Would you like the bacon or the sausage?

Off to historic golf mecca Pinehurst, for my 15th annual presentation before the Campbell School Trust Forum (it has been an honor), this time sharing thoughts on both the market and crypocurrencies. Institutions and the Trump administration are embracing cryptos, but the public isn’t so sure. The majority is dubious, but not younger men. I think it’s “a guy thing,” I said, and afterward a gentleman agreed, “I won’t argue with that!” The market has been due for a pullback. The market is broadening, with the mega caps as measured by the Russell Top 200 no longer outperforming. Within the Magnificent Seven, several names are showing losses and only one showing much magnificence. The median S&P 500 stock’s price-cash flow ratio is now at a 19% discount versus a 15% premium two years ago, historically good news for stockpickers. Year to date, US stocks have now fallen 5% behind the MSCI World ex-USA index. Europe finally saw an all-time high for the first time since the late 1990s as measured by the Euro Stoxx 50. Still, the S&P 500 remains comfortably above its 200-day moving average, which has served as support for prior 5% pullbacks seen in recent months. Of the 11 sectors, only Energy and Materials are not within 2% of their all-time record forward earnings. The nerves of retail investors may well be frazzled by the “sausage making” going on in Washington—not to mention the drop in bitcoin—but the options market doesn’t show such concern. The S&P 500 has been stuck in a 5,800-6,150 range for months now, and even the eagerly-awaited news of Nvidia’s earnings was met with a chill. February 19 showed what analysts call a key reversal, whereby the market hit a new high only to sell off sharply afterwards, down 1.7% on the week. That can be an ill omen, and indeed, the bear markets of 1987, 1990, 2020 and 2022 all began with a week where the market reached a fresh high only to fall at least 1% on the week.

Consumers are in a mood as their expectations of future inflation have spiked upwards. Businesses are better judges of future inflation, though, and per the Atlanta Fed, they see unit costs rising 2.3% over the next 12 months, unchanged from one year ago. Indeed, consumer confidence has not been a good predictor of spending in recent years. Visa studies consumer spending momentum; they’ve found that both discretionary and non-discretionary spending is improving even if 2024 was so strong a year that growth levels will be hard to surpass. As an astute attendee remarked at my fireside chat at the CFA Society Tampa Bay event this week, “Watch what the consumer does, not what he says.” According to Moody’s, the affluent now account for a record 49.7% of consumer spending. Household balance sheets are solid, with the ratio of net worth to disposable personal income near an all-time high due to asset price appreciation. The major question appears to be whether or not government policy will undermine aggregate demand. Interestingly, the recent spike in weekly jobless claims, from 220,000 to 242,000, might suggest DOGE was to blame, but the uptick for DC, Virginia and Maryland amounted to only 2,800. No matter, consumers are wondering, “Is Elon coming after me?” And as for investors …

The weekly AAII survey shows bullishness one standard deviation below the long-term average—a good sign, as this is generally reckoned a contrary indicator. The current level was last seen at the end of a 10% correction in the S&P 500 in November 2023, which turned out to be a good time to be a contrarian. There’s no sign of recession (and that’s what we should be focused on) from that data yet, as estimates remain strong after two quarters and out two years. The current decline in equities has been especially tough for companies with high price-to-sales ratios but the S&P 500 is down just 5% from its all-time high; and by the way, the average year sees a drawdown of 14.3%. The difference this time is that we have a new administration in Washington with an ambitious agenda as regards tariffs, DOGE and foreign policy. Sausage in the making, if you will.  Anyway, I guess I won’t worry about sausage, since I’m currently boycotting eggs.

Positives

• Earning more but worrying more January personal income rose 0.9% m/m, stronger than expected due to significant transfer income. Excluding transfer payments, real disposable income was up a normal 0.3%. But nominal consumer spending slipped more than expected (down 0.2%), while the savings rate rose to 4.6%. Real consumer spending is on track to be up just 1.7% in Q1. The most anticipated news of the week, headline and core price deflators reported as expected, with the headline index up 0.4%, putting the y/y at 2.5%. The core PCE deflator advanced 0.3% for a 2.6% y/y gain.
• Big ticket items on order New durable goods orders increased 3.1% m/m in January, vs 2.0% consensus expectations, driven by a strong rebound in the volatile nondefense aircraft category. Core durables orders ex-aircraft rose 0.8% m/m in January. After two years of sluggishness, this uptrend is welcome.
• Mixed, but okay The Federal Reserve Bank of Richmond index improved 10 points to 6, rising 3.1 points to 54.0 on an ISM-adjusted basis, although the Dallas Fed index fell 22.4 points to -8.3, or 47.6 on an ISM-adjusted basis while the Philly Fed non-manufacturing activity index fell to -13.1, the lowest since August 2024. Elsewhere, the second estimate of real GDP rose 2.3% q/q in Q4, unchanged from the advance estimate, reflecting a mix of revisions to its components, but showing a still-strong consumer.

Negatives

• Eggs and DOGE putting people in a mood Conference Board consumer sentiment slid 7.0 points to 98.3 in February, below consensus estimates (102.5) and at the lower end of the range it’s been in since the Fed began its hiking cycle in early 2022. Deterioration was concentrated in the more volatile expectations index, which fell 9.3 points to 72.9, below the 80 mark which is typically consistent with recession. The present situation fell 3.4 points to a still-strong 136.5. The Labor Differential fell to its lowest since October and has declined 13 points over the last year. Jobs are mostly available (with 50.3% of respondents saying so), but the percent of respondents expecting fewer jobs six months hence surged to 25.9%, the highest since March 2013, possibly reflecting all the news about federal job reductions under Trump 2.0. Year-ahead inflation expectations surged to a 21-month high of 6.0%, consistent with sticky inflation, highly visible price jumps (eggs), and respondents citing impending tariffs.  
• Housing affordability worsens … House prices posted strong gains to end 2024. The FHFA and S&P 20-city measures grew 0.4% and 0.5% m/m, respectively (vs expectations of 0.2% and 0.4%). In y/y terms, the S&P index accelerated slightly, from 4.4% to 4.5%, alongside acceleration in the FHFA index from 4.5% to 4.7%. Both are trending downwards in their y/y gains, indicating that some house price relief may be on the way.  
• … and so January new home sales fell 10.5% m/m to 657k (well below 680k consensus), alongside a cumulative October​-​December upward revision of 49k. The decline was broad-based by region and added to already-soft housing data for January, as existing home sales and starts both declined. The months’ supply of new homes at the current pace of sales stood at 9.0, higher than last month's reading (8.0), reflecting the weaker pace in January. The level of new home sales remains in line with pre-Covid.  

What Else

Calling the Democrats’ bluff The risk of a government shutdown could dampen St. Patrick’s Day celebrations. The official deadline is midnight the Friday before, but negotiators have grown predictable in using weekends to finalize deals over the past six years. Looking at a half century of US shutdown history, President Trump presided over the longest funding gap in 2018, a midterm election year in which his political opponents gained seats.

Calling China’s bluff Trump also wants to charge steep fees of roughly $1 million on all Chinese and Chinese-made cargo ships, and “at least 10 times higher than existing charges,” notes the CEO of the cargo-shipping consulting firm Vespucci Maritime. This, as China’s market share has grown from 5% (based on tonnage capacity) in 1999 to over 50% by 2023. Shockingly, American companies command just a 0.2% global market share of commercial shipbuilding: in 2022 China built 1,794 oceangoing commercial ships, compared to five in the US (which is just a little below the annual level for about half a century).

This could put Trump in a mood In Trend Macro’s "Google Trends" indicator, it appears that Elon Musk is almost three times more fascinating and famous than Trump.