Andrea | Wellington Shields & Co. LLC

We Have 5% … Do We hear 10%?

Posted on 04/26/202404/26/2024 by Andrea

DJIA: 38,085

We have 5% … do we hear 10%? It had looked like a 5% correction might do it, then the bottom fell out of the Metaverse. We’re not quite sure how much this might change things, but we expect not much. Over the years there have been plenty of 5% corrections that have led to little more. A couple of things come into play here, including the six straight months without even a 2% correction. Big momentum is hard to kill. The length of the 5% correction at less than 15 days also argues for little more – quick is better. Finally, odds are for less when above the 200-day. And while brief, we did see some real selling in the three days of 90% down volume. It’s complicated, but we don’t see that Meta (441) will change things dramatically.

After last week, of course, it’s less about the S&P and more about the NASDAQ. AI’s poster child Nvidia (826) took quite a hit, as did Super Micro (787). We’ve noted the suspect volume pattern in the latter, more than the former, but the patterns are similar. Both have bounced, but now comes the hard part. The outlook for Tech is now more difficult too because of what is happening with yields. Treasury yields across-the-board are at three-month highs, a change from which they tend to move higher still. This is a good backdrop for defensive shares for growth not so much – as you will recall from just a couple of years ago. Another non-winner here is Homebuilding, where the stocks show signs of peaking. There are two important measures of housing, Permits and Starts. When one is positive, either one, that’s good for the stocks. When like now both are negative, it’s not good for the stocks.

When it comes to the stock market, we strongly believe what we all know isn’t worth knowing. Call it discounted, priced-in, whatever. Of course, there are no objective measures here. In the case of Tesla (170), certainly the problems were well advertised, and the price down significantly. Still, you never know. It’s more instinct than anything. Having the wind at your back certainly helps. Wednesday’s market didn’t hurt. For Tesla, the rally may be a start, but it’s just that. The stock faces the problem similar to Nvidia and Super Micro, a falling 50-day around 175. For Tesla that should prove formidable resistance, as it did in February. Meanwhile, GM’s (46) little correction held its 50-day and the stock actually gapped higher a few days ago.

Texas Instruments (175) gapped higher Wednesday, does anyone care? It’s all about Nvidia and its pal Super Micro. Both had tough weeks last week, damaging to their charts. After sharp breaks, in this case below their respective 50-day averages, those averages turn to resistance. A saying among those technical types is that the stocks then typically rally to kiss the 50-day goodbye – that is they stop at resistance and resume the downtrends. Then, too, it’s always possible they blow right through resistance, but certainly it’s something to consider. If you liken the break in these stocks to that of Cisco (48) in 2000, it’s possible. However, Cisco’s initial break was followed by a several month trading range – then the real break. These big uptrends don’t die in a hurry.

Some things are hard to explain. Meta cuts costs the stock goes up. Meta invests in its future the stock goes down. And what does all that have to do with Microsoft (399) – sympathetic weakness, psychological common ground. Of course, there is the practical common ground of being in the same ETFs. Buy or sell one you get them all. We see these as a big part of Tech’s success, and on days like Thursday it’s vice versa. We suspect one day these passive ETFs will become a big problem but, of course, what day? Meanwhile, we think we saw Superman and Clark Kent together. At least that’s an image we conjure up whenever we see both Gold and Bitcoin rally together. After a little setback Gold is back to acting well. Bitcoin didn’t rally going into last weekend’s halving, but the ETFs are acting reasonably well.

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The Stealth Correction…Stealthy No More

Posted on 04/19/202404/23/2024 by Andrea

DJIA: 37,775

The stealth correction… stealthy no more. Three better than 4-to-1 down volume days make this clear. Of course, we might have continued to skate by had it not been for a war or two. Technically strong markets often can get away with a surprising amount of bad news, technically weak markets, not so much. Just how weakened the market had become under the surface showed up in several ways, particularly those numbers on the NASDAQ. Fifty-two-week lows there jumped to 365 from 230 the previous week. That’s a pretty big number given the market is down just a few percent. Clearly the Averages were masking some considerable underlying weakness, not unusual even at temporary peaks. The picture on the NYSE isn’t quite so dramatic. New highs there contracted but remain comfortably above the level of new lows. A problem here, however, is within the S&P 500 Index itself where more components reached a 52-week low versus those reaching a 52-week high. It has been a stretch of some six months since that has happened and of course, is another sign of deterioration masked by the S&P itself. SentimenTrader.com points out some interesting numbers here – when new highs in the S&P outnumber new lows, the annualized return is 12%, and when vice versa it’s -1%. It comes down to a very simple principle in technical analysis, healthy markets are in sync, stocks move together. Fortunately, the A/D Index recently made a new high, no divergence there. An unusual aspect of the recent weakness has been the volume pattern. We have seen three days with heavy down volume without an intervening day of heavy up volume. On the surface this might seem terrible, rising, volume and poor A/Ds – real selling. However, you need to keep in mind that it’s selling and not buying that makes lows. Prices rise when the selling is out of the way. What is surprising is that this sort of washout selling should come just a few percent down from the recent peak. We suppose Middle East concerns have played some role here, but the numbers are surprising. Somewhat backing up this sort of panic selling is the VIX, which has jumped from less than 13 to more than 19 – the October low saw 22-23, by way of perspective. So, we’re seeing numbers more often seen near the end of a decline, surprising but encouraging? When markets correct and even the good go down, it’s an opportunity to look at charts with a little different perspective. Celsius (70) seems a candidate here, one admittedly not so interesting from a daily perspective. Meanwhile, even a weekly perspective is quite different – a selloff down to a substantial base or support. The real story here, however, comes from a monthly chart, which needs little explanation. A big winner turned a bit ragged of late is Super Micro (928), trying to hold onto the 50-day. More worrisome than the price action is the volume pattern, one showing declining volume along each of the price peaks. The 800 area clearly seems important. Here too, however, a different perspective is more optimistic. To look at a weekly chart, the overall action seems no more than a consolidation in the uptrend. Perspective seems important here in terms of the overall market. It has been a remarkable six months, including a number of unusual streaks. In this first little drawdown of the year a number of those streaks have ended, but their implications remain intact. Protracted momentum rarely leads to important price declines. This period should prove important for Tech earnings – the market rise owes much to the Mag Seven, where reporting has begun. Even these stocks have slipped a bit from their recent holding patterns, so earnings could prove important or, as Barron’s John Authers puts it, they have taken on the aura of a macro event. Meanwhile, a number of replacements have come to the rescue – pretty much anything in the ground. We know, of course, it’s hard to replace Tech.

Frank D. Gretz

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KEEP SOME POWDER DRY

Posted on 04/17/202404/23/2024 by Andrea

U.S. stocks rallied in the first quarter of 2024 in anticipation of strong corporate profits and the Federal Reserve cutting interest rates. It is notable that the market’s breadth increased, something that was lacking for most of 2023. Towards the end of the quarter, however, some weaknesses developed as several Federal Reserve officials pushed back against the aggressive rate cuts many on Wall Street were predicting.

The U.S. has appeared to be unique versus a more sluggish performance abroad, with several foreign countries entering recession. As a result, numerous global central banks are planning on cutting policy rates in 2024. The U.S. picture, however, appears much stronger. As an example, U.S. non-farm payrolls surged 303,000 month-over-month in March, a notable upside surprise. Average hourly earnings were up by 0.3%. The U.S. labor participation rate rose to 62.7% while the unemployment rate fell to 3.8%. Job growth has been expanding for over three years.

The Federal Reserve faces a core inflation stuck above 2% annually with increasing government deficits, and there have been well-documented historical mistakes of “stopping and going” monetary policy. Notably, the University of Michigan’s survey of long-run inflation expectations was 3.0% in early April. In the end, the Fed wants a soft landing, and recent Atlanta Fed data would keep this possibility as wage growth is slowing. While goods inflation is down significantly from COVID-induced supply chain disruptions, services inflation remains more persistent. So, a longer pause (before cutting rates) makes sense at this point.

The weaknesses in equity prices that showed up at the end of the first quarter has continued, and we believe it has further to go. We also have commented in the past about the uniqueness of the election year cycle, wherein stocks tend to bottom around Memorial Day and then rally into year-end. This scenario could be upset by international events—and there are enough uncertainties around to advise holding a near-term higher-than-normal cash position—but the bigger picture is one of stronger corporate profits and eventual falling interest rates.

April 2024

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US Strategy Weekly: Inflation Redux

Posted on 04/17/202404/23/2024 by Andrea

At a policy forum focused on US-Canada economic relations, Federal Reserve Chairman Jerome Powell questioned whether the Fed would be able to lower interest rates this year prior to significant signs of an economic slowdown. This was not a huge shock to the equity market since the Fed futures markets had already signaled that there was little chance of a Fed rate hike before September. The culprit for this shift from multiple fed rate cuts to few if any rate cuts in 2024 was last week’s release of March inflation data.

Headline CPI for March rose 3.5% YOY, up from 3.2% YOY in February, and core CPI remained unchanged at 3.8% YOY. In general, March’s data reversed a fairly steady deceleration that has been seen in most inflation components since the June 2022 peak. The main exception to this was owners’ equivalent rent which did decelerate from 6% YOY to 5.9% YOY. See page 3.

The rebound in headline inflation was a disappointment to those expecting multiple Fed rate cuts this year; however, it was the underlying data that was truly worrisome. All the inflation indices excluding shelter, food, energy, used cars and trucks, and medical care, moved higher in March and service sector inflation accelerated. Prices in the broad service sector (which is 64.1% of the CPI weighting) increased from 5.0% to 5.3%. Hospital & related services prices rose from 6.1% to 7.7%. Tenants’ and household insurance rose from 4.1% to 4.6% and motor vehicle insurance rose from 20.6% to 22.2%. Medical care services, where prices were declining for most of the second half of 2023, reversed this trend and were up 2.1% YOY in March. See page 4. We continue to hear some market commentators state that headline inflation would be less than 2% if the housing component was eliminated. In our view, these comments will soon be silenced because inflation has become embedded in the system and is no longer tied to the price of oil or housing.

Nonetheless, oil prices are rising again, and this suggests that headline inflation could continue to rise in the months ahead. It is important to note that in 12 of the 13 months ended in January of this year, the price of crude oil was down on a year-over-year basis, and this was a significant factor in helping to slow headline inflation. For example, WTI was down 3.8% YOY in January 2024 and headline CPI was 3.1% YOY. In February, WTI was up 1.6% YOY and headline CPI rose 3.2% YOY. In March WTI was up 9.9% YOY and headline CPI was up 3.5% YOY. To date, in April, WTI is up 11.2% YOY and we expect headline CPI will also rise in April. What is more important is that energy is one of the few commodities that has the ability to drive prices higher throughout the broad economy. Higher energy costs increase transportation, manufacturing, and service costs, which then get passed down to the consumer (who is already burdened by higher gasoline, electric, and heating bills).

Therefore, it was not surprising to hear Chair Powell temper expectations of rate cuts. In fact, interest rates have clearly been on the rise after the March inflation release.

Warnings from the CBO

Another factor impacting interest rates is the mounting level of federal debt. We agree with those who believe a day of reckoning is ahead for the debt markets. A steady stream of fiscal stimulus packages over the last four years has been both inflationary and a catalyst for higher interest rates. According to Congressional Budget Office (CBO) data, federal debt held by the public is expected to reach a record 107% of GDP in 2029 and reach 166% of GDP by 2054. And according to the CBO (the independent advisor on budgetary and economic issues providing cost estimates for current and proposed legislation), mounting debt will slow economic growth and raise interest rates.

2023 was an important turning point for the federal budget since it marked the year when the annual primary deficit (federal inflows minus outflows) equaled 3.8% of GDP versus interest outlays which represented 2.4% of GDP. According to CBO data, this balance will shift this year and the primary deficit is estimated to equal 2.5% of GDP and interest outlays rise to 3.1% of GDP. CBO forecasts show interest outlays growing to a shockingly high 6.3% of GDP by 2054. See page 5. At present, net interest costs are 13% of current federal outlays and this is estimated to rise to 23% by 2054.

Whether or not the Federal Reserve raises or lowers interest rates will impact deficits since 3-month Treasury bills now represent 14.5% of total federal debt and total Treasury bill issuance represents 25% of total Treasury debt outstanding. This is the highest level since 2009. And though Washington DC is at the center of this spending, inflation, debt, and interest rate spiral and it seems oblivious to it and all its consequences. It must be an election year….

In general, this combination of high interest rates, growing deficits, and interest payments on federal debt exceeding the primary deficit is reminiscent of the 1980-1990 decade when the combination of high debt levels and high inflation led to a series of rolling recessions.

Technical and Earnings Update

Charts of gold, silver, gasoline, and WTI crude oil are all technically strong. See page 7. Gold and silver may be breaking out of major base patterns due to concern of war escalating in Europe and the Middle East, which in turn impacts the price of oil and most commodities. But regardless of the reason, these four commodity charts are bullish, and that has inflationary implications.

Conversely, all four of the popular equity indices are trading below their 50-day moving averages this week and the DJIA and Russell 2000 are also trading below their 100-day moving averages. Given the huge advance seen from the October low, this appear to be a normal correction; however, the Russell 2000, which never got close to making a new record high, has fallen back into its long-term trading range of 1650 to 2000. See page 10.

The NYSE 25-day up/down volume oscillator is at negative 1.15 this week and neutral after recording a 90% down day on April 12. The prior 90% day was also a down day made on February 13, 2024. This oscillator reached overbought territory for two consecutive days on March 13 and 14 and March 20 and 21 and for three consecutive trading days on March 27, March 28, and April 1. These overbought readings followed the string in early January when the oscillator recorded readings of 3.0 or higher for 22 of 25 consecutive trading days ending January 5. Since a minimum of five consecutive trading days in overbought is required to confirm a new high, this means that, since early January, this indicator has not confirmed the new highs in the averages made in January, February, and March. See page 11. The S&P Dow Jones consensus estimate for calendar 2024 is $240.93, up $0.26, and the LSEG IBES estimate for 2024 is $243.04, up $0.01. Based upon the IBES EPS estimate for calendar 2024, equities remain overvalued with a PE of 20.8 times and inflation of 3.5%. This sum of 24.3 is above the 23.8 level that defines an overvalued equity market. The LSEG IBES earnings growth estimate for the current first quarter earnings season declined from 5% YOY to 2.7% YOY this week. Growth for calendar 2024 fell from 9.9% YOY to 9.2% YOY. We remain cautious.

Gail Dudack

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US Strategy: Beware of Oil

Posted on 04/10/202404/16/2024 by Andrea

After last week’s strong jobs report for March, equity investors became a bit more concerned about the slew of inflation data that will be reported this week and with good reason. Although we have not heard anyone discuss it, for 12 of the 13 months ending January 2024, headline CPI has been benefiting from the weakness in the energy component of the index due to the negative year-over-year performance of the WTI oil future (CLc1 – $85.23). In February, the oil future reversed, but rose a mere 1.6% YOY. But in March it rose 9.9% YOY and in April, to date, it is up nearly 11% YOY. In short, while the Fed is currently focused on core and service sector inflation as the problems for 2024, headline inflation may be about to reappear.

And oil is not the only commodity moving higher. Our table of global markets and commodities on page 16 shows that of the 66 components in this table the six best year-to-date performances are seen in United States Oil Fund, LP (USO – $81.15), the WTI oil future, iShares Silver Trust (SLV – $25.72), the silver future (SIc1 – $27.89), Energy Select Sector SPDR ETF (XLE – $97.49), and the SPDR Gold Trust ETF (GLD – $217.67), in that order. The only commodity outlier is the gold future (GCc1 – $2795.10), which remains in the lower half of the table in terms of year-to-date price performance.

For a variety of reasons, equity prices do not always reflect the performance of underlying fundamentals or of commodity prices; however, in terms of S&P 500 sector performance, energy has been moving steadily higher in ranking this year and is currently in second place after communications services. The materials sector has been sitting at the bottom of the price performance rankings for a long time, but it is now improving and currently sits in the sixth slot, directly below the S&P 500 index.

In our opinion, it is wise to be wary of all future inflation reports; but this week could also be interesting since it includes Treasury auctions of $60 billion of 17-week bills on April 10^th, and $70 billion of 4-week bills and $75 billion of 8-week bills on April 11^th. It will be interesting to see how this impacts interest rates. Plus, first quarter earnings season begins in earnest with five major financial companies reporting on Friday. There is a lot of news to digest this week.

The Impact of the March Job Report

Immediately after last week’s jobs report the consensus view regarding Fed rate cuts began to change. Earlier this year the consensus was expecting six rate cuts! This was recently cut to three, and now there are whispers about one, two, or maybe no interest rate cuts in 2024. In our view, the equity market can adjust to the number of, or lack of, rate cuts by the Fed this year, but it might react poorly if inflation and/or interest rates begin to move higher. Much of the enthusiasm for equities in the last 12 months has been based on the expectation of lower inflation and lower interest rates. When the cost of money is low, the ability to invest or speculate in stocks increases; conversely, higher interest rates will lift the risk bar for investors and slay speculation. It is impossible to know how much of the rally from the October low is based on the expectation of lower interest rates, but it appears to be an essential factor.

The March employment report depicted a job market with solid momentum, and this implied that not only was a Fed rate cut unnecessary at this time, but it could be reckless. March’s job growth of 303,000 in the establishment survey, a decline in the unemployment rate to 3.8% in the household survey, and a rise in the participation rate to 62.7%, were all signs of strength. We had been concerned about the deceleration in the household survey’s job level, and though it inched down to 0.4%, it remains above the worrisome zero level. Ironically, the ISM employment indices for March remain below 50, a sign of job contraction, but this has been true for several months. See page 3.

Last week we noted that the unemployment rate for men aged 16-64 had been rising; but this may have been seasonal. Although the rate remains above the total unemployment rate of 3.8%, it fell from 4.3% in February to 3.9% in March, which is good news. This improvement may be linked to the big decline in the unemployment rate for those 25 and older with less than a high school diploma. This rate fell significantly from 7.7% to 5.8% in March, which suggests the lower end of the job market is experiencing good growth. See page 4.

Average hourly earnings rose 4.2% YOY, down from 4.6% in February, but well above inflation of 3.2%. Average weekly earnings also rose 4.2% YOY and average weekly hours in the private sector rose 0.1 of an hour. Manufacturing weekly hours rose 0.1 to 40.7 hours indicating overtime. See page 5. All in all, March data depicted a solid job market.

Multiple job holders rose to 8.6 million in March, down only slightly from the peak level of 8.7 million seen in December. Part-time workers for noneconomic reasons (in nonagricultural industries) rose by 572,000 in March to 22.5 million. Part-time workers for noneconomic reasons exclude those who wanted to work full-time but could only find part-time work. This increase in part-time workers reflects the number of new people entering the workforce and is another sign of a healthy job market. See page 6.

We do not typically read economic comments on social media, however, @RealEJAntoni wrote that in the last 12 months, 651,000 native-born Americans lost jobs, while 1.3 million foreign-born workers have gained jobs. This seemed crazy to us, but we looked at BLS data and found it to be true. Keep in mind that this data comes from the household survey (BLS Table A-7) which is an anonymous voluntary survey conducted by the US Census Bureau. It is not from the establishment survey which is derived from state payroll data. Nevertheless, the household survey includes much more information about households and captures an important segment of the job market, i.e., workers who may not receive a W-2, gig workers, homeworkers, entrepreneurs, and illegals. See page 7.

Small Businesses

The NFIB small business optimism index fell 0.9 points to 88.5 in March with six of eleven components falling in the month, two were unchanged, and three improved slightly. Seven of the eleven components of the index remained in negative territory. Plans to expand, invest, or increase employment fell. See page 8.

The NFIB survey showed that reports of positive profit trends were a net negative 29% in March, up two points, but still a very poor reading. The net percentage of owners who expect real sales to be higher decreased eight points from February to a net negative 18%. Owners indicating that sales were the single most important problem rose to 8 in March, a trend that historically mirrors the unemployment rate. Much like the ISM employment indices, this report was difficult to square with the March jobs report. There were no significant changes in fundamental or technical indicators this week. Equities remain near extreme valuations and momentum indicators are mixed with prices showing solid momentum but volume failing to confirm. We remain cautious.

Gail Dudack

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April Showers … Bring May Flowers

Posted on 04/05/202404/08/2024 by Andrea

DJIA: 38,596

April showers … bring May flowers. That loosely also works as a market forecast. Given the technical background, we admit to surprise at almost any weakness. And, of course, we don’t get the logic they should go down because they’re up a lot. Uptrends differ, but to look at the S&P and its 21-day average, few have been more orderly. Where there are excesses they have calmed of late, while several dormant sectors have picked up, Gold, Copper, Uranium, Oil, “things” generally – see XME (61), the Metals and Mining ETF. The strong economy seems the excuse for the recent weakness, but excuse seems the operative term. The overall momentum says weakness should prove temporary.

Following five consecutive monthly gains simple logic suggests some give back should be expected. Of course, you might have said that after three or four months, maybe even two. More importantly, best to keep in mind the stock market is a place where simple logic rarely works. In this case, that seems true again. Following five consecutive months of gains in the S&P, a buy-and-hold strategy over the next nine months saw a 90% win rate, according to SentimenTrader.com. Momentum, especially big momentum, is a wonderful thing. A slightly different take here is the gain of 20% or more from a 100-day low with 10 or more days of 80% volume in advancing stocks. Again, returns were exceptional.

It’s an AI World, but there are many guests that live in it. We wondered what was behind the move in Copper – China of course always comes to mind, but seemed unlikely this time around. Turns out, there is somehow a lot of Copper in AI. To look at the chart of Lincoln Electric (247), we used to joke there was a lot of welding involved. An area that does make sense is Electric Power, especially unregulated nuclear power provided by Constellation Energy (183). Bitcoin also uses a bit we understand. Nuclear in turn helps explain why those frustrating Uranium stocks have picked up again. And then there’s Dell (127), now touted as an AI Infrastructure play. Meanwhile, for now Nvidia (859) is on break.

Fool us once, fool us twice, fool us three times and you must be United Healthcare (455). If you’re there, you know what we mean. United Healthcare, with the possible exception of Molina (375), and the rest of the insurers have been disappointing. Hospitals are too crowded, not crowded enough. There always seems something. Now we find out this is a regulated industry, why don’t we just buy a Utility. The stock’s redeeming quality is its still reasonably intact long-term chart, but here we prefer something with an even better long-term chart like McKesson (535). The Healthcare ETF (XLV-142) has close to an 9% position in UNH, making it problematic. Then too, you also get an 11% dose of Eli Lilly (768).

It’s hard to understand the market’s fixation on when the Fed will ease. It’s not as though the economy and corporate earnings are not going well, the economy perhaps too well. And there’s actually some history to suggest you sell on rate cut news. In any event, Powell recently stuck to the script, rate cuts are on their way. Gold seems to believe it, but there are many scripts Gold has failed to follow. Similarly, best not to overthink or think at all about the strength in Oil – lest you ponder whether World War III has already begun. Let’s opt for the more mundane explanation of supply and demand – under-loved and under-owned. Meanwhile, after a couple of weak down days, Thursday’s downside reversal caused some damage, dropping the S&P below its 21-day average. Now that the market is somewhat stretched to the downside, it will be important to see if the market can respond.

Frank D. Gretz

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US Strategy Weekly: Achilles Heel

Posted on 04/03/202404/09/2024 by Andrea

Last week we stated that we thought the stock market was overly fixated on the Fed’s dot plot forecasts while waiting and hoping for a Fed pivot and lower interest rates (which we believe are unnecessary). Meanwhile, this is overlooking the fact that monetary policy already has been and remains very accommodative. The Fed’s current balance sheet of nearly $7.6 trillion, remains 90% above the $4 trillion seen in normal times before the pandemic. The real fed funds rates relative to the current PCE deflator is 290 basis points, high after being negative for nearly 2 ½ years, but still short of the 400 basis points, or more, seen at the end of most Fed tightening cycles. In other words, the Fed is accommodative.

It is this persistent combination of fiscal and monetary stimulus that has kept both the economy and the stock market afloat in recent years, defying a string of challenges and indications of a pending recession. The 2024 surge in Bitcoin (BTC= – $65,466.00), driven primarily by the initiation of multiple ETFs on the spot market, has also been supported by the consensus view that interest rates are headed lower. The market’s obsession with the Fed’s dot plot reveals that inflation and interest rates are the Achilles heel to both the economy, the stock market, and possibly Bitcoin.

This explains why the stock market reacted badly to a number of Fed governors, as well as Chair Powell, indicating that rate cuts may not come in June. A slew of good economic news also implied Fed cuts in June may be premature. We are not surprised.

Earnings Season Approaches

The stock market may adjust to the fact that rate cuts are not imminent, but to do so would require good corporate earnings in the first quarter. First quarter earnings reports will begin in a few weeks and LSEG IBES consensus estimates show S&P 500 earnings growing at a rather uninspiring 5% in the quarter; if the energy sector is excluded, this percentage rises to 8.1%. The communications services sector is currently forecasted to have the best earnings growth of 26.8% in the quarter, followed by technology with growth of 20.9%. Surprisingly, the utilities sector is expected to have the third best earnings performance in the first quarter with growth of 19.8% YOY.* The worst earnings expectations are for energy (-25.2%) and materials (-23.7%), but a recent rise in oil and commodity prices could offset the results of a poor earnings season. This certainly has been true for energy, which is currently the second-best performing S&P sector year-to-date. See page 15.

This has been a quiet week for earnings releases and the S&P Dow Jones consensus estimate for calendar 2024 is relatively unchanged at $240.30, up $0.07 and the estimate for 2025 is $273.79, down $0.21. The LSEG IBES earnings estimate for 2024 is $242.91, up $0.02 and for 2025 is $276.07, up $0.17. Based upon the LSEG IBES EPS estimate for calendar 2024, equities are overvalued with a PE of 21.4 times and inflation of 3.2%. This sum of 24.6 is above the 23.8 level that defines an overvalued equity market. Note: based upon the S&P estimate, the 2024 PE is 21.7 times. See page 9.

The 2024 Economy is Improving

Fourth quarter GDP rose 3.4% (SAAR) according to the “third” estimate, up from a previously reported 3.2%, which matched the long-term average for GDP. Increases in consumer spending, state and local government spending, exports, nonresidential fixed investment, federal government spending, and residential fixed investment drove growth, which was partly offset by a decrease in private inventory investment and an increase in imports. Money velocity (nominal GDP divided by M2) shows how quickly a dollar moves through the economy. Velocity has been on the rise since its 2020 low which is a positive sign of an economy gaining momentum. See page 3.

GDP corporate profits before and after taxes grew 4.1% and 3.9% respectively, which was the best growth seen since the second quarter of 2022 – a quarter boosted by fiscal stimulus. Residential investment only increased 1.7% YOY, but this follows four consecutive quarters of declines. In short, the economy appeared to be gaining momentum at the end of the year. Nominal GDP grew 5.9% YOY down slightly from the 6.2% YOY seen in the third quarter, however, it was led by a solid 5.6% YOY increase in personal consumption expenditures. See page 4.

The pending home sales index rose from 74.4 in January to 75.6 in February; but was below the 78.1 recorded in December. The ISM manufacturing index was surprisingly strong at 50.3 in March, hitting its first reading over 50 after 16 months of contracting. Five of its 10 components were higher, three were unchanged and two were lower. The University of Michigan sentiment index was 79.4 in March, its highest level since July 2021. The survey showed that both current and future expectations were improving. See page 5.

The Fed’s preferred inflation measure, the PCE deflator, had something for everyone in February’s release. Headline PCE increased 0.3% for the month, down from the 0.4% seen in January – however, January’s figure was revised up from 0.3%. The core PCE deflator rose 0.3% as expected. On a year-over-year basis headline PCE increased slightly to 2.45% in February versus 2.43% in January and core rose slightly less at 2.78% versus 2.88% in January. In short, February’s changes were minimal and essentially trendless. Goods (Auto and nondurable) inflation rose while service inflation fell. See page 6.

Employment data for March will be reported at the end of the week and we will be watching for two worrisome trends. First, there was a sharp decline in household survey job growth in February to 0.4% YOY. The importance of this is that year-over-year declines in employment are a key characteristic of a recession. Second, the unemployment rate for men aged 16 to 64 was 4.3% in February, down from 4.6% in January, but still higher than the overall unemployment rate of 4% in February. The unemployment rate for women aged 16 to 64 was 3.8% and for all workers aged 65 and over was 3%. The high 4.6% for men in January may be due to seasonality or could be a precursor of a weaker job market. We will be analyzing March data to see if these trends improve or worsen. See page 7.

Technical Update

The 25-day up/down volume oscillator is 2.82 and neutral after being overbought for three consecutive days at the end of March. This follows two consecutive overbought days on March 13 and 14 and again on March 20 and 21. The last significant overbought reading took place early in January 2024 when the oscillator recorded readings of 3.0 or higher for 22 of 25 consecutive trading days ending January 5. In sum, since early January this indicator has not confirmed new highs in the market. Conversely, the NYSE advance/decline line made a new high on March 28 and the 10-day average of daily new highs has expanded to 450. A level of 500 is typically seen in bull markets but this is close to confirming. See pages 11-12. The AAII sentiment poll showed 50% bullishness and 22.4% bearishness which is close to the negative combination of 50/20 that warns of a top. We remain cautious. *Proprietary Research from LSEG: This Week in Earnings (March 28, 2024)

Gail Dudack

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A Bitcoin Quarter

Posted on 04/01/202404/02/2024 by Andrea

Comments by Federal Reserve Chair Jerome Powell following the December 13, 2023 Fed meeting triggered a strong yearend rally that led to all four of the major US equity indices closing the year with impressive double-digit gains. The gist of Powell’s December comments was that while there would be no immediate change in Fed monetary policy, rate cuts could be coming in 2024.

Two subsequent FOMC meetings that ended on January 31, 2024 and March 20, 2024 followed a strikingly similar pattern, that is, no change in policy, a hint of rate cuts this year, followed by a strong stock market rally. Note that this sequence of events suggests that the equity market has been discounting the possibility of 2024 interest rate cuts multiple times. And since forecasts for 2024 corporate earnings have declined slightly in the interim, this means the price-earnings ratio for equities has been climbing. It is this rise in the price-earnings ratio that has led many to feel the market is or is becoming overvalued and it is also the reason the fear of an equity bubble is rising. To date, the 2024 equity market has been a momentum-driven market and not a value-driven market.

However, 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.

The financial media has heralded the S&P 500’s 10.2% gain in the first three months of the year as the best first-quarter performance in five years, but this is a bit disingenuous since this only applied to the S&P 500 index and not to other indices. The Nasdaq Composite index had a solid gain of 9.1% in the first quarter, but this was less than the 16.8% gain seen in 2023. The Dow Jones Industrial Average rose 5.6% in the quarter which was the best first quarter since the 2021 gain of 7.8%. The Russell 2000 index rose 4.8%, the best first quarter since the 12.4% also seen in 2021. In short, it was a good first quarter performance for most stocks and most portfolios, but not the best first quarter in five years.

Cryptocurrency

Still, the first quarter of 2024 may go down in history, not as the best equity performance in five years, but as the first time ETFs were introduced on spot bitcoin. After more than a decade of rejecting spot bitcoin ETFs in hopes of protecting investors from market manipulation, the Securities and Exchange Commission (SEC) was forced to approve them in January after an appeals court ruled that the SEC had not sufficiently detailed its reasoning for rejecting the products. The SEC approved 11 spot bitcoin ETFs in late January. And 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 162% since October, jumped 44% in February alone, reached a high of $73,157.00 on March 13, 2024, and generated a year-to-date gain of nearly 67%.

This surge in demand for Bitcoin (BTC= – $70,841.00) may be representative of today’s financial markets for several reasons. Bitcoin has the backing of a new generation of investors, ETFs are a form of leverage that attracts a larger audience of buyers, and there are no underlying fundamentals. Bitcoin has no assets, earnings, or revenues to analyze, yet it is surging based upon the belief that it will go higher. Likewise, momentum, liquidity, and leverage drive the typical equity bubble, not fundamentals. Bitcoin and the equity market are also similar in that they are both driven by an underlying expectation of lower inflation and lower interest rates. In sum, inflation and interest rates are the Achilles heel to both markets.

Leadership changes

Much like the popularity of spot bitcoin ETFs, many investors are using ETFs to participate in the equity market rather than buying individual stocks. And the performance of various ETFs reveals an interesting change in leadership in 2024.

In 2023 the best performing ETFs were linked to S&P sectors and industries related to technology, homebuilders, communication services, consumer discretionary, and semiconductors.

This year’s best performers have been found in oil, homebuilders, energy, communication services, financials, and industrials.

What we find most interesting about the shift in the first quarter of the year is the outperformance of oil and energy, which suggests there could be a risk of higher energy pricing and higher inflation. The good news about this shift is the outperformance of the financial sector implies a better economic environment in 2024.

Pivot or No Pivot

While the stock market is rallying in anticipation of a Fed pivot and lower interest rates, we believe a pivot is unnecessary. What many overlook is the fact that monetary policy is already very accommodative despite the rise in interest rates. Government yield curves may be inverted — and this has been the longest inversion without a recession in history – but as the Federal Reserve made a succession of interest rate hikes, underlying fiscal and monetary policies have remained surprisingly stimulative.

For example, the Federal Reserve has been shrinking its balance sheet down to $7.7 trillion as of March 20, 2024 from a peak of $9.0 trillion in April 2022. Yet this $7.7 trillion remains well above the $4 trillion seen in normal times before the pandemic. In short, the Fed’s balance sheet continues to provide considerable liquidity to the economy. Not surprisingly, this means there is plenty of liquidity in the banking system including a near-record level of total bank assets of $23.2 trillion and commercial bank deposits of $17.5 trillion (as of mid-March). These are down only modestly from the record $18.2 trillion seen in April 2022. In other words, government spending and a large Fed balance sheet have been providing liquidity and offsetting both 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.

*Stock prices are as of March 28, 2024 close

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US Strategy Weekly: Dot Plot Mania

Posted on 03/27/202404/02/2024 by Andrea

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.

Housing

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

Posted on 03/22/202403/26/2024 by Andrea

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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