May 13, 2024

“Investing puts money to work. The only reason to save money is to invest it”

Grant Cardone

I hope you all had a nice Mother’s Day, as my mother often reminded me, (after she insisted, I make my bed, which I still do to this day.) The love and sacrifice of parents make your life possible. Seriously, I wish all mothers a well-deserved day to honor them.

So last week has very good for all markets even with little economic news to report. Here are the numbers. The S&P 500 gained 1.9%, the Dow Jones Industrial average added 2.2%, the Dow, which finished its best week of the year, with an eighth-consecutive gain on Friday. The blue-chip index is up 4.5% over that stretch, outpacing the broader S&P 500 by nearly a percentage point. the Nasdaq lagged but gained .82%. The big winners were the international stock, particularly the FTSE 100 which set new high, gaining 3.2% for the week London’s FTSE 100 rose 0.4% to 8,384, taking its gains over the last three months to 10.4%, after the Bank of England left interest rates unchanged at 5.25% but implied that a rate cut was coming soon, possibly by June. The MCSI-EAFE added 1.28%, 2-Year Treasuries closed with a yield of 4.872% and the 10-Year paid 4.5%.

On Friday, investors digested a survey on consumer sentiment that was weaker than Wall Street expected, but that did not derail the U.S. stock market’s climb for the week. The Dow’s weekly gain of 2.2%, was its best performance since December, as the blue-chip gauge advanced for a fourth straight week.

However, the US economy is not out of the woods awaiting April’s Consumer Price Index (CPI) number this week, Inflation is still a nasty reality that seems unabated. For that reason, US consumers are becoming increasingly worried about the trajectory of the US economy amid the sticky inflation and the prospect of high interest rates for longer than initially hoped. The latest University of Michigan consumer sentiment survey released last Friday revealed a 13% decline in overall sentiment during the month of May. The index reading for the month came in at 67.4, its lowest level in six months, and well below economist expectations for a reading of 76.2.

As Yahoo finance reports, Year-ahead inflation expectations hit 3.5% in Friday’s report, up from 3.2% in the month prior. Longer-run inflation expectations rose to 3.1%, up from 3% the month prior. “While consumers had been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions,” survey of consumers director Joanne Hsu said in a statement. “They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.”

The drop in sentiment comes after several months of data showing that inflation’s downward path has not been as smooth as many economists had hoped. Through the first three months of the year the core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose at an annualized pace of 4.4%. This tracked significantly higher than the Fed’s 2% goal, reversing a trend of significant easing in inflation to end 2023. “In recent months, inflation has shown a lack of further progress toward our 2% objective, and we remain highly attentive to inflation risks,” Federal Reserve Chair Jerome Powell said on May 1. And while Powell said it is “unlikely” the next move for the Fed is an interest rate hike, the sticky inflation data appears to have put the Fed on a path to hold off on rate cuts longer than markets had hoped entering the year. Meanwhile, various economic data releases have come in tepid, such as the most recent weaker-than-expected jobs report and data showing a contraction in manufacturing activity in April.

Last Thursday, weekly jobless claims rose unexpectedly, hitting their highest level since August 2023.

This week, investors will get a highly anticipated reading on inflation in April from the consumer-price index, which could have a sobering effect on recent market optimism. That is the bad news, the good news? Barron’s Teresa Rivas writing today: Stocks “at their core, are a reflection of future earnings growth,” notes B of A Securities Strategist Ritesh Samadhiya, meaning that despite near-term distractions over the medium and longer term “the primacy of growth becomes apparent.” That is good news for the market in general, particularly as the resilience of the global economy starts to be felt by a wider number of companies. The Magnificent Seven, which fueled so much of 2023’s rally, have done nearly all the hard work in terms of earnings this quarter too, notching a 48% year-over-year earnings per share growth in the first quarter, compared with an estimated 2% decline for the remaining 493 companies in the S&P 500. Yet, Samadhiya notes, the S&P 493 are expected to close the gap by the end of the calendar year: Consensus calls for the fourth-quarter earnings per share of the Magnificent Seven (Apple, Microsoft, Meta Platforms, Amazon, Nvidia, Alphabet, and Tesla) to climb 15%, compared with a 14% rise for the rest of the index. Broader earnings growth would be a bullish shift, after a year of a historically narrow market led by just a handful of megacap stocks. With some 80% of S&P 500 companies’ first-quarter results already out, earnings per share are up by about 7% from the same period a year earlier. Revenue is up 3.5% so far. Analysts expect things to pick up from here. The consensus forecasts are for earnings growth of around 11%, 9%, and 15% in the next three quarters of 2024.

One other piece of good news, if it happens, is former President Trump pledged to make permanent the tax cut initiated during his first administration, true to form the wild spending Democrats (and their Republican enablers) miraculously now decry the effect on the deficit. You can’t make this up. In reality, if a change in policies returns to more US pro-growth and reduction in spending should offset the imbalance and ever-growing deficits. Now we can add to Benjaman Franklin’s old adage that “the only thing certain in life is death and taxes” you can add politization of any issue going forward.

One final point of optimism, As Market Watch William Watts opines, History may offer relief to stock-market bulls worried about the Federal Reserve’s continued reluctance to begin cutting interest rates. It’s been more than 280 days since the Fed last moved its benchmark policy rate, marking the second-longest pause in modern market history. The silver lining, however, is that data show such long pauses are often accompanied by solid gains for equities. “As the Federal Reserve extends the timeline for interest-rate cuts, historical data shows that longer Fed pauses often correlate with better equity returns,” said Mark Hackett, chief of investment research at Nationwide, in a Wednesday note.

“In fact, in periods where the pause is greater than 100 days, the stock market has historically moved higher by an average of 13%. This should give investors reasons to be optimistic,” he wrote.

Mike