The melt-up momentum in U.S. stocks since late October of last year is showing signs of faltering after a mixed four trading days ended a five-week winning streak. It may be dawning on investors that “higher for longer” interest rates might be undergoing a rebrand to “higher for the foreseeable future”. There’s certainly not very much right now that is serving to create any sense of urgency for the Fed to cut interest rates.
Having said all that, the month of May came to an end and it was a positive one for all the major stock indexes after a tough April.
Markets opened cautiously on Tuesday, following a Memorial Day long weekend which saw increasing violence and an escalating death toll in the Middle East, including an exchange of fire across the Egypt/Israel border. Fed speakers continued their “Higher For Longer” tour, hammering home the message about interest rates every time they found themselves within ten feet of a microphone, even occasionally re-raising the specter of a potential need to raise rates instead of cutting them.
By the end of the day, however, the NASDAQ had reached another record high, closing above 17,000 for the first time ever. It was driven upwards by seemingly never-ending frantic buying of Nvidia stock (NVDA), which is now worth more than the combined value of Amazon (AMZN), Walmart (WMT) and Netflix (NFLX). The other broad indexes, however, all finished mostly flat for the session.
Concerns about rapidly rising intermediate Treasury interest rates gripped markets on Wednesday and stocks took a substantial dive at the open and stayed down in the dumps all day with the S&P 500 sinking back below 5300 again. Things weren’t helped by poor results and downbeat outlooks from American Airlines (AAL) and UnitedHealth Group (UNH) which caused negative contagion among other stocks in their respective industry groups.
The first of the week’s two big data releases, the second of three official Gross Domestic Product (GDP) estimates, was released on Thursday morning and we learned that the U.S. economy grew at 1.3% annual pace in Q1, the slowest pace in almost two years and below expectations, largely because of softening consumer spending.
Stock prices remained under pressure even though Treasury yields did ease a touch following the GDP release. Investors suffered another down-day (particularly Salesforce (CRM) which swiftly fell 20% after a poorly-received earnings report), with markets bracing for the following day’s inflation data.
Trump’s criminal conviction on all felony counts came after market hours on Thursday, giving Wall Street time to decide by the opening bell on Friday that it didn’t really care. It chose instead to focus on perhaps the most influential inflation reading, the Core Personal Consumption Expenditures (PCE) Price Index, which came out pre-market and increased 0.2% between March and April and 2.8% year-on-year. This was all exactly as expected and while it showed that inflation may not be quite as sticky as some fear, it was considered unlikely to have had much impact on the Fed’s thinking
This stopped the bleeding at least and despite Dell (DELL) being brutally punished simply for not quite meeting crazy-high expectations, stocks recovered some of the ground lost in the two previous sessions.
Markets can’t go up every day and we will doubtless experience more volatility in the short term. As I have been faithfully documenting in these reports each week, the number one cause of market turbulence has been Wall Street’s constantly-fluid expectations for when the Fed will cut interest rates.
In April, stocks dropped because markets thought the Fed might not cut rates at all in 2024 or, heaven forbid, even raise them again. In the first half of May, that chatter quietened down, markets rebounded and thought the Fed could cut interest rates twice in 2024 with the first cut probably in September. Now it seems there may be another rethink going on.
Those always-shifting expectations will continue to create something of an unstable environment but this uncertainty won’t last forever. Eventually the Fed’s timetable will become clear and longer term investors simply need to ride out this period of ambiguity and let the institutional equity traders, hedge funds and day traders be the ones who lose sleep worrying about the precise timing of Fed interest rate policy.
The medium- and longer-term outlook for the economy and stocks remains largely positive as things stand. We shouldn’t get too wrapped up in the interest rate cut psychodrama. The precise timing of such cuts isn’t going to bring this rally to an end. But a meaningfully slowing economy or Fed rate hikes could. That’s what we need to watch for.
It’s important to separate the signals from the noise.
OTHER NEWS ..
A Reckoning .. Many pre-COVID-era homebuyers are about to see their cost of home ownership skyrocket. They are among the more than 1.7 million owners of homes bought since 2019 with an adjustable-rate mortgage. These loans average about $1 million to finance more expensive properties (or regular properties in expensive areas) and are set at a “teaser” rate lower than the prevailing 30-year rate for the first few years, but after that they adjust once or twice a year based on current borrowing costs.
About 330k of these buyers are now coming out of their fixed period and interest rates have of course soared to a two-decade high since their purchase. Another 100k of them are facing the same fate within the next year. Although a cap system on rate increases can sometimes take the edge off things, there are plenty of homeowners who could face an overnight increase in their monthly mortgage payments of 25%-40% or more. And that’s before even before taking into account increasing property taxes and homeowners insurance premiums, both of which are also spiraling significantly higher in many cases.
Plan B Destinations .. Travelers are increasingly opting to skip Europe’s most-visited cities and beachside venues in favor of less-frequented destinations for summer vacations this year. Fresh data shared with Bloomberg by Chase Travel shows that the cities with the biggest year-on-year tourism increases this summer are the off-the-beaten-track destinations of Brussels, Munich, Zurich and Warsaw, although the most-booked cities in Europe are still London, Paris and Rome.
The shifting emphasis toward secondary cities largely reflects ballooning prices of everything in the traditional big city destinations and record heat in often air conditioning-free Mediterranean literal hotspots.
ARTICLE OF THE WEEK ..
“Young investors in their 20s and 30s may not even recall a time when the U.S. didn’t dominate global markets .. but they should think twice about abandoning international markets.”
THIS WEEK’S UPCOMING CALENDAR ..
Still a few Q2 earnings reports left: Crowdstrike, Bath & Body Works, Hewlett Packard, Lululemon, DocuSign, Campbell Soup and J.M. Smucker.
It’s jobs week with the Jobs Report on Friday. The consensus estimate is for growth of about 183k payrolls in April, which would be a small increase from March. Before that, we have the Job Openings and Labor Turnover Survey (JOLTS) which is forecast to show about 8.4 million job openings, 100k lower than a month prior.
In contrast with an on-hold Federal Reserve, the European Central Bank is widely expected to lower its benchmark interest rate target on Thursday. A quarter-point cut would take it down to 3.75%.
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 3.0% for the week.
Last week’s worst performing U.S. sector: Technology (two biggest holdings: Microsoft, Apple) - down 1.5% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price was unchanged last week, is up 11.1% so far this year and ended the week 0.8% below its all-time record high (05/17/2024).
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price fell 0.4% last week, is up 2.5% so far this year and ended the week 15.2% below its all-time 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 was unchanged last week, is up 3.2% so far this year and is up 16.2% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
7.03%
One week ago: 6.94%, one month ago: 7.17%, one year ago: 6.79%
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.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now after the Fed’s next meeting on June 12th?
Yes .. 1% probability (1% a week ago)
No .. 99% probability (99% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on July 31st?
Yes .. 14% probability (10% a week ago)
No .. 86% probability (90% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
5.125% (0.25% lower than where we are now, implying one rate cut before the end of 2024)
One week ago: 5.125% (implying one rate cut), one month ago: 5.125% (implying one rate cut)
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.
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 ..
50% (252 of the S&P 500 stocks ended last week above their 50D MA and 248 were below)
One week ago: 50%, one month ago: 39%, one year ago: 29%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
71% (353 of the S&P 500 stocks ended last week above their 200D MA and 147 were below)
One week ago: 71%, one month ago: 69%, one year ago: 38%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks 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: 39% (47% a week ago)
⬌ Neutral: 34% (27% a week ago)
↓Bearish: 27% (26% a week ago)
Net Bull-Bear spread: ↑Bullish by 12 (Bullish by 21 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).
HIGH YIELD CREDIT SPREAD ..
3.19%
One week ago: 3.10%, one month ago: 3.18%, one year ago: 4.69%
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 (5.48%) is being paid for the 1-month duration and the lowest rate (4.55%) is for the 10-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year fell from 0.47% to 0.37%, indicating a flattening in the inversion of the curve last week.
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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