Highlights
Q1 GDP estimates are getting sliced
Continuing claims backlog points to a downside surprise in payrolls
But the Fed will need to see a string of misses before pivoting
Slumping restaurant activity points to consumer frugality
While We Were Sleeping
Well, it was a pretty tough day for those high-flying Magnificent Seven stocks. In fact, we could be down to a Magnificent One with Nvidia shares adding a further +3.6% (and the spillover to AI startups is in full view with Super Micro Computer soaring +18.7%). But Tesla was hammered -7.2%, Google slipped -2.8% and further undercut its 50-day trendline, Apple was off -2.5% and Microsoft dipped -0.1%. Outside of the Nvidia monopoly, this power group is starting to splinter. Meanwhile, both the S&P 500 and Nasdaq have gapped +5% above their 50-day trendlines, which speaks to an overextended market, and at the same time, the Nasdaq’s A-D line has flat- lined since mid-January.
The issue surrounding market breadth has not exactly dissipated with the Invesco S&P 500 equal-weight ETF up just +4% for the year versus the +8% breakout for the S&P 500 and +17% performance for the NYSE FANG+ index, which proxies the FAANG group along with the rest of the Magnificent Seven. The fact we are seeing “distribution days” pile up as we saw occur on Monday also is a sign that as the retail investor chases the price momentum at the highs, the institutional players are now taking profits by selling into strength.
I should add that in Q4, we had 73% of S&P 500 companies post EPS results above Wall Street’s expectations, while 64% reported higher revenues than expected. In both cases, that was actually below the five-year average of 77% and 68%, respectively. It may well be true that Q4 earnings growth of +4% year-over-year came in better than what analysts had expected coming into the quarter, but the S&P 500 has surged at nearly seven times that profit pace at +27%.
The consensus for Q1 is +3.6% and +11% for the end of this year — but even that projection for 2024 is about one-third of what the pricing action has been over the course of the past year. Not just that, but of the 101 companies that have issued earnings guidance for the first quarter, 71 have come in below analyst views! For all of 2024, we are now up to half of the 263 companies that provide full-year EPS forecasts having lowered them!! And yet, the clown at the circus continues to blow more air into this excessively filled balloon. Something to consider, though it stands to reason that this is a market dominated more by momentum trading than by reasonable valuations. This is a market for speculators, not rational thinkers.
On the policy side, Atlanta Fed President Raphael Bostic, who not long ago was among the doves, stated yesterday that he is opting for just one cut in the third quarter and then a pause. To which I ask: why cut at all if it’s a minor tweak? But there is little doubt that the Fed is walking back the multiple rate cuts for this year.
From an inflation standpoint, we have to consider that much of the decline from the mid-2022 peak was more goods than services, and the fact that the oil price has jumped +15% in the past three months, copper has moved up more than 5% in the past month (though looking toppy), the CRB index has crossed above all of its major trendlines, and the Baltic Dry Index is starting to feel the lagged effect of the Houthi crisis on the Red Sea as it has also begun to hook up again.
All this, with an ever-expanding share of global GDP in decline — but an inflation-centric Fed cannot possibly sound dovish in this current environment. And it is not just commodity markets that have staged a turnaround, but the fact of the matter is that both the P/E multiple on the S&P 500 and the tight high yield bond spreads have only been at today’s super-stretched levels 12% of the time in the past (back to 1990). All this has to change, not to mention more evidence that the January economic weakness was not a blip, for the Fed to pivot back again to its recent dovish posture.
In the overnight trade, here is what we see — in two words or less, risk-off: U.S. equity futures are slipping again, Europe is experiencing a rare though modest pullback of -0.3%, and Asia reversed course to the downside, save for the Nikkei 225 which was flat and China’s Shanghai Composite, which advanced +0.3% (Taiwan also rose +0.4%). Elsewhere, nothing but down arrows — Hong Kong (-2.6%), Korea (-0.9%), Singapore (-0.5%), Thailand (-0.3%), and India (-0.2%), to name more than a few. Bonds have a very tiny bid, with the 10-year T-note yield at 4.2% on the nose.
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