The stock market is priced for perfection. And more than perfection since the CAPE is at a bubble high and indexes at records including Dow 40,000. Anything that signals slowdown could burst this bubble.
Many people use low-cost index funds so the focus on the index makes sense. But the rise in SPX has been driven by only 4 tech companies, especially Nvidia. The broader market is stagnant. The dichotomy between Nvidia and the market on Thursday could also be seen in the magnitude of S&P 500 decliners during the session. Only 54 S&P 500 components ended the day in positive territory. A market that depends on such a narrow driver of growth is a fragile market.
The markets have followed a “bad news is good news” story line since the Federal Reserve began to raise the fed funds rate in 2022. Speculators hope that bad economic news will cause the Fed to cut the rate so they push stock prices up when the economic news seems bad. But that hasn’t worked since the Fed has stayed their reiterated course of keeping the fed funds rate high until inflation reliably stays pegged at their goal of 2%.
It’s still not clear what the Fed would do with stagflation – a combination of inflation and economic stagnation or recession. But at some point recession will occur since the capitalist economic cycle hasn’t been revoked.
The Fed Might Soon Have to Worry About More Than Just Inflation
As evidence mounts that the economy is slowing, pressure to lower rates could build
By Aaron Back, The Wall Street Journal, June 1, 2024
The U.S. economy continues to lose momentum. Growth hasn’t yet slowed to the point that it would be a concern to policymakers, but it might soon if current trends continue…
More noteworthy [than last week’s PCE index] were the figures for personal income and consumption. Incomes rose 0.3% from the preceding month, in line with expectations and down from 0.5% growth in March. Personal spending rose just 0.2%, below expectations and slowing from 0.7% in March. In real, inflation-adjusted terms consumption and disposable incomes both fell 0.1%.
It seems that the cumulative impact of years of inflation is finally catching up with consumers and eroding their savings cushion… [end quote]
Two leading indicators of recession have been warning for many months without a recession appearing: The inverted Treasury yield curve (10 year - 3 month Treasury spread) and the Conference Board’s Leading Economic Indicators index.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 was 2.7 percent on May 31, down from 3.5 percent on May 24. After recent releases from the US Census Bureau and the US Bureau of Economic Analysis, a decrease in the nowcast of second-quarter real personal consumption expenditures growth from 3.4 percent to 2.6 percent was partly offset by an increase in the nowcast of second-quarter real gross private domestic investment growth from 5.1 percent to 6.3 percent, while the nowcast of the contribution of the change in real net exports to second-quarter real GDP growth decreased from -0.06 percentage points to -0.60 percentage points. A real GDP growth rate of 2.7% is healthy and would not pressure the Fed to swerve from its strategy.
After dropping somewhat at the end of 2023 inflation has changed very little over the past few months. Both CPI and PCE are well above the Fed’s goal. (Treasury uses CPI to adjust TIPS and I-Bond interest.)
The Control Panel shows stabilization in the stock and bond markets. VIX is very low. The Fear & Greed Index is neutral. The trade is neither risk-on nor risk-off. The Treasury yield curve is almost flat. The options market doesn’t expect a fed funds rate cut until September at the earliest.
Junk bond spreads are moderate. Financial conditions are loose and getting looser.
There are no market-changing news stories.
The METAR for next week is sunny.
Wendy