US Strategy Weekly: Not a New Normal

The Wall Street Journal article entitled “Wall Street’s Favorite Recession Indicator is in a Slump of its Own” caught our attention this week. The writer asks the question of whether there is still value in the idea that an inverted Treasury yield curve can predict a recession. The yield curve, typically measured as the spread between the 1-year or 2-year Treasury note and the 10-year note, has currently been inverted for 23 months and since 1968, an inverted yield curve has been followed by a recession in the subsequent nine to 24 months. So, by historical standards, we should be in or entering a recession right now.

But there are no signs of a recession on the horizon, particularly with monthly employment statistics showing job growth averaging 242,000 over the last three months and there are no signs that the yield curve inversion will end any time soon. Therefore, it is valid to question whether there is still value in an inverted yield curve or if the current environment is the beginning of a “new normal.”

We believe the inverted yield curve is a valid indicator and we do not think this is a new normal. Recessions and expansions might be muted by monetary and fiscal policy, but in our opinion, they cannot be eliminated. And we admit that we count ourselves among those who were looking for a recession last year. This was not due just to the inverted yield curve, but also to the string of months of negative year-over-year real retail sales, the Conference Board’s leading economic indicator signaling a recession for 22 consecutive months (ending in February 2024), and suspected weakness in the housing market. The one recession indicator that did not appear was perhaps the most critical and that is weakening job growth. Whenever the year-over-year change in employment in the establishment and household surveys turn negative, it is an excellent forecaster of a recession. That signal did not materialize. Was it because there was a massive catch up in employment after the Covid–19 shutdown? Or was there some underlying driver of the economy that was not being measured? In retrospect, it seems quite clear that it is due to a historical level of fiscal stimulus.

The Federal Reserve had been too dovish for too long in the face of rising inflation, but the inverted yield curve was a sign that this stimulus was being unwound. What was not being unwound was fiscal stimulus. And even though the pandemic stimulus passed by Congress was slowly fading into the background, it was followed in August 2022, by President Biden’s Inflation Reduction Act (which should have been named the Clean Energy Act) which the administration described as “one of the largest investments in the American economy, energy security, and climate that Congress has made in the nation’s history. In short, the stimulus continued well after the pandemic was over.

More recently the administration has shifted to boosting the economy through government agencies. This is best seen on website which currently lists in its press releases the following statements: May 21, 2024 – 1 Million PACT Act Claims Approved and Benefits Delivered to Veterans in all 50 States and US Territories; May 22, 2024 – Statement from President Joe Biden on $7.7 Billion in Student Debt Cancellation for 160,000 borrowers; May 22, 2024 – Biden to Release 1 Million Barrels of Gasoline to Reduce Prices at the Pump Ahead of July 4; May 24, 2024 – Statement on the Signing of the Recruit and Retain Act (COPS – Community-Oriented Policing Services); May 24, 2024 – Meeting with Community Lenders Expanding Capital for Underserved Communities; May 28, 2024 – Biden-Harris administration Launches Federal-State Initiative to Bolster America’s Power Grid. Over the past week there have also been various federal disaster relief programs for West Virginia, Nebraska, Maine, Iowa, Oklahoma, Arkansas, Kentucky, and Texas, which have suffered from tornadoes and other weather-related disasters.

We are not making judgment on any of these spending initiatives; however, it is clear that there has been a steady stream of fiscal stimulus over the last four years. Moreover, the White House website reveals that it continues on a near-daily basis.

This spending is liquidity and liquidity is good for financial markets. But spending also results in deficits and at some point, it will have to stop, perhaps abruptly. We wonder how many of today’s investors remember the Greek debt crisis that materialized shortly after the financial crisis of 2008-2009. It crushed the Greek economy, and it should be mandatory reading for all investors and all politicians. But for now, the US debt market appears complacent and that is good news for equities.

May’s Conference Board consumer confidence indices improved from upwardly revised levels in April; nevertheless, the indices remain in the lower half of the range seen over the last 18 months. Revised numbers for May’s University of Michigan consumer sentiment indices were up slightly from initial estimates, yet again, indices remain well below January’s peak. In general, sentiment indices improved from April’s lows, but remain below recent peaks and well below 2019 peaks. See page 3.

New home sales were 634,000 units in April, down 5% for the month, down 7.7% YOY, and negative for the first time in 12 months. Existing home sales were 4.14 million units, down 1.9% for the month, down 1.9% YOY, and remain in the negative year-over-year pattern seen since August 2021. In both cases, sales are well below the peak levels seen in January 2021 for new home sales and below the October 2020 peak in existing home sales. See page 4.

All the same, the median price of a new single-family home was $433,500 in April, down 1.4% for the month, but up nearly 4% YOY. This is just 6% below the record new home price of $460,300 set in October 2022. The median price of an existing home was $412,100, up nearly 4% for the month, up 5.6% YOY, and close to the record $415,700 price set in June 2023. See page 5.

Residential construction and housing prices have remained strong despite a slowing sales trend due to limited inventory. The months of supply of existing single-family homes reached a record low of 1.6 in January 2022, and while it rose to 3.4 months in April, up from 3.0 months in March, the supply of homes remains historically low. It should be noted that an assortment of home price indices indicate prices are rising again, after a slump from February 2022 to April 2023. See page 6.

Existing home sales are currently six to seven times larger than new home sales and would probably be higher if inventory were greater. However, many households are finding it difficult to move or trade up in a housing market with both rising prices and higher interest rates. Still, there are signs that the housing market is improving in 2024 and if the Fed cuts interest rates later this year, the residential real estate market should improve significantly. This is just one example of why Fed policy has been a major focus for investors. See page 7. Right now, financial markets are complacent that cuts are ahead. The PCE deflator reported later this week will therefore be an important release. And finally, technical indicators are supportive of the current rally. The one laggard is our 25-day up/down volume oscillator, which despite being overbought for four consecutive days recently, is yet to confirm the advance.

Gail Dudack

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US Strategy Weekly: Utilities in Play

Along with many other stock markets around the world, the Nasdaq Composite index and the S&P 500 index recorded all-time highs this week. These highs came just a day before Nvidia Corp. (NVDA – $953.86), Wall Street’s third largest firm by market capitalization, reports first quarter earnings after Wednesday’s closing bell. Expectations are for another blowout quarter for the chip maker. The global focus on Nvidia’s earnings suggests it could be a significant market catalyst and more importantly, a test of whether the outsized rally in AI-related stocks can be sustained. Nvidia’s earnings report also comes as the stock is about to test the psychological $1,000 level, which could become a challenge, at least in the short run, considering the stock is already up over 8-fold from its October 2022 low. In our view, the obsession surrounding Nvidia’s earnings release is worrisome and revealing. It reflects a certain underlying weakness in the market if one stock is vital to the current advance and to investor confidence.

But it is also interesting to see how many different ways artificial intelligence can drive the stock market. Utilities became the latest AI-related darling. The interim CEO for American Electric Power Company Inc. (AEP – $92.62), Benjamin Fowke, noted in a hearing held by the Senate Energy and Natural Resources Committee this week, that a single data center requires three to fifteen times the amount of power as a large manufacturing facility. According to Fowke, “One small example of this demand surge – OpenAI’s ChatGPT requires 2.9 watt-hours per request, and that’s nearly 10 times more power than a typical Google (Alphabet Inc. C – GOOG – $179.54) search.” And voila! Utilities are now an AI play. As a result, in one month the utility sector jumped from being the next-to-worst performing S&P 500 sector to the third best performing sector. See page 15.

Wednesday will also include the release of the minutes of the May FOMC meeting. The document will be scrutinized for any sign of a possible rate cut in September, since the consensus and the CME FedWatch Tool are currently suggesting a 90% probability of at least one rate cut before the end of the year. We do not expect a rate cut this year. The one exception would be if the economy stumbled into a recession and that does not appear likely either.

The recent rally has had several catalysts, but the key one seems to have been the April CPI report. Headline CPI ratcheted down from 3.5% in March to 3.4% YOY in April while core CPI eased from 3.8% to 3.6%. The general trend of these two indices appears to be stable to lower; however, if one looks at the heavy-weighted components of the CPI index it shows that while prices in food & beverage and housing are decelerating (i.e., rising at a slower pace), transportation and medical prices are now accelerating. See page 3.

Many economists have been theorizing that inflation would already be at 2% if owners’ equivalent rent were excluded, and that rents were not reflecting the slowdown in home prices. There are a number of problems with this theory. First, there has always been a lag between the prices of homes and the level of rents, and this is logical. Rents usually reset every year or two which means that rising or falling housing prices work through the economy slowly with a big lag. Second, the argument that the CPI would be lower excluding OER is losing viability because the housing prices are rising again. Third, the driver of inflation made a significant shift many months ago from housing and energy to services (most notably insurance and medical). See page 4.

Inflation less shelter represents nearly 64% of the CPI and since this index hit a low of 0.6% YOY in June 2023, it has been steadily rising and rose 2.2% in April. All core CPI indices were above 2% in April, up from last year’s lows. More importantly, in April, services less rent rose 4.9% YOY, medical care services, which had been declining in 2023, rose 2.7% YOY and services less medical care services rose 5.6% YOY. See page 5. We fear the stock market may be too complacent about inflation.

Last week we noted that consumer confidence fell in May, this week we see that retail sales for April were disappointing. Seasonally adjusted total retail and food services sales were essentially unchanged from March, although up 3.0% from a year earlier. Note that the March 2024 report was revised down from up 0.7% to 0.6%. From a retailer’s perspective, after adjusting for inflation of 3.4%, real retail sales declined 0.4% YOY. The main high points of the April report were the same familiar areas: miscellaneous stores (up 6.8%), nonstore retailers (up 7.5%), and food services and drinking places (up 5.5%).See page 6.

The area of the economy that could be a concern this year is housing. Housing affordability fell in March from 103.2 to 101.1. The decline came from a combination of a slightly higher mortgage rate of 6.9% and a higher median existing single-family home price of $397,200. The $9,200 increase in home prices was much larger than the $680 increase in the median family income, which increased from $100,876 to $101,556. Similarly, the NAHB confidence index fell from 51 to 45 in May and is now below the 50-point threshold which marks a poor building outlook. Current single-family sales fell from 57 to 51 and the 6-month outlook for sales fell from 60 to 51. See page 7.  

Nevertheless, the good news is found in the technical condition of the stock market, which is much improved this week. The S&P 500 and Nasdaq Composite index made record highs on May 21, 2024 and the Dow Jones Industrial Average made a record high on May 17, 2024. The Russell 2000 index remains 14% below its high of 2442.74 made on November 8, 2021, however, the technical pattern is positive, and it is trading above all its moving averages. See page 10.

The 25-day up/down volume oscillator is at 4.02 and in overbought territory for the third consecutive trading session. This is positive; however, a minimum of five consecutive trading days in overbought territory is required to confirm a new high which means, to date, this indicator is yet to confirm this week’s all-time highs. The last confirmation from this oscillator appeared at the turn of the year when it was overbought for 22 of 25 consecutive trading days ending January 5, 2024. See page 11.

The 10-day average of daily new highs is 400 and new lows are 44. This combination of new highs above 100 and new lows below 100 is positive. The NYSE advance/decline line made a new record high on May 21, 2024, is positive, and confirms the new high in the popular indices this week. The one caveat is that daily volume has been weak and running consistently below the 10-day average for most of the recent advance. See page 12. The current rally has been a liquidity-driven event and not a valuation-driven advance. Despite the fact that earnings have exceeded consensus expectations, those expectations were significantly lowered just ahead of earnings season. The S&P 500 trailing four quarter operating PE multiple is now 24.3 times and is well above all long-term averages. See page 8. The 12-month forward PE multiple is 20.8 times and well above its long-term average of 15 times and its 1985 to present average of 17.8 times.  

Gail Dudack

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US Strategy Weekly: Eye on the Apple

With 85% of the S&P 500 components having reported earnings for the first quarter of 2024, LSEG IBES estimates that the earnings will grow 7.8% YOY on revenues that are up 3.9% YOY. This 7.8% growth rate brings the quarter’s estimate back to where it was at the start of this year and before estimates fell significantly in April. It is this downward guidance ahead of each earnings season that generates a healthy number of positive earnings surprises each quarter. There are many ways to generate a small earnings surprise which is why we do not put much weight on earnings surprises.

Apple Inc. (AAPL – $182.40), which is challenged in several of its business segments, reported its fiscal second quarter earnings last week and its results beat the Street’s modest expectations. However, revenue fell 4% to $90.8 billion and iPhone sales fell 10%. Apple reported net income of $23.64 billion, or $1.53 per share, down 2% from $24.16 billion, or $1.52 per share, in the year-earlier period.

Nevertheless, the stock surged after it announced a 4% increase in its cash dividend and authorized an additional program to buy back $110 billion of stock, the largest buyback in the company’s history. The stock climbed 7% in extended trading after this announcement.

But this response to Apple’s buyback announcement made us look at the history of Apple’s outstanding shares.* What we found was that Apple’s shares outstanding peaked at the end of the first quarter of 2013 at 26.489 billion shares. At the end of March 2024, Apple’s fiscal second quarter just announced, shares outstanding were 15.465 billion, or 42% lower. We were surprised by the extent of this decline. In other words, over the last eleven years, Apple’s earnings per share are 42% higher due to a lower denominator, not earnings growth. In the first quarter, Apple’s shares outstanding declined by 2.4%, making earnings that much higher. One could say that each share of Apple is more valuable because there are fewer shares, which is true. But it does say something about the quality of earnings, in our view. Apple is rather unique due to its cash flow and its ability to buy back shares. An investor might want to focus more on top line revenues and income, rather than on earnings per share to monitor real growth in Apple’s business.

The major leader in terms of first quarter earnings growth is currently the communications services sector where IBES forecasts earnings will rise 44% on revenue gains of nearly 7%. The communications services sector includes Meta Platforms, Inc. Class A (META – $468.24), Alphabet Inc. A (GOOGL – $171.25), Alphabet Inc. C (GOOG – $172.98), and Netflix Inc. (NFLX – $606.00).

This year to date, the S&P 500 and the Nasdaq Composite index have gained 8.8%, whereas the Dow Jones Industrial Average is up 3.2% and the Russell 2000 index is up only 1.9%. All together this suggests that despite a broadening in the rally, the bulk of the gains continue to be in the large cap technology-driven stocks.

But we also want to point out that the technical condition of the equity market has markedly improved this week. Our 25-day volume oscillator remains neutral for the fifth consecutive week; but the 10-day averages of daily new highs and new lows have gained momentum. New highs are averaging 128 and new lows are averaging 46, a combination that is now positive. In addition, the NYSE advance/decline line made an all-time high on May 7, 2024, and has now confirmed the advance. See pages 11-12.

All four of the popular equity indices have recently tested their 100-day moving averages and to date, with the exception of the Russell 2000 index, these rebounds appear successful and are in line with a normal correction. The Russell 2000 broke its 100-day moving average and tested its 200-day moving average, and despite a recent dip into its long-term neutral trading range of 1650 to 2000, the index appears to have tested this key support level successfully. In sum, the charts are positive and appear to support further gains.

It has been a busy two weeks with an FOMC meeting, a Treasury offering, inflation data, income data, and employment statistics. The next key release will be the CPI on May 15th, so it will be interesting to see how the market trades without an external stimulus to drive the daily trading.

Economic Releases

Although the job market remained solid in April, payrolls rose by 175,000, which was below expectations. Healthcare represented nearly half of the gains, while leisure/hospitality and government together added only 13,000 jobs in the month. The household survey showed modest job growth (25,000) relative to job losses (63,000) which translated into an unemployment rate of 3.9%, up 0.1%. Job growth in the establishment survey was 1.8% YOY versus the long-term average of 1.7%; however, the household survey had job growth of 0.3% YOY which was well below the long-term average of 1.5% YOY. This statistic will be important to monitor since negative job growth is a classic sign of a recession. See page 3.

Average hourly earnings for production and non-supervisory workers were up 4.0% YOY in April, down from the 4.2% YOY seen a month earlier. There has been a steady deceleration in earnings growth since the March 2022 post-pandemic peak of 7% YOY. Average weekly earnings for production and non-supervisory workers were $1005.27, down from February, but up 3.7% YOY. However, again this was a deceleration from February’s 3.9% YOY pace. See page 4.

April’s ISM nonmanufacturing index contracted for only the second time in nearly 4 years. However, both the ISM manufacturing and the ISM nonmanufacturing indices showed that prices paid rose in April (inflationary) to 60.9 in manufacturing and 59.2 in nonmanufacturing. Service industry employment fell to 45.9 and manufacturing inched higher but remained below 50 at 48.6 (contraction). See page 5.

Private residential construction spending fell 0.7% in March to $884.3 billion, reversing February’s gains, but still up 4.4% YOY. New home unit sales were up 8.3% YOY in March to 693,000 units, the best level since September 2023. However, existing home sales were 4.19 million in March, down 3.7% YOY. The price of a new single-family home rose 1.0% YOY after months of declining prices. The median price of a single-family existing home rose 4.7% YOY in March, supported by a low level of inventory. See page 6.

The existing home market is six times larger than the new home market, but sales have been slowing in both markets after the post-Covid boom. Moreover, homeownership also declined in the first quarter to 65.6% and the only area of the US with a gain in homeownership in the first quarter was the Northeast where it rose from 61.5% to 62.6%. Housing prices are rebounding, and new home sales are rising. These are good signs in an important segment of the economy. Still, many potential homeowners have already been priced out of the market. *,a%203.78%25%20decline%20from%202020

Gail Dudack

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US Strategy Weekly: It Is Different This Time

Recent economic releases suggest inflation is reaccelerating while the economy and the consumer may be decelerating. In normal times, these opposing trends would be fine since a slowdown in the economy would be enough to curb inflation in the coming months or quarters. But these are not normal times. It is an election year. And in the pre-election and election years the party in power in the White House often gives the economy a boost. The reasoning is obvious; voters tend to boot incumbents out of the White House during a recession.

As we show on page 7, inflation has never been as high as it was in 2022 without eventually triggering a recession. Moreover, a Fed tightening cycle, particularly when it is fighting inflation, has rarely ended without the real fed funds rate hitting a minimum of 400 basis points and eventually triggering a recession. However, the recent peak in the real fed funds rate only hit 290 basis points before the Federal Reserve paused rate hikes. Whether the Fed felt rates were high enough to calm inflation, or if they were fearful of triggering a recession, is unknown. But in our view, interest rates were not particularly high given the level of inflation, and therefore, were likely to stay higher for longer.

But again, these are not normal times. The main difference in this cycle, in our opinion, is the four consecutive years of massive fiscal stimulus. We have found it difficult to track the various forms of stimulus employed by the current administration, but it is worth looking at the White House website at to see the various forms of relief offered to American families. Most of these are family and small business assistance programs and do not include the aid given to illegal immigrants, the $5 trillion in pandemic stimulus, President Biden’s Inflation Reduction Act (Goldman Sachs estimates the IRA fiscal cost to be $1.2 trillion), the Bipartisan Infrastructure Bill and Build Back Better Agenda, or the estimated $56.6 billion of student loan forgiveness delivered through the Department of Education’s new SAVE program. This steady stream of fiscal stimulus is boosting economic activity in ways that are impossible to measure accurately, but it is an external stimulus, and it means these are not normal times.

Massive fiscal stimulus is typically seen only during major recessions, and it is unsustainable in the long run. Plus, as we noted in our US Strategy Weekly Inflation Redux (April 17, 2024), stimulus programs mean bigger deficits and mounting debt will ultimately translate into higher interest rates and slower economic growth. In fiscal 2024, interest outlays on the federal deficit are estimated to be 3.1% of GDP and net interest costs account for 13% of current federal outlays.

Without strong leadership in Congress, deficits and net interest costs will undoubtedly move higher. To the extent that there is a steady increase in demand for US Treasury securities the US will be able to fund these deficits. But the supply/demand balance for any security can shift very quickly. For this reason, we believe one of the biggest risks in 2024 could be found in the debt markets. In fact, the debt markets may eventually become the disciplinarian needed to put the US, and Congress, on the road to fiscal responsibility. In sum, debt markets are key to this cycle!

Economic Weakness

After some modest improvement in February, the March University of Michigan consumer sentiment survey showed weakness across the board. The Conference Board confidence index fell significantly in March and February data was revised downward. Consumer expectations in the Michigan survey were the lowest since December and in the Conference Board survey, expectations were the lowest since July 2022. See page 3.

The University of Michigan sentiment surveys are extensive and on page 4 we show sentiment by level of education and political affiliation. Those with a college degree tend to be the most optimistic most of the time, but sentiment for all levels hit a record low in 2022. Nonetheless, March data showed a noticeable improvement in sentiment for college grads. Conversely, sentiment fell for those with a high school degree or less. Politics plays a role in sentiment and optimism tends to rise when your political party is in power, which explains why Republicans have been so glum in recent years. But while sentiment in general remains well below the 100 neutral level, there has been a bit of improvement in sentiment, particularly for independent voters.

After growth of 4.9% and 3.4% in the last two quarters of 2023, preliminary data for first quarter GDP showed growth slowing to 1.6% (SAAR). Some of the drivers of first quarter growth were fixed residential investment, computer & peripheral investment (artificial intelligence?), services, and farming. The prospect of interest rates remaining higher for longer suggests that the housing market could see less growth in coming quarters. If so, a soft housing market could slow GDP further. See page 5.

Inflation Rebounds

The March personal consumption expenditure deflator was up 2.7% YOY, higher than the 2.5% YOY seen in February, and higher than expectations. While the uptick appears small, the components of the deflator show that only goods inflation was flat. Services, energy goods & services, and the PCE excluding energy, food, and housing all trended higher in March. The core PCE deflator was unchanged at 2.8% YOY in March. See page 6.

The employment cost index showed that total compensation for private industry workers rose 4.2% YOY in the first quarter of 2024 versus the 4.8% YOY seen a year earlier. Wages were the driving force, rising 4.4% YOY in the first quarter, while total benefits increased a smaller 3.7% YOY. See page 8. The Fed may focus on wage gains since inflation could prove more difficult to control with the CPI increasing 3.5% in the same quarter as wages are increasing 4.4%. Keep in mind that wage costs feed into every area of the economy and result in higher prices for consumers. One reason inflation has been difficult to control in the past is that once price gains become embedded in the economy, a vicious circle of higher prices, higher wages, is difficult to break. Only a recession can reverse the cycle.    

Technical Update All four of the popular equity indices have recently tested their 100-day moving averages and to date, with the exception of the Russell 2000 index, these rebounds appear successful and are in line with a normal correction. The Russell 2000 appears to be returning to its long-term neutral trading range of 1650 to 2000. See page 11. The 25-day up/down volume oscillator is at negative 0.50 and neutral after recording a 90% down day on April 12. See page 12. The 10-day average of daily new highs is 74 and new lows are 64. This combination of new highs and new lows, both below 100, is neutral. The NYSE advance/decline line made a new record high on March 28, 2024, confirming the advance but is now 6750 net advances away from its high. We remain cautious.

Gail Dudack

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US Strategy Weekly: A Constitutional Challenge

This could be an important week for the stock market since 30% of the S&P 500 components are expected to report first quarter earnings results. Earnings have become critically important now that expectations of Federal Reserve rate cuts are fading; but to date, earnings season has been mixed. The weekly S&P Dow Jones consensus estimate for calendar 2024 is $239.83, down $1.10, as of April 19, 2024. The estimate for 2025 is $273.65, down $0.33. The LSEG IBES estimate for 2024 is $242.06, down $0.98, and only the 2025 IBES estimate rose to $276.37, up $0.24. Using the IBES EPS estimate for calendar 2024, equities remain overvalued with a PE of 20.9 times and with the S&P estimate, the 2024 PE is 21.1 times. Both are extremely high, particularly with inflation currently at 3.5% YOY. See page 9.

However, the debt market is also having an important week given that the Treasury is scheduled to sell $183 billion of 2, 5, and 7-year notes. As we noted last week, fiscal 2024 year is a pivotal time for the US deficit since the CBO estimates that net interest outlays will soon exceed the primary deficit. This year the annual deficit is forecasted to be 2.5% of GDP, while interest payments will be 3.1% of GDP, a percentage last seen in 1995, 1992, and 1990. In fact, since 1940 net interest outlays exceeded 3.1% of GDP only once, in 1991 (3.2%), during the 1990-1991 recession. In our view, debt markets are a significant risk factor for the equity market since the supply/demand balance for debt and inflation each pose a threat.

And this week could also prove important for other reasons since we see a new trend developing in Washington DC – that of federal agencies “legislating” rules that are typically reserved for Congress. According to the Constitution, the power of the purse belongs only to Congress and all spending bills go through the Budget Committee in the House of Representatives, the legislative body that is closest to citizen voters. The Founders of our Constitution believed that the separation of powers would protect against “monarchy” and provide an important check on the executive branch. Keep in mind that our Founders fought against the British monarchy in the American Revolutionary War (1775 to 1783), and it was this experience that helped them to frame the Constitution in order to keep power with the people and not with politicians (or monarchy).

Nevertheless, after the Supreme Court ruled that President Biden did not have the authority to erase $400 billion in student debt without prior authorization from Congress, the Department of Education changed the rules on student loan repayment plans. Under Biden’s new effort, called the Saving on a Valuable Education plan (SAVE), “borrowers who originally took out $12,000 or less in loans and have been in repayment for 10 years are eligible to get their remaining debt canceled.” It also forgives debt for borrowers in public service for 10 years who have made 120 months of qualifying payments. In other cases, borrowers who have had loans for 20 years or more will see the remaining loan forgiven in total. Keep in mind that loan forgiveness impacts both the budget and deficits. It means less revenue to the Treasury and the likelihood of higher tax rates for others. There is no free money.

This week another agency, the US Federal Trade Commission, approved a rule to ban noncompete agreements commonly signed by workers in some industries. These agreements mean workers cannot just join their employers’ rivals or launch competing businesses without restrictions. According to the FTC, these agreements limit worker mobility and suppress wages and a ban should increase workers’ pay by $488 billion over the next decade and create 8,500 new businesses. (We would like to see that research!) Those who support the rule say it is necessary to rein in noncompete agreements, even in lower-paying service industries such as fast food and retail.

However, like many rules and bills coming out of Washington DC, we see both a risk and the possibility of unintended consequences. First, we doubt many minimum wage workers are asked to sign noncompete agreements. Lower-paying service industry workers tend to be supported by unions that fight for better conditions and better pay. But to the extent that nonunionized middle-level workers will have fewer barriers to switch jobs, this could force employers to increase salaries, which would be inflationary. Second, in many industries, worker knowledge, data, programs, systems, information, client lists, client relationships, etc. are proprietary and/or valuable assets of a company. The banning of noncompete agreements means this information can simply walk away and move to a competitor anytime a worker leaves the company. It could be very damaging to a business if there were no rules or agreements in place. And though there may be a need to set rules around noncompete agreements, the outright banning could be potentially harmful to many companies and to the economy.

Nonetheless, the more important issue may be that rules that impact federal and/or state finances, personal finances, or the ability of a corporation or entrepreneur to conduct business should be left to Congress, where it belongs. It should not be in the hands of anonymous unelected agency personnel in the executive branch. It simply challenges our Constitution.

New Housing Data

There were some signs of stress in recent housing statistics. Existing home sales for March fell to 4.19 million (SAAR) down 3.7% YOY, but the median price for existing home sales was $393,500, up 4.8% YOY. Newly constructed home sales were 693,000 units annualized, up 8% YOY, yet the median home price of $430,700, was down 2% YOY. From a broader perspective, the charts on page 3 show residential sales are well below both cyclical and historical peaks and home prices appear to have peaked in early 2023. Higher interest rates are apt to weigh heavily on the housing market in the coming months.

Existing home sales represent the bulk of housing transactions, but when combined with new home sales, it is clear that total sales, despite a recent increase, remain well below the average level seen over the last 30 years. Not surprisingly, total housing permits and starts for March were down on a year-over-year basis, although single-family housing activity was a bright spot for home builders. See page 4. In general, new home sales have done better in the last year than existing home sales, but builders have had to cut prices to generate demand. Existing home sales have been down on a year-over-year basis, but prices have remained relatively stable due to low inventory. In short, there are subtle signs of stress in both segments of the housing market. See page 5.

Technical Update

Last week we pointed out the technical breakout patterns in gold and silver. This week cocoa and coffee futures have had huge gains. These two commodities could increase food prices in the near future. See page 7. All four of the popular equity indices have recently tested their 100-day moving averages and to date, the rebounds from these levels have been successful. This is in line with a normal correction. However, note that the Russell 2000 appears to be slipping back into its long-term trading range of 1650 to 2000. See page 10. The 10-day average of daily new highs is now 57 and new lows are 94. This combination of new highs and new lows below 100 is neutral but note that new lows now outnumber new highs. This is not unusual in a correction, but both trends should reverse soon. In our view, the equity market remains vulnerable to inflation, rising interest rates, and disappointing earnings and we remain cautious.

Gail Dudack

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US Strategy Weekly: Inflation Redux

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

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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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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US Strategy Weekly: Dot Plot Mania

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

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

Dot-Plot Mania

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

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

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

Technicals are Trying

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

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

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


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

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

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

Gail Dudack

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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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