Investment Insights

 — Steve Orr 

Quarter don’t end.

Last week ended on a high note thanks to Wednesday’s clean-up rally. End-of-quarter positioning by fund managers, along with rebalancing by pension funds, helped several U.S. indices to new highs. The S&P 500 just finished a five-month win streak and the NASDAQ a second five-month streak in the past year. For the quarter, the S&P 500 set 22 new highs; not a record, but impressive. Surprisingly, the big index’s +10% gain is only the 11th best since 1950. In that span, there have been 16 cases in which gains exceeded 8%. In 15 of those, the S&P 500 went to further gains in the year. The outlier is the 1987 crash, for which much of the blame can be laid on Congress for their merger and tax rule changes. This year we hope Congress focuses on getting spending right and nothing else.

Another point about those 15 cases is that the next couple of quarters’ returns were no great shakes. We have argued for a pause or mild correction to calm down some of the frothy sentiment. Just because fundamentals or textbooks say a correction is needed, does not mean Mr. Market will heed the call. There is plenty of ammunition for cyclical Bears to worry over. Valuations remain above average at 21+ times forward earnings. Sentiment remains elevated and net longs are near maximum. The trend is your friend, goes the old saw, and it rings true. The secular Bull remains in place, despite the trend being a bit stretched.

We see a near-term correction as healthy and an opportunity to put funds to work. We would like to time jump over the next two quarters, as these first quarter rally years also see gains in the fourth quarter. A time warp would also jump over most of election season. Since a time warp is not in the cards, we note that April stock returns average above 1% since 1950. Our Stock Trader’s Almanac says that gains typically occur after Tax Day, with traders gearing up for earnings season. 

Dueling speeches

Line’ em up: Seven Fed members speak this week, including Chairman Powell. His press conference after the FOMC meeting and speech last Friday show a remarkable switch in focus. Members Cook and Bostic are calling for caution and possibly no rate cuts this year. Recall two years ago when the Fed began raising rates, the talk was all about knocking out inflation. These last two speeches focused on job growth. Yes, the Fed does have a dual mandate: price stability and full employment. No one is quite sure how to define either one, but Congress added full employment to the Federal Reserve Act in 1977. The inflation battle of reaching 2% per year is not yet won. We will be watching for clues from the speeches this week.

This inflation cycle is running very close to historical norms. The Consumer Price Index rose for 26 months and has fallen for the last 20. Falling inflation just means that prices are rising, just not as fast as a year ago. Economists are rightly scared of deflation or falling prices. Consumers tend to put off purchases for lower prices in the future, stunting economic growth. We are on record as favoring lower prices for our pocketbooks.

History does rhyme, thanks to Mark Twain, and inflation appears to be hitting a trough before rebounding higher in the next couple of years. Call us suspicious, but we wonder why Powell is suddenly changing the narrative from inflation to jobs. Powell’s words create the possibility of a June rate cut if the next couple of months’ jobs numbers fall below expectations.