Another positive week for stocks mostly came about exclusively because of last Monday’s favorable price action. The indexes then barely moved from Tuesday through Friday on a lack of impactful economic data releases and fewer interesting earnings reports.
Continued improving optimism about the timing and frequency of Fed interest rate cuts in the afterglow of the previous Friday’s Goldilocks Jobs Report drove stocks solidly higher on Monday. This capped the S&P 500’s best three-day run of the year so far and took the index back above its technically-important 50-day moving average.
The positive momentum initially persisted into Tuesday, sending the S&P 500 spiking briefly above 5200 for the first time in a month, but it began to tail off as the session wore on - reflecting some mixed minor earnings reports and rising geopolitical tension in Gaza and Ukraine. The major stock indexes ended up virtually unchanged on the day.
The rally ran out of steam in a snoozer of a session on Wednesday with stock prices hardly budging all day. With Q1 2024 earnings season now past its peak and no major economic data until the Consumer Price Index (CPI) a week away, markets were lacking any real mood-swinging catalysts apart from the release of some very low-level economic data, potential geopolitical developments (which, by their very nature, tend to rarely be market-positive) and maybe some chattering Fed officials throwing their two cents into the interest rate cut timing debate.
On Thursday morning, the Bank of England fell in step with the Fed and the European Central Bank, announcing no change to local interest rates. Weekly U.S. unemployment claims data showed a meaningful increase, bolstering interest rate cut hopes. Once again, though, there was still no real spark in stock markets one way or another, although we saw a bit more green on the screen than we had the day before, with the S&P 500 able to hold above the 5200 level this time.
A fourth consecutive day of virtually no change in stock prices on Friday saw a big fall in the highly-dodgy Consumer Sentiment Survey reading which basically asks Joe Public how he’s feeling about things and what his considered expectations are about the economic growth trajectory and his guesses about the future rate of retail inflation over various upcoming future time horizons.
Inasmuch as a big influence on the responses to this survey could very well be TikTok videos (see ARTICLE OF THE WEEK below), boneheaded Facebook posts and partisan political nonsense, its value as a meaningful data point is, to say the least, highly questionable and the market mostly treated it with the contempt and disrespect that it deserves.
I have been asked a lot recently about the relationship between inflation and interest rates and how and why this affects the outlook for stocks and I want to give a quick explanation here, on the eve of the latest inflation data, of how to think about it. It’s actually all about the straightforward math surrounding real interest rates.
The real interest rate is simply the Fed Funds rate (set by the central bank at its periodic meetings) minus the rate of retail inflation. So that is currently 5.375% - 3.50% = 1.875%. Real interest rates have obviously been mostly climbing as the inflation variable has been steadily falling and nothing has happened on the Fed Funds rate for quite a while. However, this trend has been leveling off somewhat lately as inflation is kind of flatlining and there have been no changes to the Fed Funds rate for nine months now. It is what happens next to real interest rates that will determine the timing and extent of the future Fed rate cuts and thereby the likely prospects for the U.S. stock market.
If inflation were to resume its rapid decline, then real rates will obviously rise and the risk of a serious economic slowdown or even a hard landing will increase and potentially negatively impact company earnings and thereby stock prices. In this circumstance, the Fed will need to quickly (and maybe severely) cut interest rates to try and avoid this outcome. Note that I say that it will “need to” rather than it will “want to”.
As long as these cuts have the desired effect of avoiding a recession, then a soft landing will have occurred and the stock market will be very happy indeed and likely charge higher, but if the Fed is too late or too timid with its cuts and fails to stop the damaging effects of higher real interest rates on potential earnings, then stocks could have a very long way to fall since this scenario is not even close to having been priced in to current levels. This is the needle that the Fed has to carefully thread.
If the rate of inflation remains stubbornly static or even shows signs of shifting higher again, then real rates will obviously remain unchanged or even begin to fall a bit. In those circumstances, there will be zero inclination on the part of the Fed to make any rate cuts at all since reducing interest rates under these circumstances will only shrink the downward pressure on inflation and risk setting up a doom loop of high inflation and higher-but-uncuttable interest rates which will obviously not please the stock market one little bit.
We’ll learn more this week.
OTHER NEWS ..
Coming Up: A Very Risky Time? .. Goldman Sachs analysts issued a note last week saying that they believe investors may be underpricing U.S. election risk. The way things are looking, we are unlikely to have a fully settled outcome immediately after polling day in November, with recounts and political posturing possibly heading to the courts with a non-trivial risk of political violence around the election and afterwards.
In 23 states (including the swing states of Arizona, Michigan and Pennsylvania), provisions exist for automatic or mandatory recounts if the margin between the two candidates is within certain parameters, typically 0.5%. Meanwhile, 41 states will permit the losing candidate to petition for a recount if he says he believes that there was fraud or some kind of mistake in the return of votes. Given the elevated level of rhetoric and the sheer number of conspiracy theory believers in the country right now to play to, this provision is likely to be very heavily leaned on by the loser candidate.
The stock market is going to hate all this and increased volatility is a certainty if things pan out as many fear they will.
Very Bad To Much Worse .. Things just keep getting worse for Boeing. Now the U.S. Securities and Exchange Commission (SEC) is scrutinizing statements made by the embattled planemaker about its safety practices following a near-tragic January accident aboard one of its 737 Max 9 planes earlier this year.
The SEC investigation is focused on comments by the company and its executives that may have misled investors. The probe, which is examining statements before and after a panel blew off during an Alaska Airlines flight on January 5th, adds to an ever-growing monster pile of legal problems facing Boeing, whose stock has lost about one third of its value in 2024.
Sinking Deeper .. The share of U.S. home mortgages considered seriously underwater (defined as where the loan balance is at least 25% more than the market value) ticked up to roughly one in 37 homes last quarter, according to real estate data firm ATTOM. Mortgages generally become seriously underwater when someone overpays for a home or when it is purchased with such a small downpayment that there is no sufficient buffer if the property falls in value.
The proportion of underwater homes is very much higher in southern states with the homeowners in the worst shape living in Kentucky, Mississippi, Oklahoma, Florida and Louisiana.
ARTICLE OF THE WEEK ..
I am sure I don’t need to tell any of the savvy readers of this weekly report not to ever take any financial advice from any of the absurd “Finfluencers” on the cess-pool that is Tik-Tok, but just in case you know anyone who may be thinking about it, here is Barry Ritholtz’s take (complete with examples) of the ignorant and dangerous financial shit that pollutes the platform.
My personal favorite can’t-miss genius strategy to “make unlimited money” is here. What could possibly go wrong?
THIS WEEK’S UPCOMING CALENDAR ..
This will be big week of important economic data, highlighted by the Consumer Price Index (CPI) measure of retail inflation, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers and U.S. Retail Sales.
The April PPI number will be published on Tuesday and then the all-important April CPI will come out on Wednesday morning before stock markets open. The consensus estimate for headline CPI is for a 3.4% year-over-year increase, which would be a touch lower than in March. The important Core CPI, which excludes food and energy components, is expected to rise 3.6% annualized, also a bit lower than the month before.
The Retail Sales data for April also comes out on Wednesday and the Leading Economic Index is released on Friday.
Highlights on the earnings calendar this week will include results from Walmart, Home Depot, Cisco, AMD, Alibaba and Deere.
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: Next Era Energy, Southern Co.) for the second week in a row - up 4.1% for the week.
Last week’s worst performing U.S. sector: Consumer Cyclical (two biggest holdings: Amazon, Tesla) - up 0.1% 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 rose 1.7% last week, is up 9.6% so far this year and ended the week 0.5% below its all-time record closing high (03/27/2024)
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 rose 1.0% last week, is up 1.8% so far this year and ended the week 15.8% below its all-time record closing 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 up 0.2% last week, is up 3.9% so far this year and is up 16.7% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
7.09%
One week ago: 7.22%, one month ago: 6.88%, one year ago: 6.35%
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 .. 3% probability (8% a week ago)
No .. 97% probability (92% a week ago)
Will interest rates be lower than they are now after the Fed’s following meeting on July 31st?
Yes .. 25% probability (37% a week ago)
No .. 75% probability (63% 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: 4.875% (implying two 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.
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 ..
57% (283 of the S&P 500 stocks ended last week above their 50D MA and 217 were below)
One week ago: 42%, one month ago: 57%, one year ago: 49%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
77% (383 of the S&P 500 stocks ended last week above their 200D MA and 117 were below)
One week ago: 72%, one month ago: 74%, one year ago: 47%
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: 41% (39% a week ago)
⬌ Neutral: 35% (29% a week ago)
↓Bearish: 24% (32% a week ago)
Net Bull-Bear spread: ↑Bullish by 17 (Bullish by 7 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 ..
3.14%
One week ago: 3.16%, one month ago: 3.10%, one year ago: 4.78%
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 (5.51%) is being paid for the 1-month duration and the lowest rate (4.50%) 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 rose from 0.31% to 0.37%, indicating a steepening 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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