Stocks edged ever so slightly higher in a rather uninspiring, holiday-shortened week that brought a spectacular, record-filled first quarter to an end, but the weekly gain was almost entirely due to a solid performance on Wednesday. This was the fifth quarter out of the last six that both the S&P 500 and the NASDAQ-100 have advanced. Bizarrely, the week's biggest and most important economic data point was released while stock markets were closed on Friday.
In the absence on Monday of any major economic updates or significant earnings reports, stock-specific concerns rippled through markets. As well as the Boeing C-Suite falling apart, technology stocks took a dive after the European Union's European Commission opened formal non-compliance investigations against Apple, Meta/Facebook and Alphabet/Google. Shares of Intel and Advanced Micro Devices stumbled on China-related news. Most major indexes traded lower on the day.
Not all earnings reports are created equal and that of UPS is regarded as a particularly important barometer for the economy as a whole. So when we heard a pretty grim near-term outlook from the parcel delivery giant on Tuesday (which didn’t even take into account the logistics-damaging fallout from the Baltimore bridge disaster), stocks took a negative turn to finish up the day in the red, despite earlier gains and a quite encouraging Durable Goods report.
The bulls regrouped on Wednesday and carried the indexes nicely higher to new all-time records. The process of month/quarter-end positioning by large financial institutions and some sideline-sitters and FOMO-sufferers finally caving in and playing catchup before the end the quarter was considered to be a part of the explanation for the northward trajectory of stocks.
With markets closed for Good Friday, Thursday was the last trading day of a barn-storming first quarter, with stocks having notched their best start to a year since 2019 (more about that in my Q1 2024 Quarterly Report coming later this week).
The third and final Gross Domestic Product (GDP) revision for Q4 2023 was raised to 3.4%, confirming that the U.S. economy performed even more strongly at the end of last year than previously thought. It ended up being a quiet session with traders seemingly comfortable with their positioning and allowing Q1 2024 to play out uneventfully with indexes essentially flat on the day, ever so slightly higher for the week and, fittingly, reaching yet another all-time record high for the S&P 500 for the 22nd time in about 60 trading days to end the quarter.
While stock markets were closed on Friday, the Personal Consumption Expenditures (PCE) price index was released. The core version is what the Fed uses to gauge what it views as the true inflation figure and it came in right in line with expectations, rising 0.3% in February for a 2.5% annualized rate.
There was some pushback last week against Fed chairman Jerome Powell’s apparent embrace of imminent interest rate cuts. Federal Reserve Governor Christopher Waller told the Economic Club of New York that there is no rush to cut interest rates. He added that he’d want to see “at least a couple of months of better inflation data” before cutting, while also noting the strong economy and robust hiring as further reasons to wait. But a couple of months of data takes us handily to the June Fed meeting and investors anyhow have a tendency to dismiss what Waller says as he is regarded to be on the Fed’s more hawkish wing.
Instead there was a continued confidence last week that the Federal Reserve may well begin reducing interest rates as soon as June (see FEDWATCH INTEREST RATE TOOL below). Some bond traders are even cautiously beginning to reload their bets on that being the case, despite being badly burned by the same narrative just a couple of months ago.
Even those of you who don’t follow financial markets closely are probably hearing a lot of things like:
“Banks are about to collapse because of commercial real estate exposure.”
”U.S. deficits are so bad, foreign investors will stop buying U.S. Treasury bonds and the dollar is doomed”
“Consumers are out of savings and retail spending is about to collapse.”
and the big one .. “If you don’t own a lot of tech, you’re going to underperform.”
There could well be an element of potential truth in each of these statements, including the last one where, sure, if you didn’t own a bunch of tech in 2023, you most likely did underperform. But facts show that it’s not really true this year and tech is not even the standout sector so far in 2024 (both energy and financials have done just as well).
Never forget that today’s media, both regular and financial, is headline-driven and click-hungry. Scary or shocking headlines are what grab attention, but more often than not, these headlines don’t match the full extent of what is almost always a far more complex reality.
Stay skeptical out there!
OTHER NEWS ..
Baltimore Bridge Fallout .. The tragic accident and deadly bridge collapse in Baltimore last week risks disrupting global supply chains and could even possibly have an impact on the level of U.S. inflation, according to experts. It is also poised to leave thousands without work for a while and will doubtless lead to claims hitting insurance companies’ inboxes that will run into billions of dollars and likely be tied up in courts for many years.
Docks in New Jersey and Virginia face the threat of being overwhelmed by traffic that’s being forced away from Baltimore, which is one of the busiest ports on the U.S. East Coast, particularly important for imports and exports of automobiles and coal.
At the very least, the incident will result in some economic data being “noisy” for the next few months and that could be a problem, given the high importance of such data on assessing the prospects for an economic soft or hard landing and its impact on stock prices.
Chocolate Meltup .. Cocoa is now more expensive than copper. The futures price for the commodity extended its surge - reaching $10,000 for the first time ever - as a supply crunch grips the market and chocolate manufacturers fight over the short supply of beans. $10k cocoa is becoming a problem. Prices have spiked due to a drought combined with a lack of professionalized cultivation in Ghana (the world’s second largest producer of cocoa beans) in particular, where the crop is still grown overwhelmingly by poor smallholders who are just making enough to subsist, lacking the means to re-invest in their plots.
BNP Paribas has even downgraded Hershey's stock because of it. For now, at least, these increases are unlikely to be passed on to the consumer. But if these prices are here to stay, Ozempic might not be Big Chocolate's only problem.
He’s Baaaaaack! .. Adam Neumann is back again. The Israeli ex-founder of WeWork made an offer of about $500 million for the wreckage of the company that once paid him a billion dollars just to walk away, potentially adding another dramatic chapter to the saga of the troubled startup.
UNDER THE HOOD ..
A more unified advance appears to be underway as most technical measures of Demand/Supply, breadth and momentum remain elevated. There is evidence of investors accumulating even the most beaten-down stocks, most of which are lying around in the Small Cap segment of the market, which is an overall positive sign for the market.
These soaring measures of breadth and momentum do, however, come with their own risks. They are now pushing into levels that are historically contrarian (i.e. where things have taken an abrupt turn for the worse in the past), pointing to elevated reversal risks. Unless, of course,“this time it’s different”.
The S&P 500 is trading above 5,200 at a never-before-sustained valuation multiple of 21.5X the expected current-year earnings of the component stocks. Another 10% gain from here would take the S&P 500 to just shy of 5,800, which would mean an extremely stretched multiple of 23.8X. Conversely, a 10% pullback from here would take the S&P 500 down towards 4,735, which would mean a much more reasonable multiple of 19.5X. Just saying.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
It’s Jobs Week! The release of the Job Openings and Labor Turnover Survey (JOLTS) data for February is on Tuesday and will show the extent of job vacancies and an update on the Quit Rate.
The full Jobs Report is out on Friday and an additional 180k payrolls in March (vs. the 275k added in February) is expected, as is a slight decline in the unemployment rate from 3.9% to 3.8%.
ARTICLE OF THE WEEK ..
I was a guest on the On The Mark video podcast helping to explain why an all-cash real estate purchase is a really bad idea.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - up 2.8% for the week.
Last week’s worst performing U.S. sector: Technology (two biggest holdings: Microsoft, Apple) - down 0.9% for the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest U.S. companies. Its price rose 0.4% last week, is up 10.1% so far this year and ended the week at its all-time closing record high (03/28/2024)
IWM, the Russell 2000 Small Cap ETF, is made up of the bottom two-thirds in terms of company size of the group of the 3,000 largest U.S. stocks. Its price rose 2.5% last week, is up 4.8% so far this year and ended the week 13.3% below its all-time closing record high (11/08/2021)
DXY, the U.S. Dollar index, is an index that measures the value of the U.S. Dollar against a weighted basket of six other major currencies (the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krone and the Swiss Franc). It rose 0.3% last week, is up 3.1% so far this year and is up 12.7% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.79%
One week ago: 6.87%, one month ago: 6.94%, one year ago: 6.34%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
The “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
The 50-day moving average of the S&P 500 remains above the 200-day. This is a continued indication of an ongoing technical uptrend.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE ..
83% (417 of the 500 largest stocks in the U.S. ended last week above their 50D MA and 83 were below)
One week ago: 76%, one month ago: 64%, one year ago: 15%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
83% (414 of the 500 largest stocks in the U.S. ended last week above their 200D MA and 86 were below)
One week ago: 79%, one month ago: 71%, one year ago: 45%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the largest 500 publicly-traded stocks in the U.S. are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 50% (43% a week ago)
⬌ Neutral: 28% (30% a week ago)
↓Bearish: 22% (27% a week ago)
Net Bull-Bear spread: ↑Bullish by 28 (Bullish by 16 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now following the Fed’s next meeting on May 1st?
Yes .. 4% probability (12% a week ago)
No .. 96% probability (88% a week ago)
Will interest rates be lower than they are now following the Fed’s following meeting on June 12th?
Yes .. 64% probability (70% a week ago)
No .. 36% probability (30% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.625% (0.75% lower than where we are now, implying three rate cuts of 0.25% each in 2024)
One week ago: 4.625% (implying three rate cuts), one month ago: 4.625% (implying three rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
HIGH YIELD CREDIT SPREAD ..
3.12%
One week ago: 3.05%, one month ago: 3.31%, one year ago: 5.01%
This closely-watched spread is a strong indicator of the risk inherent in the professional marketplace and the extent to which such risk is growing or easing. The high-yield credit spread is the difference between the interest rates offered for riskier low-grade, high yield (“junk”) bonds and those for stable high-grade, lower yield bonds, including deemed risk-free government bonds, of similar maturity.
A reading that is high/increasing indicates that “junkier” bond issuers are being forced to move their yields higher to compensate for a greater risk of default and is considered to be a reflection of broadly deteriorating economic and market conditions which could well lead to lower stock prices.
A reading that is low/decreasing indicates a reduced necessity for higher yields. This reflects less prevailing market risk and more stable or improving conditions in the overall economy and for stock prices.
For context .. this reading was regularly below 3.00% for much of the 1990s, got as high as 10.59% after 9/11 and the subsequent Dotcom Crash of 2002, peaked at 21.82% in the Great Financial Crisis in December 2008 and spiked from 3.62% to 10.87% in the space of about a month during the February/March 2020 COVID crash. The historical average since 1996 is a little over 4.00%.
Data courtesy of: FRED Economic Data, St. Louis Fed as of Friday’s market close.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.49%) is being paid for the 1-month duration and the lowest rate (4.20%) is for the 7-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year rose from 0.37 to 0.39%, indicating a steepening in the inversion of the curve.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. The lightly shaded area on the chart shows the current Federal Funds rate range.
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