Are you a 'Have' or 'Have-not?'

If you are a “Have,” you probably are experiencing angst as you watch your portfolio dwindle. If you’re a “Have-not,’’ you probably don’t own a single stock. In meetings this week in Atlanta, advisors for high net-worth clients report some cashing out, while others want to leverage up and buy stocks. In a tony suburb of Atlanta, I was on a panel before a group of advisors, many of whom were millennials. From the stage, I saw concerned looks when I suggested that inflation will be stubborn for longer than expected. “What will turn this around?” I was asked. Don’t suppose he liked my response. But I saw the room nodding when I suggested food inflation is underappreciated and could lead to social unrest. Food shortages and price spikes spawned the Arab Spring uprisings a decade ago, and the Russia-Ukraine war has the region confronting the same problem again. And then there’s the other necessity, energy. A gallon of gas costs more than it ever has (nominally speaking). As higher costs slow the economy (more below) and threaten margins, some companies are hiring less; others including Amazon, Lyft and Snap have stopped altogether and are considering layoffs. Piper Sandler thinks over a million jobs could be cut by firms that over-hired and overpaid the past two years. Have-nots who enjoyed the hottest wage gains are most at risk—and most stressed. They’ve burned through Covid savings (the personal savings rate is now at a 14-year low 4.4% after hitting a record high 33% just two years ago) and are ramping up use of high-rate credit cards. Among those earning under $40K per year, 73% worry about maintaining their living standard, a 17-point jump in a year, a Monmouth poll found. No surprise Michigan sentiment fell this month to its lowest level since 2011 (or that President Biden’s low 40s approval rating is lower than Trump’s at this stage in office).

Haves have their worries, too. When tallied as a percentage of GDP, the combined wealth erosion associated with this year’s stock- and bond-market setbacks is on par with all but the deepest bear markets. But for all this damage, the Haves are still earning good money and spending it. Nordstrom earnings were instructive. Revenue and profits surprised as the high-end retailer increased prices without seeing transaction volumes drop. Ralph Lauren and Macy’s also beat, with the latter calling out luxury strength. It was a far different story than last week when discount giants Walmart and Target disappointed. Their revenues rose but so did their costs, causing margins to slip, and their inventories are piling up. Spending remains robust (more below) but many consumers are substituting store brands for name brands and hitting dollar stores for necessities. Both Dollar Tree and Dollar General raised guidance this week. While cracks (noted above) are starting to appear, the job market’s still going strong. Short of a black-swan event (not so rare these days), the economy doesn’t go from nearly two job openings for every unemployed person to zero on a dime. Inflation is the issue, and millennials/GenZers have never seen anything but a Goldilocks 2%. Take the 58% of monthly income today’s renter/owner spends on housing. While not far from the 51% average since 1972 that older generations remember, it’s well above the 36.5% average from 2010-2019 to which the young had grown accustomed. As goes housing, count them among the Have-nots.

You can probably count many Robinhood account holders among the Have-nots. Even after falling 29% in four months, Big Tech and other growth names still comprise about 65% of S&P 500 market cap, with mega-caps dominating the average. Most remain well above trend and falling. Market-cap weighted indexes actually hide the carnage. The average stock in the Nasdaq, Russell 2,000 and Russell 1,000 is down 51%, 47% and 32%, respectively. Luckily for fund investors, active managers have been doing better. Goldman Sachs reports that 56% of large-cap mutual funds are beating their benchmarks year-to-date, the highest rate of outperformance since at least 2009. While the S&P has stabilized in the 3,900-4,000 zone, defensive leadership has not changed. It’s rare defensives lead sustainable rallies after two weeks of consolidation near market lows. Upside breadth has been lacking, too. Every time the S&P in recent weeks has neared a bear (a 20% correction marked by a close below 3,837), it’s backed off. Over the last 35 years, the four times the S&P flirted with, but averted, a bear saw stocks enter a new bull market (1990, 1998, 2011 and 2018), with the decline arrested by Fed easing or a dovish pivot. Wanna bet on a pivot? Without more pain first? History suggests growth and inflation need to weaken further before a bottom occurs. Enjoy the long weekend. The market will be closed!

Positives

• The consumer is still spending Personal spending increased 0.9% month-over-month (m/m) in April, following an upwardly revised 1.4% rise in March and beating market forecasts, a sign consumption remains robust despite rising prices. There was widespread spending across goods and services, led by motor vehicles and parts, food services and accommodations as well as housing and utilities, while spending on gasoline and other energy goods decreased. Adjusted for changes in prices, purchases of goods and services increased 0.7%, higher than March’s 0.5%.
• Peak inflation for real? Core PCE, the Fed’s preferred inflation measure, slowed a second straight month in April to 4.9% year-over-year (y/y). It marked the first time since early in the pandemic that the core rate experienced back-to-back monthly declines. The headline rate rose by its smallest amount in a year and a half. But that was due largely to a decline in gas prices that have subsequently rebounded, though other components indicated some softening.
• No recession signal here The Philly Fed’s coincident index shows activity still increasing in all 50 states. In its 43-year history, a recession hasn’t happened without a 5-state decline for at least seven successive months in the history of the data.

Negatives

• Home sales fall again New home sales plunged 17% m/m in April to a 591K unit annual rate, the slowest sales pace since April 2020, while pending home sales slipped nearly 4% m/m, also to April 2020 lows. New home sales have now fallen 30% the past four months, as higher mortgage rates and declining affordability weigh on building activity and sales. Inventories shot up in April, though as noted below, there’s debate about whether that accurately portrays the situation. The median sales price shot up 20% y/y to a record $450,600 and is up 45% over the past 24 months. Very tight inventories, along with higher prices and mortgage rates, were culprits again for pending sales.
• Isn’t this what the Fed wants? Markit’s initial read on May manufacturing fell to a still robust 57.5, a 3-month low, while its flash services PMI sank to 53.5, the lowest since January. Despite this slowing, the composite PMI future output index advanced to a very strong 70.2.
• Isn’t this what the Fed wants? Durable goods orders rose less than expected in April, and March was revised down, too. Underlying orders showed a similar softening. Core orders also slowed, though core shipments rose more than expected as businesses continued to adhere to capital spending plans. Elsewhere, high frequency data showed job postings on Indeed down 8.5 percentage points from their Dec. 31, 2021 peak (but still 55.6% above Feb. 1, 2020 levels). Additionally new job postings from Revelio Labs fell a broad-based 2 million in April and continuing jobless claims rose.

What else

April plunge in new home sales is misleading So says Evercore ISI, which notes builders are deliberately preventing buyers from purchasing homes until they are further along in the construction process. This depresses sales while pushing the “homes for sale” number higher, making the inventory look larger than it is. That—along with employment and pay increases that have homebuyers in good financial shape—is why house prices continue to surge to new highs. The average 30-year mortgage rate fell a second week to 5.10%, still attractive on an historical basis (the past decade’s post- crisis lows were the anomaly).

Energy has energy Even with global slowing, Energy is riding macro tailwinds as crude oil, natural gas and gasoline bear down as the summer vacation season approaches. (Finding a room on the road is going to be hard this Memorial Day weekend if you haven’t made reservations.) More than 70% of the sector traded to a 52-week high on Thursday, a remarkably robust reading for a day that was largely characterized by laggards leading (i.e., retail, semiconductors and housing).

Uh oh Erstwhile economist John Kenneth Galbraith wrote in 1929 that when leaders seek to assure by saying, “‘The economic situation is fundamentally sound’ or simply ‘The fundamentals are good,’ all who hear these words should know that something is wrong.” So, how, in a tweet, did European Commission President Ursula von der Leyen describe the outlook for Europe’s economy in the face of inflation and Ukraine war headwinds? “Our economic fundamentals are strong!”

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