Hokey Pokey, Charting Divergence, Most Loved and Unloved Stocks, Week Ahead
The Hokey Pokey. That's what it's all about.
The week just ended was dominated by data for May inflation. That's right, a week expected to be dominated by an FOMC policy decision impacted by such data ended up being dominated by the data itself.
To make it short, month-over-month and even year-over-year data for both May CPI (Consumer Price Index) and May PPI (Producer Price Index) surprised to the downside on Wednesday and Thursday. This cheered investors, or at least investors in U.S. Treasury debt securities and a narrow swath of U.S. equities if not U.S. equities broadly.
Why the optimism? Despite a Fed that doesn't seem ready to cut short-term rates for a good while barring economic calamity, Fed Funds Futures have now priced in an increased probability for a rate cut prior to the presidential election in early November. Preposterous says you? Indeed, preposterous says I. I, however, am not a keyword-reading algorithm and keyword-reading algorithms are exactly the who and what that controls financial market price discovery in 2024 at nearly every level.
Whatever shall we do, dear Hulkamaniacs, when generative AI comes for you? Alas, my weary and disheveled friends, for generative AI came for us long ago. We did notice, for we were blacksmiths once, and darned good ones too. The algos say September for a rate cut, while the wise man says November, a couple days after ballots are cast, but maybe not completely totaled.
They say that fear is but for the wicked. Whatever shall we do, when each side honestly, and maybe even innocently thinks the other wicked? Sarge, can't you just stick to business, economics and markets. Ah, indeed we shall move on my young friends. Forgive my wandering mind.
Consumer Level Inflation
Ahead of the release of the Fed's latest policy statement and economic projections on Wednesday afternoon, the Bureau of Labor Statistics released their numbers for May consumer prices on Wednesday morning. May CPI printed flat from April at the headline level, which was just a smidge below expectations for monthly growth of 0.1%. The core print hit the tape at month-over-month growth of 0.2%, also just a tad better than has been consensus. On a year-over-year basis, which is more focused upon than the monthly data, at least by the public if not professional economists, headline May CPI printed up 3.3%, while core CPI sported growth of 3.4%.
Both of these prints beat consensus view by one-tenth of a percentage point. Oh, and both were down from April. Much of this improvement in consumer prices came about thanks to outright deflation across the energy space, especially gasoline. It wasn't just about energy, though. New autos, apparel, and transportation services all printed down from the month prior, though prices for medical care commodities actually heated up, and the cost of shelter remained an issue.
Producer Level Inflation
On a month-over-month basis, May headline PPI printed in outright contraction, at -0.2%. This was down from growth of 0.5% in April and well below expectations for growth of 0.1%. At the core, May PPI printed flat (0.0%) from April. April, remember, had been up 0.5% from March, so the economy needed this break. This print was also below expectations for growth of 0.3%.
The year-over-year prints crossed the tape at headline growth of 2.2%, which was down from 2.3% and below consensus view for growth of 2.5%. At the core, the y/y print posted growth of 2.3%, down from April's 2.4%. That 2.4% pace was also what the markets were looking for.
Interestingly, about 60% of the drop in the m/m headline print was due to gasoline prices all by themselves. Core goods prices, it should be pointed out, actually increased 0.3% month over month. That's not so disinflationary. Even if disinflation in services is still to come, it appears that the disinflationary phase for goods may be "over and out."
The Fed
On Wednesday afternoon, the Fed released the FOMC policy statement along with their quarterly economic projections. The Committee was not as easily pushed around by a moderately softer than expected print for consumer inflation as was Wall Street. The Street, at least for Treasuries and at least for their chosen stocks, went into "risk-on" mode. That is until Friday, when things cooled down just a bit.
The FOMC Policy Statement last week was just another "cut and paste" job. There was a minor change in the first paragraph where a "lack" of progress towards the Fed 2% inflation objective in early May was replaced by "modest" progress. That was perhaps their nod to the May CPI report.
As I mentioned last week, I thought it somewhat important that the sentence, "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent" was left in the statement and unchanged. That sentence alone informs the public that the Fed is not feeling as dovish as some might expect at this time and might like to put policy changes on the shelf until after the national election in early November. This way, their independence from the administration currently in power cannot be called into question.
There's More
There were no outlandish surprises to be found in the Fed's economic projection for this meeting. 2024 GDP was left where it had been, at growth of 2.1%. The FOMC also left its unemployment rate for 2024 where it was back in March at 4%. There were some minor adjustments. Headline PCE inflation for 2024 was inched up to growth of 2.6% from growth of 2.4%. while Core PCE for 2024 was ratcheted up to growth of 2.8% from growth of 2.6%.
The real news last Wednesday was the fact that the Fed expected to experience less success in 2024 as far as returning inflation to their objective is concerned as illustrated by their median projection for the Fed Funds Rate. That projection for the year end 2024 Fed Funds Rate is now 5.1%, up from 4.6% in March. With the current target for the Fed Funds Rate at 5.25% to 5.5%, this equates to a reduction of just 25 basis points this calendar year, down from a projection for a reduction of 75 basis points this year made three months ago.
The FOMC does project much more success over 2025 and 2026 in getting their target range for the Fed Funds Rate down to lower levels, but that's less than meaningful. The committee always sees greater success in the future. In my opinion, any projections made beyond the current year are to be taken with a grain of salt. The FOMC also sees exactly 2% GDP growth for both 2025 and 2026. Like magic.
Marketplace
- The S&P 500 closed down 0.04% on Friday, up 1.58% for the week, and up 13.87% for 2024.
- The Nasdaq Composite closed up 0.12% on Friday, up 3.24% for the week, and up 17.84% for 2024.
- The Russell 2000 closed down 1.61% on Friday, down 1.01% for the week, and up down 1.03% for 2024.
- The Dow Transports closed down 1.08% on Friday, down 1.43% for the week, and down 6.86% for 2024.
- The Philadelphia Semiconductor Index closed down 0.07% on Friday, up 5.88% for the week, and up 34.08% for 2024.
- The KBW Bank Index closed down 0.63% on Friday, down 2.58% for the week, and up 4.46% for 2024.
Four of the 11 S&P sector SPDR ETFs closed up for the day on Friday, with Technology (XLK) leading the way at +0.37%. The five cyclical sector funds took the bottom-five rungs on the daily performance tables, led lower by the Industrials (XLI) at -1.01%.
For the week, just three of these SPDRs closed in the green, while seven closed in the red and one, the Utilities (XLU) , closed unchanged. Closing unchanged for the week is rather difficult to do. The winners were led by XLK, up a stunning 5.6% in a narrow market, as both Energy (XLE) and the Financials (XLF) surrendered 2%.
Charts
I am going to stick with a theme that I have been stuck on for quite a few days. That is the performance of the S&P 500 versus the equal-weight S&P 500 because that divergence is quite incredible. If you haven't been reading, or even if you have, refresh your memory and take a look at this:
We had a "shooting star" last Wednesday that was followed up by a "hanging man" candlestick on Thursday. Two bearish one-day patterns often signal an imminent sell-off. As readers can see, the selloff that we did get on Friday was not the significant bout of profit-taking that would have validated those signals. This still could happen Monday or perhaps Tuesday as long as those two candlesticks still represent a recent apexing of the index.
Relative Strength is slightly overbought, the daily Moving Average Convergence Divergence (MACD) remains extended for both the 12-day and 26-day exponential moving averages (EMAs), and the index continues to run far above all of its key moving averages.
What do we have here? When weighted without bias, the S&P 500 did suffer a more significant selloff on Friday, validating our thoughts on Thursday. The equal-weight version of the index closed on Friday at its lowest level since May. Relative Strength is neutral but weakening, while the daily MACD continues to position itself bearishly.
Just look at the divergence of these two versions of the S&P 500 away from each other. Very visible is the activity in May, when we thought perhaps that the mega-cap tech stocks had ceded control of the markets to those less "magnificent" in a broadening rally. Then comes June, when the magnificent reassert their dominance, the rally narrows, and broader market performance appears in all honestly to be quite unhealthy.
Earnings Estimates
First-quarter earnings season has been put to bed. According to FactSet, which loyal readers know by now is my long-relied-upon resource for earnings-related data, the quarter landed with 5.9% (y/y) earnings growth on 4.2% revenue growth across the S&P 500. That performance was up from estimates on March 31 for earnings growth of 3.4% on revenue growth of 3.5%. We now turn our attention to second-quarter earnings season, which will start in earnest in about four weeks.
Sticking with FactSet as my source, estimates for Q2 performance are now for earnings growth of 9% on revenue growth of 4.6%. For the full year, FactSet sees earnings growth of 11.3% on revenue growth of 5%. For the second quarter, Communication Services, Health Care, Technology and Energy are all seen sporting earnings growth of greater than 15%, while Staples, Industrials, and Materials are seen moving in a negative direction.
The S&P 500 ended last week trading at 21 times forward-looking earnings. This is still well above both the five-year average of 19.2 times and the 10-year average of 17.8 times for the index.
Interesting
In last week's Earnings Insight newsletter, published by FactSet, a top ten was listed for both highest percentage of "buy" ratings and highest percentage of "sell" ratings in the S&P 500.
Three stocks tied for the most loved, at 95% of ratings being "buy" or buy-equivalent. Those three were Amazon (AMZN) , Delta Air Lines (DAL) , and Microsoft (MSFT) . Two stocks tied for the least loved, with 43% of ratings being "sell" or sell-equivalent. Those two are Robert Half (RHI) and Franklin Resources (BEN) .
The Week Ahead
The earnings calendar is rather scant this week, but there is some macro that might catch your interest. The Fed will also be out in force early on this week.
Do not forget that this week is split in two around the "Juneteenth" holiday this Wednesday, which is a federal holiday. Financial markets will be closed that day. There will be a triple-witching expirations event this Friday. I erroneously wrote to you in last week's Monday note that it would be this past Friday.
Corporate: There are just a few well-known corporations set to report their quarterly numbers this week. No real headliners to speak of. On Monday afternoon, we'll hear from home-builder Lennar (LEN) . There will be some action on Thursday as Accenture (ACN) , Darden Restaurants (DRI) , Jabil (JBL) , and Kroger (KR) report ahead of the open. Finally, both CarMax (KMX) and FactSet (FDS) report on Friday morning.
The Fed: Currently, I have eight Fed speakers on my radar for Monday and Tuesday. Then, I just have one on Thursday for the balance of the week. Obviously, this can change as time marches on, but it would appear that the Fed is being sent out "en masse" early this week to drive home a message. We do know that our frenemies, the keyword-reading algorithms that run (ruin) everything. will be ready.
Macro: The headline event for the week will be May Retail Sales on Tuesday morning. That day, we'll also get May Industrial Production from the Federal Reserve. There will be plenty of housing data with May Starts on Thursday and May Existing Home Sales on Friday. Outside of all of that, we'll see June manufacturing survey releases from both the New York and Philadelphia Feds and the May release of the Index of Leading Indicators on Friday by the Conference Board.
Economics (All Times Eastern)
08:30 - Empire State Manufacturing Index (June): Expecting -12.7, Last -15.6.
The Fed (All Times Eastern)
13:00 - Speaker: Philadelphia Fed Pres. Patrick Harker.
21:00 - Speaker: Reserve Board Gov. Lisa Cook.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (LZB) (0.70), (LEN) (3.23)
At the time of publication, Guilfoyle was long XLU, AMZN and MSFT.