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New highs – let's get some confirmation — Week of May 20, 2024

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Wall Street: short patience; long just about everything

indexwtdytd1-year3-year5-yearindex level
S&P 500 Index1.6011.8028.2610.4115.005,303.27
Dow Jones Industrial Average1.356.9021.747.6811.5240,003.59
Russell 2000 Small Cap1.793.8919.17-0.437.832,095.38
NASDAQ Composite2.1511.4732.588.7417.3816,796.67
MSCI Europe, Australasia & Far East1.688.4316.254.298.352,381.35
MSCI Emerging Markets2.728.4015.87-3.394.941,099.79
Barclays U.S. Aggregate Bond Index0.57-1.401.86-2.860.112,131.63
Merrill Lynch Intermediate Municipal-0.11-0.782.91-0.601.24312.43

As of market close May 17, 2024. Returns in percent.

Investment Insights

 — Steve Orr 

Back again

Life is so good, meme stocks are a thing again. We wonder who finds natural gas, copper and gold breaking higher when you can jump on the YOLO train of GameStop and AMC Theaters rocketing higher? Hey, AMC went from $2.91 on May 10 to $11.88 on the 14th. Those gains did not last for more than a day, but the stock is still up 52%. GameStop is only up 14% as of this writing. Ditch the fundamentals and technicals and gamble. We do not subscribe to that line of thinking and shake our heads in wonder. We are more comfortable with our 52% gain in the S&P 500 since the end of its last Bear cycle in October 2022.

Since we are back at the meme-anything-goes market, we would point out that the latest all-time highs in the major U.S. indices should be viewed with caution. Consolidations take time and price or both. Markets took about a six-week break to consolidate and retrace back to their late March highs. The S&P, Dow Industrials and NASDAQ all reached new highs over the past three days and are mildly overbought. Rather than the steady march higher of last November through January, we look for a more muted inconsistent rally over the summer.

The geopolitical landscape is unsettled, which can pull Treasury rates back and forth in flight-to-safety and run-to-risk trades. The intermediate and long-term trends are still toward higher rates. Liquidity remains very high, supporting borrowing and investing in stocks. The Fed should be on hold, and inflation remains a problem. Scoring your LIFT market drivers gives you Liquidity = +1, Inflation = 0 (neutral), Fed = 0 and Treasury Rates = -1. Adding them up gives you a zero, which reminds us of junior high grades (Ed note: somebody else’s grades). Balanced market drivers mean lots of back and forth ahead. 

A tenth

No, this is not a request for a tithe. April’s Consumer Price Index fell one-tenth from 3.5% to 3.4% annualized rate in March. Reason to celebrate? Hardly, but that did not stop Wall Street from pulling out the rate cut drums. Look, we remember, well, any decade prior to this one, a one-tenth change in CPI was (is) noise. Housing makes up roughly 40% of CPI. The shelter component of CPI is rising at a 5%+ clip. “Supercore,” which cuts out gas, shelter and a few other necessities, is closely watched by the Fed. It is running at a 5% pace over the past year and 6.3% annualized rate over the past three months.

Not to read like a broken record here, but sub-4% unemployment, second-gear 2.5% economic growth and relatively stable gasoline costs are not the recipe for a Fed rate cut. Rising unemployment, increasing layoffs and some outside shock (e.g. Middle East change) are needed to move the economic needle toward recession and rate cuts. 

Waiting

Wall Street and Washington do not always get the message. We appreciate the FOMC members who have counseled patience in recent speeches. Fed Governor Bowman was on the tape last week stating that inflation will remain elevated for some time. Cleveland Fed President Mester remarked that wage inflation is still too strong. Recall back in 2022 the Fed thought raising rates would quell wage inflation. Through March, the Atlanta Fed’s median wage growth tracker is rising at 4.7% annual clip. Yes, that is the lowest reading in 26 months, but there is little anecdotal evidence suggesting wages are stagnating.

Pleas for a Fed rate cut from the current 5.25% to 5.5% target range come from a number of markets. Housing and car finance are at the top, but let’s not forget anyone using a credit card. Cutting interest rates when employment is below 4%, markets are hitting new highs and inflation is at best flat, seems like pouring gasoline on the fire.

At the June meeting, the Fed will release its update on its Summary of Economic Projections. These are the staff’s forecasts and FOMC members’ views on short-term rates. The “Dot Plot” graph of members’ rate views gets a lot of attention on Wall Street. If recent speeches do not tamp down the calls for a rate cut, then we expect the June 12 Dot Plot to show more members with only one or no rate cuts over the next year. Perhaps that would get the message across that markets need to turn their attention to earnings and economic growth. 

Speaking of

Earnings season came to an unofficial close last week with Walmart’s report. WMT posted 60 cents per share in net income, some 14% above analysts’ expectations of 52.5 cents. The retailer said customers are spending more (inflation) on necessities and less on big electronics and other hard goods. This fits with Starbuck’s lowering sales forecasts for the rest of the year and Home Depot reporting lower sales for the third straight quarter.

TJ Maxx, Target and Lowes turn in their first quarter homework this week. For the quarter, the S&P 500 has averaged earnings growth of 5.7% over 2023’s first quarter. FactSet reports that is the highest gain since the second quarter of 2022 (5.8%). Semiconductor hardware and equipment led the charge with a 79% growth in earnings. Excluding NVIDIA and its semi-peers, the S&P 500’s growth rate would fall from 5.7% to 3.2%. In other words, earnings growth would match year-over-year inflation. Earnings growth equaling inflation growth means unit sales would be stagnating in coming months. Recession? No, but definitely the slowdown we thought was coming last fall.

April’s preliminary employment surveys should show the unemployment rate unchanged at 3.8% and net-new payrolls near 200,000 new jobs. Not bad for a late cycle, second gear economy. We expect March’s blowout +303,000 number to be revised lower. Durable Good Orders (think airplanes and big machinery), Factory Orders and PMI indices round out a busy data week. 

Wrap-Up

Large company stocks continue to carry the water for the stock market. Recent new highs were led by utility and consumer staples stocks on thin volume. Not the kind of lasting rally we like. We are on consolidation alert and not yet sounding the rally all-clear.

Rates jumped lower by almost a quarter of a percent after the very minor change in the consumer price index. There is a lot of hope for lower rates in the bond market. Actual bad news needs to happen to cause rates to drop. We would rather not have that scenario. Our indicator dashboard remains green, tilted toward U.S. with some minor readings from Emerging Markets. Wall Street needs more rate-cut patience. 


Steve Orr is the Managing Director and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here

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