US Strategy: Beware of Oil

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 10th, and $70 billion of 4-week bills and $75 billion of 8-week bills on April 11th. 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

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

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

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

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

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

Inflation

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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