May 20, 2024

“No wise pilot, no matter how great his talent and experience, fails to use his checklist”

Charlie Munger

Picking up on this aviation theme, my brother, who is a senior Captain with Delta, often tells me things look different from 40,000 feet. Well, we are there, and its time to look at what’s outside. Here are the numbers.

The S&P 500 added 1.4%, the Dow Jones Industrial Average gained 1.04%, the Nasdaq came back up 2.1%. International markets continued their strong performance, though the FSTE 100 cooled off a little, down .016%, but the broad market MSCI-EAFE was up 1.5%. A side note, Commodities were up 3.5% and Oil closed at $80 a Barrel. 2-Year Treasuries yield finished at 4.82% and the 10-Year paid 4.42%.

The headline was the Dow closing as U.S. stocks ended mostly higher Friday, the Dow Jones Industrial Average had modest gains taking the blue-chip gauge to a finish above 40,000 for the first time ever. Stocks had a strong week across the board, helped by easing inflation numbers. As reported by MarketWatch reporter Christine Idzelis, The Dow gained 134.21 points, or 0.3%, to close at 40,003.59, clinching a fresh record peak. The S&P 500 rose 6.17 points, or 0.1%, to end at 5,303.27. The Nasdaq Composite slipped 12.35 points, or 0.1%, to finish at 16,685.97. Despite that, all three major indexes logged weekly gains as investors appeared encouraged by signs that U.S. inflation eased in April based on a May 15 reading from the consumer-price index. The S&P 500 and Nasdaq each increased for a fourth straight week, while the Dow notched a fifth straight week of gains. All three benchmarks scored their longest weekly winning streaks since the stretch ending Feb. 9, according to Dow Jones Market Data. On top of that, it was another solid week for global stocks with the rally broadening out to include small-caps, Europe, and emerging markets.

Speaking of inflation, the consumer price index was up 3.4% in April versus a year earlier. That’s down from March’s 3.5% rate. Prices were up 0.3% from the prior month. It was the “first favorable inflation report in four months,” as Barron’s Megan Leonhardt wrote. That was enough to spark a rally in stocks and Treasuries (bond yields fall as prices move up.) The CPI report contained other good news for investors, Megan notes: “Under the hood, there was room for optimism: Core prices for goods prices fell outright, with a decline of 0.1%, and core services prices rose by just 0.4%, the weakest gain since December.” Also, “The retail sales report is a good example of how Wall Street is rooting for bad economic news — bad news is good news because if consumers stop spending, the Fed will cut,” Navellier & Associates’ Louis Navellier said. However, U.S. inflation appears to have gotten stuck in the low to mid-3% range, leaving it well above the Fed’s 2% goal. Until the rate of inflation slows further, the central bank is unlikely to reduce a key short-term interest rate that now sits at a 23-year high. Despite that, the market is pricing in two rate cuts this year, what do they think they know?

Much of the good news for stocks has come from earnings reports in recent weeks. More than 90% of the companies in the S&P 500 have reported first- quarter results, according to FactSet, with 78% of them delivering better-than-expected profit. But FactSet earnings analyst John Butters suggests a secondary boost from the latest earnings season. Companies just aren’t as worried about inflation, he writes: FactSet searched for the term “inflation” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from March 15 through May 17. Of these companies, 219 cited the term “inflation” during their earnings calls for the first quarter. This is the lowest number of S&P 500 companies citing “inflation” on earnings calls going back to Q2 2021 (218). It also marks the seventh consecutive quarter in which the number of S&P 500 companies citing the term “inflation” has declined quarter-over- quarter.

Two things, one, any inflation pressures can be passed on the consumer, and two they believe Inflation is likely easing. I find this bit of tone deafness alarming especially when I go to the grocery store.

On the jobs front: the number of Americans who applied for unemployment benefits last week fell by 10,000 to 222,000 and indicated the U.S. is still experiencing a low level of layoffs. Economists polled by the Wall Street Journal had forecast new claims to total 221,000 in the seven days ending May 4, based on seasonally adjusted figures. As Market Watch reports, New jobless claims fell in 32 of the 53 states and territories that report these figures to the federal government. Claims rose in 21 others, but the increases were small.

Some good news on housing? Also, from MarketWatch, U.S. mortgage rates fell for the second week in a row, as the economy cools. Though rates remain over 7%, they are at the lowest level since mid-April. The 30-year fixed-rate mortgage averaged 7.02% as of May 16, according to data released by Freddie Mac last Thursday. Separate data by Mortgage News Daily said that the 30-year fixed-rate mortgage was averaging at 6.99% as of midday Thursday. The Mortgage Bankers Association’s survey noted that the 30-year was at 7.08% as of May 10. Construction of new homes rose 5.7% in April, as builders ramped up new projects. The pace of construction accelerated up as builders try to meet pent-up home-buying demand as mortgage rates are poised to fall over the coming months. Housing starts are generally a volatile data series, but the data indicates a broader trend that home builders are feeling nervous about buyer demand in the face of how expensive it is to purchase homes. April’s rebound did not retrace the sharp drop in March. Mortgage rates are falling as the U.S. economy slows, which is good news for the housing market. Freddie Mac said: “Given the news that inflation eased slightly, the 10-year Treasury yield dipped, leading to lower mortgage rates,” Sam Khater, chief economist at Freddie Mac, said in a statement. “The decrease in rates, albeit small, may provide a bit more wiggle room in the budgets of prospective homebuyers.” In many markets, prospective homebuyers are hitting affordability ceilings — home prices that are too high for them to qualify for a mortgage,” she added, and also due to competition with cash buyers who are immune to rates.

So, what can we expect going forward? The first quarter was a nice surprise, April was a big downer but so far in May things are going well, except inflation of course, the markets are not yet technically oversold yet but at 40,000 we are getting close. So, expect some summer volatility, see if we actually get those expected (or as I believe, Wall Street is trying to bully the FED into,) rate cuts.

I will close with on Bull perspective: Larry Tentarelli, chief technical strategist, Blue Chip Daily Trend Report: “Weekly chart trends continue to set up well. If the Goldilocks scenario continues to play out, of moderating inflation and slightly higher, but acceptable, labor market weakness, we believe this sets the stage for a move to 42,500 for the DJIA by the end of this year.” Let’s hope he is right.

On a personal note, I wish you all a happy and safe Memorial Day weekend, please remember the reason we have the holiday for all those who served and died for our freedoms, I will be taking next Monday off so I will return to the newsletter on June 3rd.

Thank you,

Mike