This continues to be one of the most confounding markets to understand of my lifetime.
With the Federal Reserve implementing the harshest monetary tightening since the days of Paul Volcker after pumping up the money supply by some 40% during the pandemic, and the federal government running a fiscal deficit of six to seven of the GDP during an economic expansion, it is hard to get a good handle on the true state of the economy or the markets.
That said, we seem to be seeing some increasing signs signaling caution, even as most investors appear content for now ignoring those clarion calls. Jamie Dimon of JPMorgan Chase (JPM) seems to have taken a Louis Rukeyser type role as a consistent source of common sense around Wall Street, when so many have become irrationally exuberant despite a decelerating economy and some recent cautionary signs in the jobs market.
This week Dimon stated his bank would not be buying back its own stock now that valuations have reached 2.3 times book value. Given banks always seem to bottom at one times book value or lower at the trough of most economic cycles, that seems more than prudent.
Nonetheless, this news sent JPM’s shares down by more than 4% in trading on Monday. Dimon warned that investors were pricing in twice the likelihood of a ‘soft landing’ scenario than they should earlier this month.
An analyst at Piper Sandler was also out this week stating she saw increasing signs of a potential recession on the horizon and noted that the unemployment rate had increased by a half percent or more from peak levels in 19 separate states, a classical harbinger of recession.
Of course, the monthly Leading Economic Indicators have been positive for all of one month in over two years and Treasury yields have been inverted since July of 2022. Both these readings have also been very correlative historically to upcoming recessions even as we have rarely if ever seen this sort of lag into a recession. Like I said, the best description of the economy and markets right now is distorted because of extreme government largess.
Several members of the Federal Reserve have reiterated comments in recent days that the central bank needs to see concrete data on inflation levels coming down further before they would be comfortable in reducing interest rates. Still, futures continue to point to the first cut in the Fed Funds happening at the FOMC meeting in September.
A team of Goldman Sachs analysts were out this week noting the deteriorating financial health of low-income consumers and that the U.S. consumer is proving more ‘stretched’ than previously anticipated. Evidently Goldman has reached the same conclusion I have by reading through the Q1 earnings reports from consumer stalwarts like Starbucks (SBUX) and McDonalds (MCD) that reported results last week and provided commentary about weak consumer demand. These themes were also on full display in Target’s (TGT) earnings release before the bell this morning, and the stock is getting whacked in early trading.
And while equities continue to plumb all-time highs, investors should not be lulled into complacency and at least listen to increasing signs and commentary calling for caution.
At the time of publication, Bret Jensen had no position in the securities mentioned.