Daily Stock Market Articles

Six Reasons This Bull Market Is Alive and Well


“Sometimes the questions are complicated and the answers are simple.”

-Dr. Seuss

2024 came out swinging, with the S&P 500 up more than 10% in the first quarter on the heels of adding more than 11% in the fourth quarter of ’23. Back-to-back double-digit quarters are quite rare, but the good news is they tend to happen in bull markets, something we’ve been saying we are in for a long time.

April is usually a bullish month, but it saw the S&P 500 fall 4.2%, which included a well-deserved 5.5% mild correction mid-month. The economy remains on firm footing, but there are potential cracks forming. What could be next for stocks? We’ve been overweight equities since December ’22 and remain there today, as we expect to see stocks move to new highs this summer and the bull market to continue.

Here are six reasons we think the bull market is alive and well.

Big Starts to a Year Are Bullish
Listen, after a five-month win streak we were probably due for at least a pause. We also saw some of the same bears who mocked us last year for being bullish turn into bulls themselves. With that kind of setup, it makes sense that some type of volatility was necessary to shake the tree. Even though the S&P 500 pulled back just over 5%, many of the former highfliers saw much larger corrections.

As for the big start, we looked at other years that gained double digits in the first quarter and stocks were higher the rest of the year (so the final nine months) 10 out of 11 years. Yes, 1987 was the one year it was negative, but stocks were up 40% for the year in August back then, so we don’t see that repeating. The average return is skewed due to 1987, but the median return the rest of the year is a solid 8.2%, better than the median return for all years. Bottom line, a big start to a year shouldn’t be a reason to become bearish. In fact, historically it signals likely additional strength.



This Bull Market Is Still Young
The current bull market started in October ’22, which means it is now just under 19 months old. Would you believe that if the bull ended here and now this would make it the shortest bull market ever? That’s right, most bull markets last much longer, with the past 12 bull markets averaging more than five years in total. Taking this a step further, many bull markets started in the “bear market killer” month of October (this one included), and we found that those bull markets lasted even longer.



The current bull market is up more than 40%, which might feel like a lot, but looking at the four bull markets since 1990 shows they all at least doubled. The bottom line is history tells us to be open to a much longer bull market and potentially large gains along the way.

Stocks Like a President Up for Re-election
We noted in our Outlook 2024 that the past 10 times a President was up for re-election stocks finished the year higher. It was election years with a lame duck President where things didn’t go as well.



Taking this a step further, a surprise summer rally is normal when the President is up for re-election. This chart does a nice job of showing how strength the rest of this year is likely with a president up for re-election, while trouble brews when the President is a lame duck.



It’s All About Earnings
What drives long-term stock gains? It is earnings and the backdrop continues to look quite strong. The still healthy consumer, strong labor market, potentially lower rates helping housing, and improving manufacturing all suggest an economy that could surprise to the upside the rest of ‘24. Nominal GDP came in near 6% last year for one of the best years in recent memory, but the stage is set for similar growth this year. Remember, nominal GDP growth leads to profit growth and profits matter.

S&P 500 first quarter earnings are up more than 5.0% currently, from 3.2% expected at the start of the quarter, according to FactSet. This would be the best earnings growth in nearly two years, while revenue is higher for the 14th quarter in a row as well.

Corporate profits for the S&P 500 are expected to hit an all-time high this year, with a gain in ’24 of close to 11%. We’ve found that periods that have strong productivity (like we are seeing now) tend to come in even better than expected and we think 11% could be a tad low as a result. The mid-to-late ‘90s saw strong productivity, and also saw earnings and GDP consistently come in much better than was expected. It was the last decade, when productivity was low, that GDP disappointed consistently in the 2% range. Look at the quote at the top one more time, the easiest answer is earnings are strong and that is likely why stocks have been strong!

The other thing we’ve seen lately is analysts coming in too low with earnings estimates, as they are still too skeptical of this recovery. Looking out a year, forward 12-month S&P 500 earnings have soared from $243 at the start of the year to $254 currently. When companies post record profits you tend to see stock prices follow suit and we don’t think this time will be any different.



Profit margins and CAPEX Continue to Improve
A cousin to earnings is profit margins and stronger profit margins could be another reason to expect a stronger economy and bull market. Yes, profit margins are improving due to cost-cutting, but this will likely create a leaner and more agile corporate America the second half of this year.

We’ve been told for what feels like years now that profit margins have only one way to go and that is lower, but the opposite continues to happen. Improving profits and profit margins supported by continued economic growth next year would provide a strong tailwind for equities.



Higher capital expenditures (CAPEX) is another positive. In fact, forward 12-month CAPEX is at an all-time high as well. Companies investing in themselves should lead to continued stronger productivity growth, which will help economic growth likely exceed expectations.



Improvement on the Inflation Front
Lastly, and maybe most importantly, we’ve seen overall improvement on the inflation front over the past year, but the past few months have shown that the path lower won’t come without some bumps. We remain in the camp that inflation will continue to improve and the blip we’ve seen early this year is more seasonal quirks and outliers that are unlikely to persist (higher auto insurance and higher financial services fees for example).

We know that rents are falling in the private data, which gives a good estimate of prices for new or renewed leases. The rental price for a lease today is likely less than a similar lease over the last couple of years, but that has yet to flow to the government’s data, which includes all rents and shelter, even rent “attributed” to homeowners. Remember, shelter makes up more than 40% of the core Consumer Price Index (CPI), so any improvement here will quickly influence CPI data. But while we’re waiting for overall rents to catch up with changes in asking prices seen in private data like Apartment List and Zillow, keep in mind that if you remove shelter from CPI, inflation is actually running quite close to that 2% level the Fed targets.



There has also been concern over higher wages impacting inflation, but we expect improvements there as well over the coming months and quarters. The recent JOLTS data showed a healthy but normalizing labor market as wage growth slows. The Indeed Wage Tracker similarly showed slowing wage growth. Remember the 1970s saw wage growth up around 9%, which did flow through to overall inflation. Wages are still solid right now, but more in the range of what we saw pre-pandemic.



All of this matters, as it sets the stage for the Fed to cut rates this year, likely two times. We started the year with markets looking for 6-7 cuts, but it then fell to only one cut (with some vocally calling for a hike recently). Just as the pendulum had swung too far toward many cuts to start the year, we feel it has swung too far the other way now. With improving inflation data expected, the Fed should have the ammo to cut rates, likely starting in September, or at the very least to push back on the hawkish rhetoric. Either could be a nice tailwind for equities.

 

Typical May Up Early, Weak Middle, Strong Finish

Over the last 21 years, the first three days of May have historically traded higher, and the S&P 500 has been up 18 of the last 26 first trading days of May. Bouts of weakness often appear around or on the fourth, sixth/seventh, and twelfth trading days of the month while the last four or five trading days have generally enjoyed respectable gains on average, but the last day of May has weakened noticeably with only NASDAQ gaining ground.

Monday before May monthly option expiration is much stronger than monthly expiration day itself albeit weaker for small caps. S&P 500 has registered only ten losses in the last thirty-four years on Monday. Monthly expiration day is a loser nearly across the board except for Russell 2000 with a slight average gain (+0.01%). The full week had a bullish bias that is fading in recent years with DJIA down seven of the last eight and S&P 500 down six of the last seven. The week after options expiration week now tends to favor tech and small caps. NASDAQ has advanced in 24 of the last 34 weeks while Russell 2000 has risen in 26 of the last 34 with an average weekly gain of 0.88%.

 

When Bullish April Is Down Stocks Often Struggle Until Q4

April was the first down month in 6 months. Almanac readers know April is the best Dow month by average percent change and #2 for S&P. It’s ranked fourth for average percent change on NASDAQ and Russell 2000.

In general, April is a notoriously bullish market month overall with a high average percent and plurality of gains across the board. A negative April is cause for concern. When the #1 Dow month is down that could be significant.

Digging into the data in the tables below of all down Aprils since 1950 there is a plethora of red in May and through Q2 and Q3. There are several steep drops scattered throughout these 21 down April years. May, Q2 and Q3 show consistent and average losses.

Q4 however delivered solid gains except for four years: 1973 (Watergate, Vietnam, Oil Embargo), 1987 (Crash), 2000 (Undecided Election) and 2012 (ZIRP, QE3, Operation Twist, Big Q1 & Q3). You can see why we expect the market to struggle for the next several months.

 

Claims Fine In Spite of Superlatives
Thu, May 9, 2024

Today's data slate was light with the only release of note being initial jobless claims. The release is perhaps more in focus than normal given it comes on the back of weaker-than-expected labor data last week in the form of the nonfarm payrolls and JOLTS reports. Just like last week's data, the weekly jobless claims number was a disappointment with seasonally adjusted initial claims totaling 231K. That was handily above the estimate of 212K and last week's reading of 209K. As frequently quoted today, that results in the highest reading since last summer. Additionally, the 22K week-over-week jump marks one of the larger sequential increases of the past few years.



Despite those superlatives, one week does not make a trend. The chart below shows the four-week moving average of claims, which helps smooth out week-to-week fluctuations. By this reading, not much has happened. The moving average remains relatively flat with current levels consistent with those from the few years before the pandemic as well as those levels since the start of 2022 when pandemic era programs expired.



On a non-seasonally adjusted basis, claims totaled 290K. As shown below, for the comparable week of the year that is somewhat higher than the past several years (outside of the elevated 2020 and 2021 readings), but that is far from any alarmingly high level. The current week of the year did see claims rise week-over-week which is a bit unusual, though not without precedent having happened 39% of the time historically and is likely the reason for the big jump in the adjusted number.



As for seasonally adjusted continuing claims, it is a similar story. Claims matched expectations rising to 1.785 million versus 1.768 million the previous week. Once again, those levels are well within the range of readings of the past year and are little cause for concern.

 

Stocks Make Mom Happy Before & After Mother’s Day

Remember to take time out this Sunday for all the Mother’s in your world. Over the last 29 years on the Friday before Mother’s Day Dow has gained ground 19 times. On Monday after, DJIA has advanced 18 times. Average gain on Friday has been 0.25% and 0.23% on Monday. However, Monday following Mother’s Day has been down 8 of the last 12 years. In 2019, DJIA suffered its worst post Mother’s Day loss going back to 1995, off 2.38%.

 

The Year of the Utes?
Fri, May 10, 2024

The Utilities sector has been the second best of the eleven S&P 500 sectors so far in 2024, and it's the best performing sector so far in May.

The sector has been on fire.

Below is a look at eight charts from our daily Sector Snapshot that gets sent to Bespoke Premium and Bespoke Institutional clients daily.

Pretty much all readings are now very extended to the upside, including P/E ratio!



Below is a look at the individual stocks in the S&P 500 Utilities sector from our Trend Analyzer tool (also available to Bespoke Premium and Bespoke Institutional clients). As shown, every single stock is overbought, with the large majority in "extreme" overbought territory.

With AI and other new technologies demanding so much more electricity, have investors woken up to the fact that the companies providing it stand to benefit?

 

Highest and Lowest Price to Sales (P/S) Ratios
Fri, May 10, 2024

In the S&P 1500, which encompasses the large-cap S&P 500, the Mid Cap 400, and the Small Cap 600, there are just under 1,175 stocks that have positive next-year EPS estimates and trailing 12-month revenues of more than $1 billion. We wanted to see which stocks of this group currently have the highest and lowest forward price-to-sales ratios. For those that aren't familiar with the price-to-sales ratio, it's simply a stock's current market cap divided by annual sales (in this case, forward 12-month consensus sales estimates).

Of the 1,150+ stocks that fit our initial criteria, the average stock currently has a forward price-to-sales (P/S) ratio of 2.59, but the median is significantly lower at 1.73.

Notably, 31 stocks currently have forward P/S ratios greater than 10, meaning their market cap is 10x larger than projected annual sales. That's a very high P/S ratio, and the company better be growing significantly if it hopes to maintain that type of multiple. Collectively, these 31 stocks are up an average of 43.34% over the last year! Below is the list for those interested.

NVIDIA (NVDA) currently has the highest forward price-to-sales ratio at 18.9. Its shares are up 211.7% over the last year.

Five other stocks have P/S ratios above 15: Fair Isaac (FICO), Eli Lilly (LLY), Cadence Design (CDNS), Intuitive Surgical (ISRG), and Monolithic Power (MPWR). Credit card companies Visa (V) and Mastercard (MA) both have 14x P/S ratios, and a few other very notable large-caps that have 10+ P/S ratios include Microsoft (MSFT), Broadcom (AVGO), and Texas Instruments (TXN). Clearly, many of the Tech stocks on this list have seen massive gains since late 2022 from the current AI boom, and investors are still expecting BIG things in the years ahead to justify these kinds of multiples. They have a lot to live up to indeed.



On the flip side are the stocks with the lowest price-to-sales ratios. There are currently 338 stocks with forward P/S ratios that are less than one, meaning their market caps are lower than annual sales estimates. When sales are greater than market cap, companies typically have very low (and usually declining) margins. Many of the names below with P/S ratios of 0.20 or lower come from slow and steady groups like wholesale food distributors, big box retail, or large health care insurance providers.

Whereas the 31 stocks with 10+ P/S ratios are up 43% over the last year, the group of stocks below are only up an average of 6% YoY. While many of these names are and will continue to be on a downward trajectory in the coming years, we're confident that a few will end up turning around their margin situations, especially if we see a disinflationary environment. Now go dig deeper and find them!

 

Shorts Surge
Mon, May 13, 2024

Thanks to a single tweet marking the return of the poster child of 2021's meme stock mania, shares of GameStop (GME) are back in the news thanks to a soaring share price. As shown below, the stock that was at the center of the 2021 short squeeze is once again flying with gains of well over 70% in today's session.



As always, one day does not make a trend. Although the massive rally in GME today is impressive, overall, highly shorted stocks have not done much since their heyday from a few years back. Below we show an index comprised of the 100 most highly shorted Russell 3,000 members, rebalanced monthly over the past five years. As shown, while there have been a couple of higher lows in the past six months, the index has been rangebound at best over the past two years. Perhaps more importantly, current levels are still well below those from 2021.



Moving back to the present, today's outperformance of the most highly shorted names is remarkable. Below we break down the Russell 1,000 into deciles based on their levels of short interest. Decile 1 represents the 100 stocks with the least short interest while decile 10 is made up of the stocks with the most heavily shorted names.

As shown, whereas the average Russell 1,000 stock is up 31 bps today, the average gain of the 100 most shorted members is 3.5%. Of course, that includes GameStop (GME), but even when that one name is removed the average gain is still an impressive 2.75%. Moving down the line, performance gets much less impressive. As shown, stocks in deciles 1 through 6 are all averaging declines today while deciles 7, 8, and 9 are averaging modest gains. The surge in GME, though, has caused traders to pile into other heavily shorted names in hopes of additional squeezes.



Late last week, the latest short-interest data was published with readings through the end of April. Below we show the Russell 1,000 members with the highest levels of short interest per that data. Medical Properties (MPW), Petco (WOOF), and Kohl's (KSS) top the list as each one has more than a third of its float sold short. Each of those are rallying hard today, but only MPW is up on the year. Moving further down the list, there are multiple clean energy-related names—Lucid (LCID), ChargePoint (CHPT), Plug Power (PLUG), and Sunrun (RUN)—falling in the top ten most heavily shorted names. Right behind those names is, of course, GameStop (GME). Worth noting is that after today' gain, GME joins MPW and only a handful of others on this list that have year-to-date gains.

 

Weak May Monthly OpEx Week - DJIA Down 12 of Last 15

Since 1990 May’s monthly OpEx week has a slight bearish bias with DJIA and S&P 500 down 18 and up 16. More recently, DJIA has suffered declines in 12 of the last 15, monthly expiration weeks. S&P 500 has one additional weekly gain since 2009, down 11 of the last 15. NASDAQ has declined in 9 of the last 15.

 

Small Businesses Sit Out Growth
Tue, May 14, 2024

Earlier in the day on 5/14, the NFIB published the results of its latest survey of Small Business Optimism. While economists expected a modest decline, the index rebounded from 88.5 in March to 89.7 in April. As shown below, albeit higher month over month, current levels of small business optimism remain historically depressed, even lower than at the height of COVID.



While the optimism index sits in the bottom decile of historical readings, the 1.2 point month-over-month jump ranks in the top quartile of monthly moves, and it was on account of a wide number of categories. In fact, the only categories not rising were expectations for the economy to improve, expected credit conditions, and expansion outlook. As we discussed in today's Morning Lineup, the six different labor market series in aggregate rebounded following a large drop in March.



As previously mentioned, one of the few areas to decline month-over-month was expectations for the economy to improve. The drop was small at just 1 point, and as shown below, the reading is still progressing in the right direction over the past two years. However, the progress has been painfully slow as the reading remains below anything observed before the past few years. In addition to the weak economic outlook, only 4% of businesses consider now a good time to expand. That was unchanged versus March, and current levels are consistent with the past two recessions and lower than the two before that!



The NFIB provides greater detail into why small businesses are reporting optimism or lack thereof. As shown below, economic conditions are overwhelmingly blamed for the negative expansion outlook. Headed into the final six months before the election, another 11% point the finger at the political climate. Next up, with each at 7% of total responses, are interest rates and the cost of expansion.



Below we plot those reasons for negative expansion outlooks over the past decade. Although it remains the biggest problem, the percentage of respondents reporting a poor economy as a reason for not growing their businesses has come down significantly over the past couple of years. Similarly, interest rates are not as big of an issue as it was only a few months ago. However, as another negative on the inflation front, cost of expansion is back to swinging higher. At 7% in April, the reading matches previous highs of the past decade.

 

The Bears Are Back, Why That’s a Good Thing


“Even a broken clock is right twice a day.”

Some well-known bears are back in the news, with their usual dour predictions, from a recession coming soon to an outright 65% market crash. You can read more about their calls here, but we’ve been hearing these same things for years now and been pushing back the whole time. To be honest, I’m glad to see these permabears still pumping out the same old story, as I’d be much more worried if they looked at the data and come to a bullish conclusion.

We can talk all we want about the path of the economy, inflation, the election, geopolitics, or what the Fed should or shouldn’t do, but what matters at the end of the day is what markets do. Here are a few things I’ve noticed recently that continue to suggest this bull market is alive and well and a summer rally is still likely. For more on this, be sure to read Six Reasons This Bull Market is Alive and Well.

Breadth Is Strong
If more and more stocks are making 52-week highs, that’s a good thing. It suggests the foundation of the bullish move is healthy and likely sustainable. Below we show that is happening across the board.



One of my favorite technical indicators is advance/decline (A/D) lines. These are simply a daily look at how many stocks go up versus down each day on various exchanges. When A/D lines are breaking out to new highs, it could be a clue that overall price is about to follow. The same could be said for new lows in A/D lines, which means there’s weakness under the surface.

Last week saw new highs in these A/D lines: S&P 500, NYSE, and Midcaps. Small caps are close to a new 52-week high. To keep it very simple, this isn’t something you see in a bear market and it means this early spring rally likely has legs.



Lastly on breadth, there was a buying thrust on the NYSE that tends to be very rare, but quite bullish. For three days in a row more than 74% of the stocks on the NYSE were higher on the day. It is normal to see this for a day or two, but three days is very unusual and it suggests heavy buying pressure taking place. We found this happened only eight other times since 2000. A year later the S&P 500 was higher every time and up close to 23% on average.



Stocks Don’t Peak in March
The last time the S&P 500 hit a new high was March 28, which lead to the 5.5% mild correction into mid-April. We were on record the whole time that it likely wouldn’t turn into a 10% correction (or worse) and with the big rally the past three weeks, that is looking accurate. I looked at the past 38 corrections and bear markets since World War II and I found that only once did one start in March. That of course was March 2000 when the tech bubble burst. But the bottom line is it’s quite rare to see stocks peak in March and this time doesn’t appear to be any different.



Better Inflation Data Coming
We’ve talked a lot about why the recent blip in inflation to start this year was probably nothing more than some pain after the large improvement in the past year and seasonal quirks (like higher auto insurance and higher financial services fees), and that we expect to see things like shelter drastically improve over the coming months. Here’s another interesting development that shows used car prices have outright tanked, even though the government’s data doesn’t show this yet.

Prices in the Manheim Used Car Index are down 14% year over year and lower six of the past seven months. Compare this with the government’s data showing used cars down about 1% the past year.



We’re actually pleased some of the bears are coming out of hibernation, or may have never left, as we think it actually is a positive for stocks. But we still always ask whether the arguments they are making are persuasive. At this point, we believe the preponderance of the evidence still says no. No doubt they’ll be right eventually, but many of these bears have been wrong through so many years of stock gains that the eventual bear victory dance will likely ring hollow. After all, even a broken clock is right twice a day.

 

No New Orders and No Spending in the Empire State
Wed, May 15, 2024

Among this morning's data releases was another weak NY Fed manufacturing report. The Empire State Manufacturing Survey's headline reading came in at -15.6. That compares to -14.3 for April and expectations of an improvement to -10. That miss relative to forecasts means the indicator has been weaker than expected three months in a row. The last streak of weaker-than-expected readings that lasted as long was in the first quarter of 2022.



The negative reading in the headline index indicates a contraction in the Northeast's manufacturing economy that came with weak breadth among the report's categories. Only three categories for current conditions are currently expanding: Prices Paid and Received and Inventories. Most other categories are in the bottom quintile of historical readings.



One of the weakest areas of the report has been New Orders. The January report saw this category fall to one of the weakest readings on record. While things have improved since then with little change in May, the current reading remains in the sixth percentile of all months. Perhaps more impressive is that this was the eighth month in a row with a contractionary reading in this index. As shown in the second chart below, that is one month away from tying the record of nine months in a row set in 2008/2009 and again in 2015/2016.



In addition to the ugly new orders picture, one area that is just as bad is spending plans. Overall, expectations indices are a bit more of a mixed bag, but the indices for number of employees, capital expenditures, and tech spending are historically low with readings ranging in the 3rd to 12th percentiles. Averaging across these three indices shows that the region's manufacturers have some of the most pessimistic spending plans for labor or capital in the survey's history. The reading edged up only slightly in May and sits roughly 0.1 point above the post-pandemic low set one year ago. On the whole, that reading is in the bottom 6% of readings.

 

This Is Why We’re (Still) Not Worried About an Inflation Resurgence


There’s no question that the inflation data in the first quarter was uncomfortably hot. But as we highlighted over the past several months, there were good reasons not to panic about another sustained upswing in inflation. I wrote about this when the January, February, and March consumer price index (CPI) reports were released. It was reassuring to see that Federal Reserve (Fed) officials took a similar view. As Fed Chair Powell noted after their May meeting, they didn’t think the hot inflation data in Q1 negated the progress made in the second half of 2023. All it did was make them realize that it would take longer to gain confidence that inflation was headed to their target of 2%.

The April CPI report confirmed that there was no need to panic after the hot inflation data in Q1. Headline inflation rose 0.3% in April, below expectations. On a year-over-year basis, CPI eased to 3.4%. That’s still elevated but as you can see below, shelter inflation is the main cause of that (the dark green bars in the chart). If you exclude shelter, headline CPI is up 2.2% since last April.



The heat in the prior inflation reports was mostly due to post-pandemic catch-up effects, rather than renewed demand or supply-side side pressures.

Shelter is a classic case in point. As we’ve written and talked about on Facts vs Feelings, the podcast Ryan Detrick and I host, official shelter inflation runs with significant lags to what we see in actual rental markets. Shelter inflation matters a lot for CPI, as it makes up 35% of the basket. Rents of primary residence account for 8% of that, while “owners’ equivalent rent” (OER) accounts for 27%. OER is the “implied rent” homeowners pay, and it’s based on market rents as opposed to home prices.

However, there’s good news with respect to shelter. Rents of primary residences rose at an annualized pace of 4.3% in April. That’s the slowest pace since August 2021 and not far above the 2018-2019 average of 3.6%. OER remains elevated but it’s easing (albeit slowly). It rose at an annualized pace of 5.2% in April, below the Q1 average of 5.9% but well above the 2018-2019 average of 3.2%. You can see why OER is keeping CPI elevated.



Another example of post-pandemic catch-up effects is auto insurance. Core CPI inflation, which excludes food and energy, was up 3.6% year over year in April. Of that, auto insurance accounted for 0.73%-points. What’s amazing is this: auto insurance makes up just over 3% of the core inflation basket of goods but accounted for about 20% of the year-over-year increase. That’s because vehicle prices and repair costs surged after the pandemic and insurance premiums rose as a result. Official data is just about catching up to that, even as actual real-time vehicle prices are now easing.

Combine the contribution from auto insurance (0.73%-points) to that from rents and OER (2.37%-points), and the three categories account for about 85% of the year-over-year increase in core inflation. Of course, that’s all backward looking because none of this is really capturing what’s happening in real time, and what’s likely to happen going forward.

The good news is that several forward-looking indicators of underlying inflation don’t give us any cause for concern.

• Wage growth for workers is running at the pre-pandemic pace of around 3%, which means there’s no underlying demand-side pressure on inflation.
• Broad commodity prices are not surging like they did in 2022 (in fact, oil prices have fallen close to 10% since early April), which means a commodity-driven supply shock is not on the cards for now.
• Market-implied expectations for future inflation are consistent with the Fed’s 2% target, and well off their 2022 peak.
• Consumer expectations for inflation are not far above what we saw before the pandemic, and this should ease further as gas prices pull back (which has happened recently).
• Business expectations for inflation in the year ahead are running at 2.3%, which is also close to pre-pandemic levels.

An Inflation Bellwether Is Cause for Optimism
As I’ve written previously, one category I like to keep a close eye on is inflation at full-service seated restaurants (the official category is “full service meals and snacks”). It’s technically not in the core CPI basket, but interestingly, it’s historically tracked core inflation fairly closely. I find it useful because full-services restaurant meals combine several demand- and supply-side elements that drive inflation, including:

• Commodity prices – food, but also energy (since food has to be transported across the country)
• Wages – for restaurant workers
• Rents – for restaurant premises

Inflation for restaurant meals has eased significantly over the past year and half. It peaked at 9% year over year in August 2022, but is now running at 3.4%. That’s similar to the pace we saw in 2019. The message is that underlying inflationary pressures are quite benign. If you look at the chart below, you can see that it’s quite unusual for inflation of full services meals (blue line) to run below core CPI inflation (green line), as is the case now. But that’s only because shelter inflation is elevated, going back to what I discussed earlier.



Still On Track for Interest Rate Cuts in 2024
As Fed Chair Powell recently reiterated, recent inflation data has yet to give them confidence that inflation is headed back to their 2% target, which means they’re unlikely to cut rates at their June, or even July, meeting. The April inflation data was a step in the right direction, and the forward-looking data suggests we should continue to see disinflation ahead. That means we may still be on track for at least a couple of 0.25%-points of interest rate cuts in 2024.

Markets clearly read optimism in the April CPI data – the one-year Treasury yield, which is a close proxy for policy rates over the following year, fell from 5.16% to 5.09% over the day, and the S&P 500 rose more than 1% to a new record high. We could see more of this if the inflation picture evolves as we expect it will over the next several months, keeping the bull market alive and well (as Ryan Detrick, Carson’s Chief Market Strategist recently wrote).

 

Historic Moves in the Utilities Sector
Fri, May 17, 2024

OK, we get it; you've heard enough about the Utilities sector for now, but check out these charts, they're nuts. Starting with the 'boring-est' of them, the SPDR Sector ETF for the Utilities sector (XLU) has not only gone practically straight up but check out all the green bars (days where the closing price was higher than the opening price) in the shaded area. Until the last week, it was a green and clean line higher. At one point last week, the sector closed higher than it opened on 16 out of its prior 17 trading days.



The chart below puts the run of higher closes into perspective. On a rolling 15-trading day period (three weeks), the reading of 14 reached on 5/9 was a level matched during only one other period in the last 24 years - January 2020.



While the S&P 500 Utilities sector has performed exceptionally well lately, not all Utilities are created equal. The chart below compares the performance of the S&P 500 Utilities sector to the Dow Jones Utilities Index over the last year. From last May through mid-February, the two indices performed hand in hand, but their paths have steadily diverged since February. As the two have continued to generally move in the same direction, the performance gap may not seem large, but it has actually been historic.



Over the last 50 trading days, the S&P 500 Utilities sector has outperformed the Dow Jones Utilities sector by over three percentage points, and at one point during the divergence cited above, it reached 4.7 percentage points. Levels like that haven't been seen in over two decades (December 2002). For years, utility stocks have been thought of as somewhat interchangeable with each other as their heavy regulation made it hard to differentiate one from the other. The rise of artificial intelligence (AI) and the ever-increasing demand from data centers have reshaped the Utilities sector. This, coupled with a growing number of less-regulated players, has created a more dynamic – but also less standardized – environment. As a result, the inclusion or exclusion of certain companies in different indexes can lead to significant performance disparities, as we've seen in this case.