A version of this post first appeared on TKer.co
Stocks closed higher last week with the S&P 500 up 0.4%. The index is now up 12% year-to-date, up 20.2% from the Oct. 12 closing low of 3,577.03, and down 10.4% from the Jan. 3, 2022 record closing high of 4,796.56.
On Thursday, we finally got confirmation that the October bear market was over and that’s it We’ve been in a new bull market ever since.
We also realize that market movements for this year so far have been far from unanimous expectations in an upward manner.
Let’s turn back the clock.
Exaggerated anxiety
In December, I published a roundup of Wall Street Strategists’ 2023 Predictions for Stocks. The bottom line at the time: “Strategists expect a volatile first half to be followed by an easier second half, which could see stocks rise modestly.”
The big concern was that brief Earnings growth stagnatedAnd Who came something that bears fruitwill come with a rolling sale in stock
But at the time, a few analysts, such as Ari Wald Oppenheimer, ran the numbers and concluded “Fears are exaggerated. “
There is not only a file Very weak linear relationship between a one-year earnings change and a one-year S&P 500 price change, but there is already some evidence that Decrease in profits is indeed lagging market index. Moreover, history shows that there are More cases where stocks did not fall but rose in years when earnings fell.
The ‘most common’ concern 👯♀️
There was also a problem Many experts They were openly calling for stock market weakness in the first half of the year. So that prediction was made Barron’s cover!
At the time, two of the smartest Wall Street strategists I followed commented on this. from December 18, 2022 TKer:
“I think we’re going to go down and then up… The problem is that’s a growing consensus view. So I think the biggest risk going into the first half is actually not investing in stocks.” — Savita Subramanian of Bank of America, Dec. 7.
“Everybody and their mother, and their brother, and their sister, and their cousin, and their uncle is negative in the first half of the year… so we’re going to go out and be a little different. I think the vulnerability probably won’t last long, everyone thinks.” – Brian Belsky of BMO Capital Markets, December 16th
The thing about stakes is that they are It becomes less of a problem for the markets the more market participants talk about it Because this means that risk is likely to be priced in.
In fact, it’s the middle of June and the stock market has spent the first five and a half months of the year mostly in an uptrend. The S&P 500 went modestly into the red on January 3 and 5; Every day was green.
“The most popular prediction heading into 2023 was that markets would suffer through about the first half but pick up by the end of the year,” Michael Aron, State Street Global Advisors, Written on Tuesday. However, stocks and bonds refused to conform to consensus expectations.
In recent weeks, consensus has shifted with strategists across Wall Street revising year-end price targets for the S&P 500, including David Kostin of Goldman Sachs (to 4500 from 4000), Brian Belsky of BMO Capital Markets (to 4550 from 4300), Savita Subramanian from BofA (until 4300 from 4000), and Laurie Calvacina of RBC Capital Markets (to 4250 from 4100).
The big picture 🤔
To be clear, this is not meant to be a celebration of the wrong timing of the bear market.
Instead, the point is that short-term movements are very difficult to predict with any precisionuntil When you know where the basics are headed.
It can be especially dangerous to make downward movements The stock market usually goes up. You risk missing out on significant gains in the short term Irreversible damage to your potential long term returns.
Total cross currents review 🔀
There were a few notable data points and macroeconomic developments from the past week to consider:
🛍️ Consumer spending is holding up. from American bankBank of America internal data shows that consumer spending was broadly flat in May, with total card spending per household rising 0.1% month-over-month (MoM), seasonally adjusted. YoY (YoY) growth no The rate remains negative at -0.2% y/y.”
from JPMorgan: “As of June 04, 2023, Chase consumer card spending data (unadjusted) was 2.2% higher on the same day last year. Based on Chase consumer card data through June 4, 2023, our estimate of the US Census control measure For May retail sales m/m is 0.46%.
💵 High net worth of the family. Here’s a new Bloomberg report Federal Reserve dataThursday’s Fed report showed that household net worth rose $3 trillion, or 2.1%, in the January-March period to $148.8 trillion, after jumping $1.6 trillion in the previous quarter. The value of stock holdings increased by about $2.4 trillion in the first quarter, while the value of family-owned real estate decreased by about $617 billion.”
💵 Consumers have excess savings. Torsten Slok of Apollo Global estimates that families still have $1.2 trillion in excess savings.
That’s just over $500 billion recently estimated by the Federal Reserve Bank of San Francisco. Regardless, the bottom line is that consumers have a lot of excess savings, which Explain why spending remains elastic.
💳 Delinquency rates improved. here Slok from Apollo Global on Monthly Transunion data“The latest data shows a slight improvement in credit card default rates and auto loan delinquency rates for subprime, prime and near-prime borrowers, see chart below. This is the opposite of what might be expected as the Fed attempts to tighten financial conditions.” “
💸 Wage growth cools. from Recruitment lab: “Wages and salaries advertised in job advertisements actually grew 5.3% year-on-year in May, according to the Indeed Pay Tracker report. This is down significantly from the high of 9.3% recorded in January 2022, but is still much higher than In 2019, the average pre-pandemic pace was 3.1%.”
💼 Unemployment claims are going up. Initial claims for unemployment benefits It rose to 261,000 during the week ending June 3, up from 233,000 in the previous week. While this is higher than the September low of 182,000, it continues to trend at levels associated with economic growth.
From economists at JPMorgan: “The move could be distorted by the Memorial Day holiday, which is difficult to adjust seasonally. Furthermore, it’s only a week’s worth of movement. However, if this level holds, it would indicate further material decline.” in the labor market.”
🛢️Gas prices are dropping as the summer driving season begins. from AAAFor the first time since 2021, domestic demand for gasoline exceeded 9 million barrels per day for the third week in a row. However, despite the strong numbers, pump prices have only barely budged as the low cost of oil is currently facing an uptick. The national average for a gallon of gas is down a penny since last week to $3.56… Today’s national average of $3.56 is three cents more than last month but $1.39 less than last year.”
⛽️ Consumers are hitting the road. Weekly EIA data Through June 2, gasoline demand showed an uptick from last year.
⛓️ Supply chain stresses are getting easier. Federal Reserve Bank of New York Global supply chain stress index
1– a composite of various supply chain indices – fell in May and is well below levels seen even before the pandemic. It’s down a lot from supply chain crisis in december 2021. Who Fed: “Reductions in late business in Great Britain and delivery times in Taiwan were significant contributions. Delivery times and delays in the Eurozone showed the biggest sources of upward pressure in May. Looking at the underlying data, readings for all regions tracked by GSCPI are below their historical averages.” .
👍 Surveys of the services were mixed, but they reflected growth. The US Services PMI for S&P Global rose to 54.9 in May, indicating an acceleration in growth. from a report: “Businesses in sectors such as travel, tourism, entertainment and leisure are enjoying a small post-pandemic boom as spending is shifted from goods to services. Survey data indicates GDP growth at an annual rate of just over 2%, and the uptick in business expectations indicates survival Growth is strong as we head into summer.”
the May ISM Services PMI It fell to 50.3, indicating slowing growth in the sector as growth in new orders slowed. Although inventories are back to growth. Price growth also slowed.
🎈 Profit margins drive inflation. a New York Federal Reserve Bank paper (HT Tracy Oy) found that “maintaining consistent profit margins” is the second most important factor influencing pricing decision for firms.
🏢 The offices are very empty. from castle systems: “Office occupancy fell 1.4 points to 47.6% in the last holiday week, according to a 10-city return-to-work measure from Kastle. The drop in occupancy was widespread, with all tracked cities seeing a decline except for Los Angeles. The city rose a tenth of a point to 49 % occupancy.
📈 Estimates of near-term GDP growth remain rosy. the The GDP model is now available for the Federal Reserve Bank of Atlanta Real GDP growth is expected to pick up at a rate of 2.2% in the second quarter. While the model’s estimate is far from high, it is nonetheless very far from its initial estimate 1.7% growth as of April 28th.
Putting it all together 🤔
despite of recent banking turmoilwe continue to get evidence that we can see a file The “moderate” bullish soft landing scenario Where inflation subsides to manageable levels without the economy having to plunge into recession.
The Federal Reserve has recently adopted a less hawkish tone, Recognition on February 1 that “For the first time the process of deinflation has begun.” on May 3The Fed has signaled that the end of rate hikes may be here.
In any case, inflation still has to fall further before the Fed can get comfortable with price levels. So we must We expect the central bank to keep monetary policy tightwhich means that we must be prepared for strict financial conditions (for example, higher interest rates, stricter lending standards, and lower stock valuations).
All this means The market may continue to be hit For now, the risks The economy plunges In a recession it will be relatively high.
At the same time, it is important to remember that while recession risks are rising, Consumers come from a very strong financial position. The unemployed get jobs. Those who have jobs get raises. And many still have excess savings To take advantage of. Indeed, strong spending data underscores this fiscal resilience. So it is It is too early to sound the alarm from a consumption perspective.
At this point, ie An economic downturn is unlikely to turn into an economic disaster Given that The financial health of consumers and businesses remains very strong.
And as always, long-term investors should remember this recessions And bear markets equitable part of the deal When you enter the stock market with the goal of making long-term returns. while The markets have had some very difficult yearsThe long-term outlook for stocks It is still positive.