Investment Insights

 — Steve Orr 

Twisting in the wind

Okay, another December Fed meeting, another Fed pivot. The “Powell Pivot” three years ago started as a definite announcement in that December when the Fed was going to raise rates. After a 9% drop in the S&P 500 and NASDAQ that month, Powell relented early in January 2020. The NASDAQ ripped 20% higher by the end of April. Sound familiar? We started December 2023 with the Fed message “higher for longer.” On December 13 the message became “considering rate cuts.” Then back up just a few days, post Turkey Day we were staring at 1.5% GDP growth in the fourth quarter and continued rolling recession. With two months of data in the books, the fourth quarter could have 2.3% GDP growth. Not bubbly and certainly not recessionary.

And the rest of the fundamentals? Job growth has slowed but is well above recessionary levels. Unemployment claims and the unemployment rate are at full employment levels. The core CPI sits right at 4%. History tells us that the Fed has cut rates four times when core CPI was 3.9% or higher. Of the four cuts, three were during deep recessions and the fourth was during a war.

Wall Street has pressured the Fed for rate cuts since mid-2022. In this latest rally, rates markets are now pricing in six rate cuts by the end of 2024, where the Fed is projecting barely three. Recent retail sales and manufacturing data are not exciting but not flashing recession either. Forward-looking surveys suggest a continued rolling slowdown in the U.S. So, with fundamentals so steady, we wonder what the Fed is seeing that we do not.

Either the Fed sees a much greater chance of recession, or they want to get a rate cut or two in before the election. You decide. We wonder if the Fed is twisting in market or political winds. It is interesting to note that FOMC members Mester, Williams and Goolsbee are out on tape Monday morning trying to talk Wall Street back from rate cuts. 

Rally long

We are suspicious of most things. Big 12 referees, black cats and economists are on the list. We are deeply suspicious of fast market moves, in either direction. The rally from October 27 has been one of the fastest we can remember. The first 10% move from the low through Turkey Day was largely confined to the big indices. Since then, the rally has broadened out to include mid- and small-cap stocks for the first time this year. The S&P 600 Small Cap index is up 11% since Thanksgiving, while the Mega-Cap 7 that drove most of this year’s price action (+104%!) is up a minuscule 0.5%.

When all stocks in an index participate, rallies tend to have staying power over the intermediate to longer term. Last week the Dow Industrials was the first big index to hit a new all-time high in this cycle. The S&P 500 and NASDAQ are within 1% and 7% of their late 2021 all-time highs. Markets rally and top by price leading breadth. If a rally is sustained, it is usually because more and more names participate in the rally. In the current run, short-term trust indicators hitting rally thresholds include the percentage of stocks at 20-day new highs, advancers over decliners over several time periods and the five-week total of advancers over decliners.

When markets move fast, these indicators tend to show overbought conditions. Relative strength is also very overbought for all of the S&P indices. In these situations, both of the big indices have backtracked several percentage points before resuming their uptrend. You should expect a few days of consolidation before year-end.

We like Januarys to be positive. Recent Januarys have seen mixed performance at best. Eric Johnston at Cantor Fitzgerald pointed out to us that the S&P 500 has run 15% or more 24 times since 1960. In 15 of those cases, returns were negative in January or February. The next few months is short term. The broadening participation and rising advance-decline lines support a longer-term rally. Let’s ask Santa.  

Back home

We bring up the global and U.S. picture often in our writings because most of the larger stocks in client portfolios earn revenue here and abroad. The U.S. remains one of the few economic bright spots on the globe. Texas, in turn, is one of the bright spots in the U.S.

We are experiencing some of the same symptoms as the rest of the country: slowing job growth, lack of housing supply and worries about the future. Texas’s job growth is still ahead of the rest of the country. According to the Texas A&M Real Estate Research Center, the state attracted over 453,000 new potential workers — a new record. Our unemployment rate has held steady at 4.1%. WARN notices of impending layoffs are rising back to pre-shutdown levels. A greater proportion of layoff notices this year was concentrated in the Austin area and in financial services. Falling numbers of job openings mean demand for labor is moving down to match supply.

In the third quarter, manufacturing experienced a bounce and the Dallas Fed’s manufacturing survey has ticked up the past two months. Their employment forecast projects the state’s employment growth to slow to 2.5% this quarter, well above the state’s long-term average of 1.7%. The Fed did not give a 2024 estimate.

The Dallas Fed’s Texas Manufacturing Outlook Survey turned negative May through August but has returned to positive territory over the last couple of months. Revenue and new orders moved lower and are stabilizing at what the Dallas Fed calls a “soft landing” level. Business leaders are not optimistic about next year, as they are seeing their customers delay or cut orders. Reading the survey comments, they worry about uncertainty and global unrest. One machinery manufacturer reported losing a customer to China because the finished product price was the same as what the manufacturer pays for raw material.

Like the rest of the country, home sales have been dented by mortgage rates. Texas consumer confidence has fallen along with business. Activity is definitely slowing but remains at levels above the rest of the country.