What did you just call me?

I visited three great country clubs this week, traveling through three cities. First, Oak Hill CC in Rochester, NY, home of the East golf course which hosted the PGA Championship last May. Indeed, Rochester has “more golf courses than you could play in a year,” as well as its East Avenue Historic District where George Eastman’s (of Eastman Kodak fame) cavernous house sits among numerous other multimillion-dollar mansions in an otherwise “very affordable” city. Second, Hayfields CC in Hunt Valley, MD, offering spectacular views and home to McCormick headquarters. Lastly, The Country Club of York, in York, PA.  Founded in 1899, it is among the oldest country clubs in America. Amidst such tranquility you might not expect to hear worry, but such is not the case in this market. The recent pullback, with the S&P 500 retreating more than 5% from its highs, may not be as bad as it feels. The market sells off 5% or more three times a year on average, and it had been mostly straight up since last fall. Various factors have been given as causes of the drop: geopolitics, higher rates and sticky inflation. J.P. Morgan sees a possible repeat of last fall, when 10-year rates bumped up on 5% and the equity markets fell 10%. Seasonality is different in election years, notes Renaissance Macro. Instead of a late-summer selloff, usually the market is weak right about now, reaching a bottom around Memorial Day. As regards the Q1 earnings season, Taiwanese and South Korean exports have been solid, which is good news for us, as this measure has a strong correlation with forward earnings for the S&P 500, particularly the technology sector. So far, this earnings season, like last quarter’s, is full of surprises and sharp reactions, with stock correlations remaining very low, at 20%.

A survey of surveys reveals a mostly positive picture. Bank of America says 36% of investors now expect a “no landing” scenario over the next 12 months, up from just 7% in January, even as CPI expectations have risen from 2.6% in January to 3% today. The National Association for Business Economics asked economists about business conditions, and they foresee a jump in Q2 profit margins at their own firms together with 2024 S&P 500 earnings of $240, up 10% from last year. RBC polled its own equity analysts and found that optimism remains strong in most sectors and regions globally, high rates notwithstanding. Investor sentiment fell, but, as a contrary indicator, that can be a good thing. The AAII Sentiment survey showed the Bull-Bear ratio falling from 2.1 at the beginning of this month to 0.9 this week. Similarly, the Investors Intelligence Bull-Bear ratio dropped to 2.2 this week from 4.4 three weeks ago, which was the highest level since February 2018. As goes the consumer, LegalShield reports that U.S. consumer financial stress fell to its lowest level in a year, based on the volume of callers seeking legal help. This suggests that worries about consumers running out of excess savings and feeling the squeeze of higher prices and rates may be somewhat premature. Still, in a sign of just how fast prices—and mortgage rates—have risen, Redfin says that fully 38% of homeowners think they wouldn’t be able to afford a comparable house in their neighborhood today.

Catalysts for a market correction seem to be accumulating. Causes for concern have appeared in the labor market, inflation, trade and beyond. 1) Inflation remains elevated globally, not just here, with core CPI outside of China and Turkey rising 0.3% for the third straight month. 2) Piper Sandler sees weakness in the BLS’s Business Employment Dynamics data, which suggests a much softer hiring picture than that shown in the monthly nonfarm payroll report. 3) Loan delinquencies have been ticking higher, and gas prices are up 13% since the start of the year. 4) Chinese demand looks set to soften due to inadequate stimulus. Given that large caps within the S&P 500 have near-record levels of exposure to China, this could spell trouble for semiconductors and other tech stocks, with autos, pharmaceuticals and household product firms also exposed. This week I met advisors, bankers, business leaders and retirees in gorgeous settings of rolling hills and stately country clubs, but the feeling was of trouble brewing. A retired RIT tech professor at my AI seminar warned the group that “large language models can’t be trusted,” while my York bank president host reported increasing delinquencies and a weakening job market. But the most strongly articulated list of troubles brewing came from a room full of advisors at a breakfast meeting in Rochester. One has real concerns about a contested presidential election, another about the ballooning government debt and another about the odds of the Fed successfully engineering a return to 2% inflation. I suggested that Powell may declare victory closer to 2.5% inflation, which would probably be okay and allow for rate cuts. “You’ve just made my blood boil! Elitists thinking 3% inflation is fine when the little guy is struggling!” What did you just call me?! Why this working-class mill worker’s daughter who grew up in a home costing less than an old used car has never been called “elitist” before! My daddy would have laughed his head off! Please, don’t shoot the messenger. We parted as friends, agreeing to meet next time during happy hour.

Positives

• Sweet home New home sales jumped 8.8% m/m in March to 693K vs. expectations of 668K. A large downward revision to the February figure accounts for the surprise, though. On a seasonally adjusted basis, prices were up 4.8% m/m, but that number does not reflect mortgage “buydowns” by builders seeking to entice buyers put off by current mortgage rates. Single-family starts are up 21.2% vs. last year.
• Staying power Durable goods orders rose 2.6% in March, but this was largely due to volatile auto and aircraft numbers. Core orders rose 0.2%, in-line with consensus. Orders for civilian aircraft and parts surged 30.8%, while defense orders rose 2.8% in March following February’s 9.1% increase.
• Sick no more? Germany’s Ifo business climate index rose in April for the third month in a row, to its highest level since last June. The country’s composite PMI rose 2.8% as well, with improvements felt broadly through the economy. The euro area composite output PMI also rose, by 1.1 to a stronger than expected 51.4 in April.

Negatives

Probably not stagflation GDP growth in Q1 fell from 3.4% the previous quarter to 1.6%, well short of expectations. However, on a final sales to private domestic purchasers basis (net of government, net exports and inventory investment) GDP rose 3.1%. This matters since this figure tends to be a better indicator of forward GDP. Core PCE came in at 0.3% higher m/m in March, continuing a string of disappointing inflation readings. While goods consumption was restrained, spending on services was particularly strong.

Q2 looking iffy? S&P’s flash PMIs for April came in below expectations, with manufacturing slipping to 49.9% and services falling to 50.9. New orders fell in both groups and employment dropped as well, with service employment falling to its weakest level since mid-2020. Also, the Richmond and Kansas City Federal Reserve banks both indicated increased business activity, but they remain in negative territory.

The consumer is starting to worry The University of Michigan’s consumer sentiment survey fell unexpectedly in April, while inflation expectations rose from 2.8% to 3%, in-line with forecasters’ predictions. 

What Else

Arms and the man Military spending globally rose 7% last year to $2.4 trillion, a new record. The U.S., China and Russia were the three leading spenders, and Poland’s spending on defense rose by some 75%. 

Pharma supply chain A record 323 drugs were in scarce supply in the U.S. in Q1. The shortages are blamed on multiple factors, including the ease of getting a prescription via telemedicine, the technical difficulty of producing certain in-demand medicines and regulations that reduce the financial incentive to produce generic medicines. 

Clean living Japan’s largest brewer said that by 2040 fully half its business could be in zero and low-alcohol beverages due to the consumption preferences of a health-conscious younger generation.