewarded success as much as usual and it has been brutal to those who missed. This may create the opportunity for companies that beat expectations to be rewarded in the days and weeks ahead. Nvidia’s jump and a recent uptick in market breadth suggest to Fundstrat that some of the dry powder—of which there are trillions out there—may at last be getting deployed. Fueled by increased P/E multiples, the rally that started last fall was based on rate-cut expectations, but recent inflation news has been less reassuring. And yet, the market has not seemed to mind. Why, with fed funds at 5.3%, the highest policy rate in the developed world, the Fed has more, well, dry powder than any other central bank when the time comes to step off the brake. With its economies sputtering, the European Central Bank should probably move before the Fed. In practice, the ECB has not led the Fed in an easing cycle in its 25-year existence.

If mob psychology crowds out reasoned financial analysis, watch out. While bullish overall, euphoria is a concern for Yardeni. You always know when there’s been a melt up, he adds, because of the melt down afterwards. Certainly, good feelings abound. The equity allocations of U.S. households and non-profits now stand at 41%, four times the level 40 years ago (just before the last 40 years of Goldilocks-like tame inflation)—a spike not seen in other countries. In J. P. Morgan’s view, that fondness for equities drove the U.S. market’s increased multiples and accounts for much of U.S. outperformance seen since 1987. Morgan sees U.S. equity allocations coming down over the next 5-10 years, due factors such as macro volatility, the end of TINA with bonds’ reemergence and the aging of the U.S. populace. This implies muted returns on stocks over the next decade. How much of a recession would it take to wreak havoc? The 2001 downturn was quite mild by post-war standards, but it occasioned a 49% selloff in the S&P 500. Why so bad? Because the S&P was so expensive. The S&P 500 currently trades 41% above net present value, by which measure it’s the most expensive it’s been since October 2000. You know, my last stylist said I’d look great if I let my hair go gray. “But it will make you look 10-15 years older.” Even if he’d suggested the more-desirable platinum locks, I still would have fired him.  

Positives

• QED Weekly jobless claims fell to 201,000 vs. a consensus estimate of 218,000. Unemployment can’t go up if claims go down, and there cannot be a recession without unemployment rising.
• The soft landing landed Former Fed Vice-Chair Alan Blinder argued in the Wall Street Journal that the economy is in equilibrium and the soft landing already happened. So, does this mean that we’re in a new economic cycle?
• That recession may be a mirage The Conference Board’s index of Leading Economic Indicators has been falling since December 2021. Though it continued to fall in January, the Conference Board finally announced that the LEI does not currently forecast recession now that six of the 10 components have been positive over the past six months.

Negatives

• That rate cut may be a mirage The Fed’s minutes of its January meeting show that “most participants noted the risks of moving too quickly” with regard to cutting rates. Futures markets have written off once-likely March and May rate cuts, and June is now reckoned the likely date for a cut. The only previous time the Fed cut with the S&P at all-time highs was 1995 (seems like low odds to me). 
• Something’s gotta give Sales of existing homes rose 3.1% in January, vs. expectations of a 5% increase, and cash sales were 32% of transactions, the highest level in almost a decade. Median single-family home prices reached a new high of $379K, up 5.1% from a year ago. Getting sales numbers up again may require the Fed to start cutting, but the restriction of supply creates inflation—which stays the Fed’s hand. 
• Cleanest dirty shirt? PMI reports offered a mixed picture of global activity. Manufacturing PMIs for Europe and Japan contracted in February, with Germany particularly hard-hit. In the U.S., the manufacturing PMI moved up in February’s data for the second month after a lengthy swoon, but it still stands at a weak level relative to the past decade. 

What Else

Why we feel so stretched Wages (up 22%) have mostly kept up with inflation since the pandemic, setting aside certain outliers like eggs (up 36.5%). The general view is that everything has gotten so much more expensive, and two likely culprits are autos and houses. Indeed, the Case-Shiller housing index is up nearly 50% since the pandemic, with rising mortgage rates adding insult to injury.

Room to grow Per the Boston Consulting Group, only 8% of U.S. executives have implemented AI widely but 89% say it is a high priority for 2024. The U.S. is ahead of its global peers, only 6% of whom have introduced widespread AI training at their firms. The survey didn’t include the (collectively huge) small business sector, which has made even less of a foray into AI.

Gone Fishing Australia passed a “Right to Disconnect” law that gives workers the right to ignore company messages sent when they are off duty. Similar measures exist elsewhere, most notably in France and Spain. Australian business groups complained the new law will hamper flexibility and productivity.