US Strategy Weekly: Dot Plot Mania

Non-defense capital goods orders excluding aircraft, which is a good proxy for capital spending plans, rose 0.7% in February after falling in January. This was an encouraging sign for the economy. The Conference Board Consumer Confidence index changed little for March, although February’s data was revised downward. This was the second consecutive month with substantial downward revisions to earlier data. And there was a clear pattern in the survey that showed consumers are feeling a bit better about their current conditions but worse about future prospects. A similar result was found in the University of Michigan Consumer Sentiment indices reported last week.

This week should be a calmer time for the stock market after last week’s FOMC meeting. There are few important economic releases, but ironically, the most important data of the week, the PCE deflator, will be reported on Friday when the stock market is closed for Good Friday. Friday data will also include personal income and personal spending.   

Dot-Plot Mania

There was a near-obsessive focus on the Federal Reserve’s meeting last week. Perhaps this was due to the fact that not only was the Fed reporting on Mach 20, but the Bank of Japan and the Reserve Bank of Australia met on March 19, and the Bank of England and Swiss National Bank reported on March 21. The equity market celebrated the fact that there was very little change in the Fed’s statement or the dot plot from the December meeting. To us, this suggests there was significant, but hidden, anxiety about February inflation data and the fact that inflation has been stickier than many anticipated. In our view, the market’s response to Chair Powell’s statement and news conference was overdone. The focus on the dot-plot survey is also extreme. For example, if just one participant projecting three rate cuts this year had shifted to two cuts, the median forecast would have moved from three cuts to two cuts and the dot-plot would have been a major disappointment to the consensus. Only a very slim margin implied three rate cuts. More importantly, the dot plot could be one of the Fed’s tools to temper or deliver messages to the market when it feels it is necessary. In simple terms, it is not an absolute projection of policy. We see it as a point of information and nothing else. Moreover, if Chair Powell is waiting for a majority of FOMC voting members to agree to three rate cuts this year before changing policy, he will be facing an uphill battle. In our opinion, the market’s reaction to the March FOMC meeting is another example of the market finding a pearl in every oyster.

However, while the stock market is waiting and hoping for a pivot and lower interest rates — which we believe is unnecessary — it is overlooking the fact that monetary policy is already very accommodative. Government yield curves may be inverted — and this has been the longest inversion in history without a recession – but if there is a difference this time it is due to the very stimulative fiscal and monetary policies implemented in recent years. See page 3.

The Federal Reserve has been shrinking its balance sheet which as of March 20, 2024 was $7.7 trillion, down from a peak of $9.0 trillion in April 2022. But the current $7.7 trillion remains well above the $4 trillion seen in normal times before the pandemic. In short, the Fed’s balance sheet provides considerable liquidity to the economy. Not surprisingly, there is plenty of liquidity in the system as seen by the near-record level of total bank assets now at $23.2 trillion. Commercial bank deposits as of mid-March were $17.5 trillion, down only modestly from the record $18.2 trillion seen in April 2022. This liquidity has been offsetting the Fed’s interest rate hikes and the inversion of the yield curve, in our view. If the Fed should cut interest rates, we hope it is accompanied by substantial quantitative tightening. If not, it could open the door for another round of higher inflation. See pages 3 and 4.

Technicals are Trying

The main equity indices made new highs in the past few trading sessions and the Nasdaq Composite finally bettered its November 2021 high of 16,057.44 in early March. The Russell 2000 is trading above the key resistance level of 2000 for the first time in two years but has retreated back toward the 2000 level in recent sessions and remains nearly 15% below its all-time high of 2442.74 made on November 8, 2021. See page 10.

The 25-day up/down volume oscillator is at 2.69 this week and neutral after being overbought for two consecutive days on March 13 and 14 and again on March 20 and 21. These were the first overbought readings since early January when the oscillator was in overbought territory for 22 of 25 consecutive trading days ending January 5. Nonetheless, this indicator has not yet confirmed the string of new highs seen in the S&P 500 index, Dow Jones Industrial Average, and Nasdaq Composite index in January, February, and March. To confirm, this oscillator must remain in overbought territory for a minimum of five consecutive trading sessions which would indicate that volume is concentrated in stocks that are moving higher. This is a classic sign of a bull market.

The 10-day average of daily new highs is 387, down from more than 500 in recent weeks, and new lows have been consistently around the current level of 55. This combination of new highs above 100 and new lows below 100 remains bullish, but not demonstrably so given the new highs in the popular indices. The NYSE advance/decline line made a new record high on March 21, 2024 for the fourth time since November 8, 2021 which is a confirmation of the recent highs in the S&P 500. See page 12.


On a seasonally adjusted basis, new home sales for February were essentially unchanged for the month, but up 5.9% YOY. The price of a new single-family home fell to $400,500 in February, down 3.5% from January and down 7.6% YOY. See page 5.

February’s existing home sales were 4.38 million units (SAAR), up 9.5% versus January, but down 3.3% YOY. The median price of a single-family house was $388,700 in February, up 1.5% from January and up 5.6% YOY. However, prices remain 7.7% below the June 2022 peak price of $420,900. See page 6.

Despite rising mortgage rates and housing affordability being near its lowest level in forty years, the housing market has remained resilient. This is due to a slow, but steady rise in median family income and the lowest level of inventory in forty years. See page 7. However, none of this data reveals the fact that many households and young families have been shut out of the housing market after the price gains and interest rate increases seen in the last four years. If the stock market is forming a bubble, and we think it is, it is in the early stages. PE multiples are exceedingly high at 24.2 times trailing 12-months and 21 times forward 12-months. Yet during the 1997-2000 bubble, the financial crisis of 2008, and even the post-COVID-19 peak, the trailing 12-month PE reached 26 to 30 times earnings. See page 8. 

Gail Dudack

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Just Buy the S&P… Sage Advice in Recent Years

DJIA:  39,781

Just buy the S&P… sage advice in recent years.  The 500 stocks there sounds like the diversification everyone preaches, and its performance has been hard to beat.  So-called passive ETFs have made it easy, though these ETFs have created some distortions.   Of every dollar that goes into the SPYs, the SPDR ETF for the S&P, 24% goes to the top five stocks in the S&P index.  That doesn’t exactly sound like diversification and, no surprise, they’re all Tech.  All is well that ends well – it’s working for now and will for the foreseeable future, at least based on a still healthy technical backdrop.  And tech has gotten where it is for good reason. Its profit margin of some 23% is pretty much double the rest of the S&P.  Then, too, Tech is no fun in a downturn – Tech led the fall when rates rose in 2022.  And this time there will be those passive ETFs that will work the other way.

While Wednesday’s rally may have resolved things, stalled seems a reasonable description of the market recently.  A look at the Averages bears that out, a look at something like the FANG+ ETF suggests even the Tech leaders fall under this description.  However, it’s not a euphemism for weakness, most days most stocks go up – ten of the last 12 days.  And despite complaints of narrowness, the Equal Weight S&P (168) is bumping along its highs.  There’s also some indication of expansion in participation, certainly in terms of Oil, Gold, and Copper.  General Mills (69) and Colgate (89) also seem examples of good charts outside of Tech.  That also remains true of most of the Econ- sensitive stocks we have alluded to from time to time, Eaton (316), Ingersoll Rand (95), Trane (304) so on.

Many years ago we saw a study showing the best and worst performers each year were a function of earnings. However, it was not about earnings per se, but the surprise in earnings. The best performers each year were the companies whose earnings were well above analysts ‘estimates and vice versa.  While nothing to do with earnings, this comes to mind when we think of the announcement of Nvidia’s newest, bestest GPU.  Where’s the surprise?  Perhaps more to the point, while the S&P is up 8% this year Nvidia is up 80%. Short of that GPU curing cancer, how does it surprise?  And, of course, the announcement itself wasn’t exactly a surprise, leaving a real sell on the news opportunity.  It’s hard to be negative on dramatic uptrends like Nvidia’s and we’re not – they don’t turn on a dime.  Stall on a dime, that’s possible.

While the Nvidia show wasn’t about earnings, eventually it will become so.  In a recent piece for CNBC, Karen Firestone looked at a company’s subsequent performance following a good year.  The work looked at performance January to December only, but still offers a good guide.  It looked at stocks up 200% and 400% and found not a great deal of difference.  Perhaps more surprisingly, results were pretty much 50–50 in terms of up or down in the subsequent year.  It seems the determining factor here was earnings, more specifically earnings that beat.  Again, it’s about the surprise rather than earnings per se.  Performance was about the ability to out-earn or out-surprise estimates.  So while estimates for Nvidia’s earnings are to double this year, earnings need to be surprising next year as well.

After spending most of the year trying to talk the market down, Powell finally talked the market up – no doubt inadvertently. If we’re finally out of what we’ve called the market’s stall, give credit where credit is due – to the market.  As always the market makes the news, and now we know what the average stock, the A/Ds, have been saying all along. Most days most stocks have gone up regardless of Nvidia’s volatility or Apple’s (171) weakness. This will change when the market finally narrows as it tires of going up. Meanwhile, ever notice stocks rarely split anymore.  In the old days stock splits were used as an indicator of sorts, peaking as they did along with the market. Of course it was no more than a gravity call – when stocks are up a lot they split, and when up a lot they’re likely near a peak. Chipotle (2905) announced a 50-for-1 split recently. We have often thought what it would do for volume if every $200 stock split even 2 for 1.

Frank D. Gretz

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US Strategy Weekly: Japan’s New Era

A Landmark Shift

This week, just as the Federal Reserve begins to debate a possible reversal of tight monetary policy, the Bank of Japan implemented its first interest rate increase in 17 years. Considered by many to be a landmark shift, this rate hike marked the end of a long era of ultra-easy monetary policy and eight years of negative interest rates. However, the Bank of Japan remains behind most central banks which have been combating inflationary pressures by hiking rates at an unprecedented speed in recent years. In most developed countries policymakers are still wrestling with post-Covid distortions created by policies of negative interest rates (Europe and Japan) and fiscal stimulus. This combination has left the global financial system awash in cheap money — with most of this liquidity parked at central banks earning an easy no-risk profit.

But the move by the BOJ suggests that the era of low interest rates and low inflation is probably over. In addition to increasing rates, Japan’s central bank announced it will cut back on its limit of buying Japanese government bonds in order to manage the yield curve and will also end purchases of riskier assets such as ETFs to support the Japanese stock market. The Japanese stock market was shaky after this news but closed with a small gain. Although not gathering much attention, the Japanese stock market has been an outperformer in 2024. The iShares MSCI Japan ETF (EWJ – $70.92) is up 10.6% year-to-date versus the 8.6% gain in the S&P 500 Composite. See page 13. It will be interesting to see if the Japanese stock market can continue its solid performance since the move by the BOJ means that banks in Japan will raise ordinary deposit rates for the first time in 17 years.

The Federal Reserve is meeting this week, and the current consensus is for no change in policy. We believe Fed Chair Jerome Powell when he says that the Fed will be data driven, but the data is not always, or often, truly clear. The real fed funds rate has been averaging 200 basis points for most of the last nine months, which is a major change from the negative real rates seen for much of the last twenty years. Nonetheless, it is still below the long-term average of 233 basis points. See page 3. In our opinion, the current real fed funds rate is not high enough to expect a rate cut in March, or until headline inflation falls closer to the Fed’s 2% target. Nevertheless, the FOMC will have its hands full as it debates a combination of strong headline retail sales (but weak real retail sales), slowing inflation, falling consumer confidence, and rising oil prices.

Economic Releases

Headline retail sales for February rose 1.5% YOY, and retail sales excluding motor vehicles and parts and gasoline stations rose 2.2% YOY. But after inflation, real retail sales fell 1.6% YOY. This was the 12th year-over-year decline in the last 16 months, a pattern in retail sales that is typical of an economic recession.

The best year-over-year gains were seen in nonstore retailers (6.4%), food services and drinking places (6.3%), and miscellaneous store retailers (3.2%). Since December 2019, the percentage of total retail sales has increased substantially for nonstore retailers, food service & drinking places and miscellaneous stores, but declined for all other categories. This means for many retailers the pie is not growing and growth comes from taking sales from your competition. It is a survival of the fittest scenario in the retail industry. See page 4.

Consumer confidence was on the rise at the end of 2023, but it seems to have peaked in January. The University of Michigan consumer sentiment survey for March was 76.5, down from February’s negatively revised reading of 76.9. Present conditions were unchanged from a negatively revised reading of 79.4 in February. Similarly, expectations fell to 74.6 from February’s negatively revised reading of 75.2. According to the University of Michigan report, rising gasoline prices weighed on inflation expectations and reversed recent gains in confidence. The Conference Board Consumer Confidence survey was down in February and results for March will be released next week. See page 5.

The National Association of Home Builders (NAHB) confidence index rose 3 points to 51 in March, surpassing the breakeven point for the first time since July. All components increased with sales, sales expectations, and traffic each up 2 points; but absolute levels in the index remain well below 2020 peaks. However, this confidence from home builders may be a result of February construction trends. New residential construction jumped in February with permits and starts up nicely from January levels in all categories, including single-family, multi-family, and condominiums. Nevertheless, some of the increase in February could be a recovery after poor weather in January. See page 6.

PE ratios keep rising

A strategist on CNBC stated this week that fundamentals are not good timing devices and do not work in the short term. We agree with that statement, but we disagree with the thought that they should be disregarded. The S&P 500 trailing 4-quarter operating multiple is now 24.0 times and well above all its long- and short-term averages. The 12-month forward PE multiple is 21.9 times and when added to current inflation of 3.2% sums to 25.1. The importance of this is that this sum is well above the top of the normal range of 14.8 to 23.8. By all measures, the equity market is at valuations seen only during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. However, for the bulls, we would point out that the 12-month trailing PE ratio reached 26 to 30 before these market peaks. See page 7.

Technical Indicators

The S&P 500 made a new high this week, but the Dow Jones Industrial Average made its last high on February 23. The Nasdaq Composite index made its high on March 1, but did manage to fractionally beat its November 2021 high of 16,057.44. The Russell 2000 had been trading above the key resistance level of 2000 for the first time in two years but has since retreated closer to the 2000 level. The Russell 2000 index remains nearly 17% below its all-time high of 2442.74 made on November 8, 2021. See page 9. The 25-day up/down volume oscillator is at 2.22 and neutral after being overbought for two consecutive days on March 13 and 14. These were the first overbought readings since the string of overbought readings of 3.0 or higher in 22 of 25 consecutive trading days ending January 5. Nevertheless, this indicator is yet to confirm the string of new highs seen in the S&P 500 index in recent weeks. To do so, this oscillator must remain in overbought territory for a minimum of five consecutive trading sessions, See page 10. The 10-day average of daily new highs is 402 and new lows are 52. This combination of new highs above 100 and new lows below 100 remains bullish, but the new high list is down from a week ago when it was well above 500. The NYSE advance/decline line made a new record high on March 13, 2024 for the 3rd time since November 8, 2021. Overall, technical indicators are mixed.

Gail Dudack

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Underlying Fundamentals … Way Under is How Some Would Seem

DJIA:  38,905

Underlying fundamentals … way under is how some would seem.  With all due respect to companies like Nvidia (879) and Super Micro (1130), underlying fundamentals don’t drive those kind of straight up moves.  Moves like that come about when at some point investing turns to trading – when stocks are bought not so much for the companies they represent, but simply because they’re going higher.  Let’s not pretend GPUs are any more important than routers back in 2000, or that either are really understood by most doing the recent buying.  And let’s not pretend there’s ever been a shortage of anything that hasn’t been met.  As for Bitcoin, it’s a position we like for exactly that reason.  After all, what do we know about Bitcoin.  We do know, or hope we know the passive ETFs seem likely to drive Bitcoin just as they have FANG/AI.  At least when you buy one of the FANG/AI ETFs you may be buying 10 stocks, with the Bitcoin ETFs you’re getting just one thing.

Meanwhile, a correction remains the proverbial watched kettle.  Last Friday one seemed more likely when Nvidia reversed and took the market with it.  Indeed, Nvidia had what those technicians call an outside day down – higher high and lower low than the previous day on a bar chart.  It’s a “reversal” pattern but not one we find terribly useful.  Nvidia’s cohort of sorts Super Micro, had an outside day down Feb 16, and was back to its highs three days later, and from there onward and upward.  Certainly there is a correction of sorts when you consider something like the MicroSectors FANG+ ETF (FNGU-311) has gone nowhere for six weeks now.  Markets and stocks also correct by going sideways rather than down.  The main consideration here is that on average this has not hurt the overall market.  And that’s what matters.

While Bitcoin gets all the attention of late, in its corner Gold is quietly making new highs.  After several failures over the past four years Gold’s new high seems promising though, after all, it is Gold we’re talking about here – and its history of false dawns.  And on a cyclical basis, Gold is in one of its four year down-cycles which persists through the end of this year.  Together with Bitcoin’s performance, it’s easy to argue there’s a real interest in investments seen as a store of value, a hedge against currencies and the establishment generally.  A look at the weekly chart of the SPDR Gold ETF (GLD-200) which holds Bullion, pretty much says it all.   While the miners have lagged, they have moved from having only 5% above their 200-day to 20%, a change that has seen higher prices since 1997, according to SentimenTrader.

Things act better, by things we mean stuff other than the esoteric stuff like AI.  It’s true of Oil but most dramatic here we’re thinking of Copper, at least as measured by the ETF (COPX-41).  When we see this, in our simplistic way we think China is rebuilding – again.  And the Chinese market does seem to have a turn.  Or perhaps more simply the world economically is a better place.  Of course stocks like Grainger (992) with their division called “endless assortment” and Fastenal (75) with their very techy nuts and bolts have been telling us that for a while.  If there’s a bubble in parts of the market, this is why it’s not a market bubble.  Bubbles occur in segments or sectors of the market and end when only they are moving higher.  Back in 2000 the dot-com’s were going up and everything else was going down.  This market is different.

Most days most stocks go up, but Thursday wasn’t one of them.  With some 3000 stocks down on the NYSE it wasn’t close.  Like most such days blame the usual suspect bonds/rates.  Bad down days happen.  It’s the bad up days – poor A/Ds and the Averages up – that are the worry.  Lacking virtually any divergences, a setback here should prove temporary.  The worry is that in any recovery the A/Ds don’t quit on us.  While Regional Banks held together almost surprisingly well in light of the NYCB (4) news, it may be premature to say all is well.  Tech seems everyone’s worry and yet most held together Thursday.  Meanwhile, abetted by Tuesday’s CPI print, the Fed’s message was that it wants to cut, but doesn’t think the data will allow it.  The market’s lack of disappointment here likely stems from the fact cuts are coming, and corporate profits in the meantime are just fine.  Of course, higher prices do much to dampen worries.

Frank D. Gretz

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US Strategy Weekly: Beneath the Headlines


The financial press reacted to February’s CPI report this week with headlines like: “Gasoline, shelter costs boost US prices; inflation still slowing.” This may be part of February’s inflation story, but not all of it. Headline CPI rose 3.2% YOY in the month, higher than consensus expectations, and up from the 3.1% pace seen in January. Core CPI rose 3.8%, down slightly from the 3.9% seen in January, but still higher than forecasts which expected core inflation to ease to 3.7% YOY.

Housing, which has a 45.2% weighting in the CPI, rose 4.5% in February and transportation, with a 15.7% weighting in the index, rose 2.7%. In the post-COVID economy, travel and entertainment have been booming. This means food away from home, which is 5.4% of the CPI index, is relevant to most consumers. It rose 4.5% YOY in February. In addition, the Federal Reserve has stated they are most concerned about service inflation. In that regard, “other goods and services” which is 2.9% of the index, increased a hefty 4.7% YOY in February. However, these were some of the most concerning components of the CPI. Many other components of the CPI grew 2.7% YOY or less. See page 3.

Economists can take solace in the fact that most major inflation indices are decelerating. The pace of prices for headline, core, services, and owners’ equivalent rent of residences, in the CPI are trending lower. However, many segments of the service sector are not. In recent months we have pointed out the huge rise in motor vehicle insurance prices and this continued in February. There are also rising trends in hospital & related services, medical care services, and services less rent of shelter. Since most of these services are household necessities, rising prices in these areas impact most consumers and are most damaging for lower-income families. See page 4.

From a forecasting perspective, we are most anxious about healthcare. Healthcare pricing has been muted for most of 2023 and in fact prices were declining for the overall medical care index with an 8.02% CPI weighting, and particularly for the medical care services category (a 6.54% weighting). These declines helped contain core CPI in recent months. But this appears to be changing and healthcare prices are now rising. See page 5.

Moreover, while prices for “rent of primary residence” are increasing at a slower rate, prices for tenant & household insurance, fuels & utilities, and water/sewer/trash collection services are now trending higher. The increase in these services explains why many consumers remain worried about inflation and are not responding favorably to the slower pace of headline inflation or solid GDP reports. It also explains why the Fed is focused on service inflation which tends to lag goods inflation. These underlying trends also suggest that inflation may be more difficult to manage than many economists expect. In this case, Fed Chairman Jerome Powell may be right by attempting to dampen expectations of a fed rate cut in the near future.

The impact of inflation is seen in many parts of the economy. The NFIB Small Business Optimism Index fell to 89.4 in February, marking the 26th consecutive month below the 50-year average of 98. The survey was generally weak, and most components moved lower in the month. Not surprisingly, inflation was noted as the single most important business problem according to 23% of small business owners, up three points from last month, and now replacing labor quality as the top problem. See page 6.

Consumer Credit

We also read headlines about January’s consumer credit outstanding which highlighted January’s annualized growth rate of 4.7% for the month — an acceleration from a downwardly revised gain of 0.9% in December — that mirrored other positive economic data from January. In simpler terms, total consumer credit grew by $19.5 billion in January, to $5 trillion, but this was a 2.5% YOY pace and down from the 2.6% YOY rate seen in December. Nonrevolving increased $11.1 billion in the month, which was a 0.5% YOY increase, and revolving credit grew $8.4 billion, which was an 8.8% YOY increase. But more importantly, all these YOY rates are decelerating sharply from a year ago. It is curious to us that the press would suggest credit expansion is accelerating when it is clearly decelerating, particularly nonrevolving credit. Perhaps more importantly, the senior loan officer survey indicated that banks are planning to tighten credit standards beginning in the first quarter.

It is also interesting to see that the federal government is now the second largest owner of the $3.7 trillion in nonrevolving consumer debt. The government currently owns $1.48 trillion of nonrevolving consumer credit, which is largely student loans that originate from the Department of Education. See page 7.

Fundamentals No Longer Matter

Although February’s inflation report was disappointing, the equity market shrugged it off this week. We are not surprised since economics and fundamentals do not matter in a bubble. We are amused by the many discussions in the financial media about whether the current stock market is a bubble or not. Few of today’s prognosticators have lived through a bubble, and even if they had, a bubble is nearly impossible to analyze. But in our view, this is a bubble, perhaps best exemplified but the massive move in Bitcoin. Both equities and bitcoins are being propelled higher by the popularity of ETFs which is this bubble’s form of financial leverage, in our opinion. Nonetheless, it is prudent to point out that the S&P 500’s trailing 4-quarter operating earnings multiple is now 24 times and well above all long- and short-term averages. The 12-month forward PE multiple is 21.3 and when added to current inflation of 3.2% sums to 24.5. This is well above the top of the normal range of 23.8. See page 8. By all measures, the equity market is at valuations seen only during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. Still, prices could go higher since those previous market peaks hit sums that were well above 30!

Technicals: all good except for dow theory

There is plenty of good news on the technical front. The 25-day up/down volume oscillator reached 3.47 on March 12 and is overbought for the first time since early January. This oscillator needs to remain in overbought territory for at least five consecutive trading days to confirm the new highs in the indices, but this is the best performance we have seen in over two months. See page 11. The NYSE cumulative advance decline line has made a record high confirming the market highs. The 10-day average of daily new highs is currently at 511 and above the 500 level that we like to see on new market highs. See page 12. Last week’s AAII readings showed bullishness increased 5.2% to 51.7% and bearishness rose 0.5% to 21.8%. The 8-week bull/bear spread rose to 20.8% and is back into negative territory of 20.6% or greater. However, sentiment indicators tend to be early warning signals and are not good at timing peaks or troughs in the market. The only negative one can point to in the technical arena is Dow Theory. The lack of a new high in the Dow Jones Transportation Average is, to date, a nonconfirmation.

Gail Dudack

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US Strategy Weekly: Bitcoin, Equities, and ETFs

Bitcoin (BTC= – $63,770.00) touched a record high this week based on a view that global interest rates will soon fall. In many ways, bitcoin is a good illustration of the speculative nature of today’s stock market. According to LSEG data, net flows into the ten largest spot bitcoin funds reached a stunning $2.2 billion in the week ended March 1. The cryptocurrency has soared nearly 160% since October and jumped 44% in February alone. February’s action followed the Securities and Exchange Commission’s approval of 11 spot bitcoin ETFs in late January. Most crypto analysts believe these ETFs should give the current rally a boost. The underlying assumption is that institutional investors are more likely to commit long-term money to exchange-traded crypto products than they would commit to Bitcoin directly. This may prove to be an important viewpoint. ETFs represent a relatively new form of leverage, and the importance of this is that new forms of leverage have been major factors behind every financial market bubble.

Bitcoin is representative of today’s financial markets for several reasons. It has the backing of a new generation of investors and there are no underlying fundamentals. Bitcoin has no assets, earnings, or revenues to analyze, yet it is soaring based upon the belief that it will go higher. Likewise, momentum, liquidity, and leverage drive an equity bubble, not fundamentals.

Housing, Income, and Employment

Fundamentals may not be driving the current market, but it was a week full of economic data. The pending home sales index fell to 74.3 in January from 78.1 in December and remains well below the long-term average of 100. Census Bureau data showed the median price for a new single-family home fell 2.6% YOY in January; and though this may appear to be a negative, it was an improvement over the 13.9% decline reported in December. This data reveals the impact rising mortgage rates have had on the homebuilding industry.

However, the National Association of Realtors (NAR) survey indicated that the median price of an existing single-family home rose nearly 5% in January and the FHFA purchase-only house index showed an even better price gain of 6.6% YOY in December. See page 3. The stability in existing home prices may be due less to increasing demand and more to a low level of inventory, however, homebuilding stocks have been one of the best performing sectors of 2024. One reason for this was the breakout in the SPDR S&P Homebuilders ETF (XHB – $103.44) in late 2023 and the attention this technical chart received on several social media platforms. Price momentum, charts, and social media are important drivers of the new age of investing.  

Personal income increased a healthy 4.8% YOY in January and disposable income increased 4.5% YOY. However, real personal disposable income only grew 2.1% YOY, which was the slowest pace in twelve months. Personal consumption expenditures grew 4.5% YOY, which was impressive given the pace of personal income, yet it was the weakest pace in nearly three years. January’s consumption slowdown was predictable since spending had been exceeding income at the end of 2023. But in general, personal income trends appear to be slowing. See page 4.

The slowdown in consumption resulted in a modest increase in the savings rate, which inched up from 3.7% to 3.8% in January. Last month we pointed out an interesting trend in government workers’ wages. It continued in January. Government wages grew at an 8% YOY pace whereas most other sectors experienced wage growth of 4% to 6%. This disparity in wages between government and private workers is historical! See page 5.

January’s relatively low consumption pace was also due to an increase in personal taxes, which is typical of the first quarter. Also weakening household consumption is the massive jump in personal interest payments which has been a direct result of rising interest rates. An additional negative for households is the fact that government transfer payments are no longer supporting income. For all these reasons, Friday’s payroll data will be noteworthy. The household survey had a sharp decline in job growth in January and we will be looking to see if this was a one-off event or the beginning of a trend. This could be important since the household survey captures many lower-income workers that are not included in state payroll data. For this reason, it is often a leading indicator of employment trends. See page 6.

The ISM manufacturing index fell from 49.1 to 47.8 in February with six of its ten components falling, or remaining, below the 50 breakeven level. The ISM nonmanufacturing index rose from 55.8 to 57.2, with four of its nine components registering below 50. It was also notable that both surveys show employment contracting in February, with the manufacturing index at 45.9 and the nonmanufacturing index at 48.0. This could be an omen for future jobs data and therefore personal income. See page 7.

The best piece of economic news in the past week was the PCE deflator for January which eased from 2.6% YOY to 2.4% YOY. Core PCE edged down from 2.9% to 2.8%. The stock market celebrated this report since it supports the view that inflation is slowly decelerating and if so, interest rates may soon decline. With this in mind, February data for the CPI and PPI will be released next week and both could be market moving events. See page 8.

Fundamentals and Technicals

The S&P 500 trailing four-quarter operating multiple is now 23.5 times and well above all long- and short-term averages. The 12-month forward PE multiple is 21.4 times and when added to inflation of 3.1% sums to 24.5. This is well above the top of the normal range of 23.8 and it helps to explain why equities are hoping to see inflation fall to 2%. By all measures, the equity market is at valuations seen only during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. See page 9.

Conversely, technical indicators improved this week. The S&P 500 and Dow Jones Industrial Average have continued to make a series of new highs while the Nasdaq Composite index finally rose above its November 2021 high of 16,057.44 on March 1st. The Russell 2000 also definitively broke above the 2000 resistance level for the first time in two years. As we have been stating in recent weeks, this move bodes well for the overall equity market. However, the Russell 2000 remains 16% below its all-time high of 2442.74 made on November 8, 2021. See page 11. But in line with the Russell index, the NYSE cumulative advance/decline line made a record high on March 1. Most technicians are stating that the market is overbought, but our 25-day up/down volume oscillator is at 1.18 and neutral this week. This indicator is based on volume, not price, and as such, it reveals the conviction behind price moves. Our oscillator has not come close to recording an overbought reading since the 22 of 25 consecutive trading days of overbought readings that ended January 5. This means volume in advancing stocks has not been impressive and the indicator is yet to confirm the string of new highs seen in the S&P 500 index and Dow Jones Industrial Average in January, February, or March 1st. To confirm the current advance, this indicator needs to reach and remain in overbought territory for a minimum of five consecutive trading sessions. In sum, we remain cautious.

Gail Dudack

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Go Big … Going Small

DJIA:  38,996

Go big … going small.  Big has dominated the markets, at least in terms of the market averages.  The top 10% of the market is 75% of the market.  The last time it was this concentrated was 1929.  For the first time in almost 40 years, a third of the S&P is just 10 stocks.  Concentration isn’t necessarily a bad thing, leaders lead and to some degree markets always will be concentrated.  We see the issue being more in the breadth of the market – are the leaders the only thing going up?  The good news is they’re not.  The Equal Weight S&P (163) reached a new high for the first time in two years.  Historically this offers that Index a very high win rate over the subsequent year, according to  Given where the concentration lies, even more surprising the NASDAQ 100 Equal Weight (123) is also nudging new highs.  Concentration doesn’t kill markets, it’s losing participation that kills markets.  This market seems yet to have done so.

We have likened Nvidia (792) to Cisco (48) for a couple of glaring similarities.  They pretty much are the names associated with their respective innovations, the Internet and AI.  Innovation typically has been the backdrop for most bubbles. Nvidia may well be tracking Cisco pricewise, but consider that when both started their runs in October, 1998 and 2023 respectively, Cisco didn’t peak until March 2000.  Even then the real decline took many weeks to get going.  Remember too, unlike the market in 2000, “the market” this time is not itself a bubble.  To dance on the dark side we call funnymentals, back then the dot-coms didn’t have revenues let alone earnings, a bit different from what we saw from Nvidia last week.  And back then it was the “new economy,” the dot-coms, and the “old economy,” which was pretty much everything else and was moving lower.  The A/D Index background was quite poor.

After a couple of weeks of consolidation Bitcoin, particularly as measured by the ETFs new and old, is having a good week.  We can see some real bubble-like potential here, particularly on the back of the ETFs.  We have suggested some part of the rally in AI stocks likely is due to the ETFs.  When you buy an ETF, you’re buying into something like AI regardless of valuations and stretched charts.  Bitcoin shares had a good fourth quarter, in anticipation of the adoption of the new ETFs.  When this became a reality, it was a sell on the news event, particularly for the miners which dropped as much as 50%.  The recent strength could be about the so-called halving slated for April 20, which last time saw a subsequent quadruple for Bitcoin.  While this could be anticipatory buying resulting in another need to sell on the news, sufficient unto the day.

When we think of Biotech we think of those who discover the stuff, the drug companies those who sell the stuff.  Clearly the latter do both, but when you hear about “trial” most often it’s in reference to Biotech.  On Tuesday Janux Therapeutics (48) announced encouraging results in its trials for solid tumors, while Viking Therapeutics (77) announced positive results in a trial for obesity.  Janux Therapeutics more than tripled on the news to 50, while Viking only more than doubled to 85.  Most of us have learned, often the hard way, these trials are like standing at the roulette table and placing it all on red or black.  Still, positive outcomes can be extremely rewarding, as per the above.  Our suggestion is get a medical degree, a PhD in Biotech, and find a drop-dead smart guy who knows Biotech stocks.  Or consider the SPDR Biotech ETF (XBI-99).  It’s an Equal Weight ETF, meaning smaller companies like those above have a greater impact.

Too much of a good thing can be a problem, despite the counsel of Mae West.  The history of these glorious starts to a year is the likelihood of a stall around this time.  While the market has seemed a bit more rotational of late, the numbers about which we care the most, the A/Ds, show almost surprising strength – in keeping up with those unweighted averages.  While it may be time for a stall, we’ve chosen that word carefully.  When the average stock is acting as well as it is now, there would not seem great risk.  Valuations to our thinking, no surprise, are pretty much useless.  Most argue by P/E standards stocks are not expensive.  Yet valuations relative to the rest of the world are comparable to 2000, stocks relative to bonds are the most expensive in two decades.  Best to just pay attention to the market – most days most stocks go up.

Frank D. Gretz

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