Crosscurrents

You’re going to have to learn to deal with these if you plan to live to 100. That’s the life expectancy a well-oiled covering-all-bases Hartford, Conn., team uses when working with its investor clients. I visited a lot of “characters” in the advisor community here. Kindness and a steady hand pervade them all. A Gen X advisor tells his clients, “I have this bald head, I take all the stress” so they don’t have to. (Hold on, stress has nothing to do with a bald head, which by the way—bald is beautiful!) Another advisor has background music on while he shares that his new Skechers are “like walking on clouds.” A musician himself, he once played at Ethel Kennedy’s home and was given a tour by Caroline! Stress is evident nowhere even as crosscurrents are everywhere. Evercore ISI’s trucking survey is plumbing Covid-stunted May ’20 lows but its airline survey has soared to near a record high. Jobless claims among $200k+ earners are at their highest level since the pandemic and above those making under $25k (a possible canary in the coal mine), but the “jobs plentiful” tally rose again and remains extremely elevated. Conference Board expectations are down to ’22 lows but earnings from Staples icons (Procter & Gamble, Coca-Cola, etc.) and spending in Q1 (more below) reflect a consumer who is just fine. M2 is contracting the most since the Great Depression but, after the biggest expansion since WWII, it’s still trillions above its pre-Covid trend (different this time!). All these crosscurrents left institutional investors offering an amazingly wide range of views in a survey this week on the year-end ’24 levels for the S&P 500 (3,450 to 4,800) and earnings ($190 to $240).

Big Tech earnings gave a lift to the major indexes this week. At this writing, what looked to be a down April for the S&P (usually one of the seasonally strongest months of the year) is now trending positive for the month. What’s notable is how just a few names are doing the driving. Indeed, Information Technology as a whole has been the clubhouse leader in the percentage of stocks trading to new 3-month relative lows over the last few weeks, with relative highs in the market’s more defensive outposts such as Staples and Health Care. This is illustrative of the narrowest stock leadership in an up market since the ’90s, with only two stocks (Apple and Microsoft) accounting for almost 25% of the market cap in the Russell 1000 Growth Index and six stocks (Microsoft, Google, Amazon, Meta, Nvidia and Salesforce) explaining YTD performance for more than half of the S&P and Nasdaq 100. JP Morgan says this concentration indicates recession risk is far from priced in. Even with Microsoft shooting up 7% midweek, declining NYSE stocks outnumbered advancing stocks by nearly 3 to 1 on Wednesday, only 38% of Nasdaq issues traded up on the day, the Russell 2000 probed fresh YTD lows and the Dow Transports finished 350 basis points lower. This speaks to how “split” this market trades under the surface, Strategas Research says, adding “unhealthy” may be the better word.

The road ahead may be difficult to read for bulls and bears alike but Fundstrat believes the Oct. 12, ’22 bottom will hold. Since then, the S&P has remained above its 200-week average and managed two consecutive quarterly gains. Since 1950, such outcomes have always signaled a low is in place. Moreover, even as earnings and free cash flow growth have fallen further into negative territory, Q1 earnings-to-date are handily beating estimates and the breadth of EPS momentum (the number of companies with a positive change in 12-month forward expectations) has been improving since January. Still, with stimulus and behavioral changes anything but mild in the pandemic boom, Gavekal Research believes it’s wishful thinking to expect the bust to be mild. Policymakers may have calmed runs on U.S. banks—the verdict is still out in First Republic—but bank credit is contracting, inflation is accelerating and the economy is slowing (more below). Is this the definition of “stagflation?” And what about the debt ceiling? While there’s debate on when the X-date will hit (more below), midsummer seems likely. In the fixed-income market, 1-year credit default swaps have shot above 140 basis points, nearly double 2011 crisis highs. Meanwhile, the S&P is near the high end of its range. Surely both can’t be right!

Positives

• The consumer is not going down without a fight Real Q1 consumer spending jumped 3.7%, almost quadruple Q4’s pace. That wasn’t enough to lift overall GDP, which slowed to a below-consensus 1.1% on a big disappointment in inventories (more below). After a modest March—consumer spending was flat—the Bureau of Economic Analysis said 4-week average card spending accelerated above 9% in April and weekly Redbook chain-store sales last week rose the most in three weeks. WardsAuto projects “strong growth” in April vehicle sales.
• Housing reviving New home sales jumped to their highest level in a year and weekly mortgage applications climbed. Homes sold but not yet started reached a 13-month high, a positive for single-family starts. FHFA and Case-Shiller home prices inched higher, the latter ending a 7-month decline. Pending home sales fell for the first time since November but the National Association of Realtors blamed a severe shortage of inventories as boomers stay put. Builders are rushing to try and fill the void, as permits for single-family homes continue to climb. They were up 4.2% in March.
• Early signs of inventory rebuild A big drawdown in inventories carved 2.3 percentage points out of the initial Q1 GDP estimate: real GDP ex-inventories would have risen 3.4%. However, in March retail inventories ex-autos doubled consensus and wholesale inventories also advanced.

Negatives

• Inflation is not going down without a fight Estimated Q1 PCE jumped 4.2% at the headline levels, triple consensus and up from 3.7% in Q4 ’22’s. Core PCE accelerated an even faster 4.9%, the highest reading in a year. A 4% spike in the GDP deflator slashed 5.1% nominal GDP growth to 1.1% in real terms, and the Employment Cost Index accelerated during the quarter on higher wages. PCE slowed slightly in March, dropping the y/y core rate to a still elevated 4.6%.
• Manufacturing retreating Real capex intentions fell in the first quarter, undermining improvement in headline durable goods orders, and regional Fed surveys reflected additional capex weakness in April. The Dallas Fed’s manufacturing gauge fell deeper into contraction, hitting a 9-month low, and the companion Richmond Fed index sank further vs. expectations for a slight increase.
• Higher-earners looking at chopping block? Conference Board confidence among households earning more than $125k fell 12 points in April, causing the overall consumer sentiment gauge to decline more than expected to a 9-month low.  Notably, the jump in jobless claims among those earning more than $200k represents an aggregate income loss of $105 billion vs. $40 billion a year ago. While the present situation component edged up, expectations plunged to historical lows.

What else

Secular bear for king dollar? Who is going to buy all this debt? 1) With the U.S. government increasing debt by $2 trillion or more a year while the Fed simultaneously shrinks its balance sheet, a flood of new supply is set to hit markets. 2) China, Saudi Arabia and Russia are running large current account surpluses and are unlikely to increase their demand for Treasuries anytime soon. 3) Hard to see commercial banks stepping up in the current environment.

Washington rarely acts until the stock market does An awful year for stock investors means capital-gains tax receipts are coming up short, a key reason the debt-ceiling drama has been pulled forward to mid from late summer. An April 25 surge in tax receipts may have pushed the X-date for a default from June to late July.

Unlikely just “transitory” Florida gained $63 billion of new income from pandemic-era migration—the next closest state was Texas at $17 billion. Income from the average tax filer moving into Florida was $77k higher than the average filer moving out. To the opposite, California and New York lost $40 billion of income each from residents fleeing during Covid. Manhattan alone suffered a $31 billion hit.

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