Back in 2005, when I was an intern on the trading floor of a very large bank, they asked me to put together a list of economic indicators in order to develop a "surprise index" of macro data points. I basically used the indicators listed on J.P. Morgan's economic calendar (still the standard reference point today), plus some market-based gauges like the performance of transports and semiconductors.
And for the next fifteen years, that list would have been basically unchanged. Until today. Suddenly, things aren't lining up. Unless they are. There's a lot of confusion out there in the marketplace. And I'm not the only one who feels this way. Even Jamie Dimon laid out three reasons why the economy is so hard to explain right now in his annual shareholder letter released yesterday.
Liz Young talked about it on Halftime yesterday, in response to Mike Wilson of Morgan Stanley's call that we are in a "bear rally" led by utilities and defensives. "Some early cycle things are turning over, like housing," she said. "But the macro data is okay." Rich Bernstein on Power Lunch said we are "late cycle" and favors defensives along with materials, financials, and industrials--but he also noted that "it's very hard to find corroborating evidence that says a recession is imminent." So we could be late cycle for a long time, say, eighteen months? I asked him. "We could be," he replied.
Bernstein said he would shy away from consumer discretionary stocks right now. But at the same time, we've seen travel stocks--the ultimate discretionary play--going gangbusters over the past four weeks. The "AWAY" ETF is up 20% since March 7th. Just this morning, shares of Carnival cruise are up 5% after the company reported that last week was its single busiest week for new cruise bookings in history. The CEO of Expedia says this summer will be "the busiest travel season ever" and their shares are making a go back towards their February all-time highs.
So what gives? Raymond James strategist Tavis McCourt talked about these "strange days" over the weekend, but warned investors not to jump to overly bearish conclusions from signals like the inverted yield curve, or the recent slump in transport stocks. "We believe we are seeing a substantial shift from goods spending transitioning to services as the U.S. economy reopens, rather than a slowdown due to financial stress," he wrote.
And if he's right, then the slumping performance of transports and semiconductor stocks doesn't matter as much as it normally would, because it tells us the recession goods "supercycle" may be over, but not that the overall economic expansion is as well. The transport stocks had their worst day Friday in two years, and are down 6% in a week. But, that was also after the Dow Transports on March 29th hit an all-time high, which makes it a little soon to say this bellwether is collapsing.
The semiconductors have been even weaker, with the "SMH" ETF down 15% from its all-time highs around the turn of the year. Steve Grasso warned us yesterday away from the group, which he thinks is heading into a post-pandemic glut. Again, this would normally be a "tell" that the economic cycle is turning, and yet this time around, the only "tell" may be that the pandemic period is over and we are returning to a more normal economy.
In fact, this perhaps could all have a nice goldilocks ending if only inflation was receding sharply right now. The fact that it's not means we could be entering a very different kind of cycle entirely. Just yesterday, Goldman's U.S. wage tracker hit a new all-time high, going back to the mid-1980s. It's running up around 5.5% from a year ago, and pulling it back to the 4% or so range needed for the Fed to hit its inflation targets would require even more tightening than what's currently priced in, Goldman warns.
Or as Larry Lindsey told us, for the Fed to hit its inflation goals, we also need to see monthly CPI gains in the 0.3% range, less than half of what we've recently been experiencing and well below the 1%+ gain expected in the March report next week. Oh, and he thinks we'll be in an "inflation recession" next quarter, if we're not already in one. I asked him if he wanted to offer any investment advice in such a landscape, and he said in his personal portfolio he's short bonds and long commodities.
So it all seems to come down to whether we are entering a rerun, or not, of the 1970s. Goldman's equity strategist, David Kostin, reassured investors last week that the "S&P 500 has typically posted positive returns in the 24 months following yield curve inversion." But...the "1970s was the exception," he noted. The firm expects stocks to be basically flat this year, with the S&P at 4700 versus just under 4600 today. In the early 1970s, the two-year/ten-year yield curve inverted in 1973, and the S&P ultimately went on to drop 48%.
Does your head hurt yet? I'll close with this--Barry Knapp, of Ironsides Macroeconomics, doesn't think a recession is imminent and is sticking with this overweight in U.S. stocks. "In a word, productivity," he says--the pandemic "was a positive productivity shock [and profit] margins will increase."
He is overweight industrials, financials, and energy--much like the more cautious Rich Bernstein--but underweight defensives like staples and utilities that more bearish investors favor right now. Meanwhile, as for the "reopening" plays, that has been a definite call of MKM's Michael Darda, along with smaller-cap "cyclical value." And yet, growth stocks have lately been regaining their mojo as people worry that broader growth will become more scarce.
This is the mushiest mid-market cycle that I can remember, nothing like the "set it and forget it" days of the 2010s. And I'm just glad I don't have to be a professional trader or investor right now.
See you at 1 p.m!
Kelly
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