Transcript

No Real Spark. · ANGLES.

0:01
SPEAKER_00: No real spark.
0:03
SPEAKER_00: My weekly market review, May 12th, 2024.
0:07
SPEAKER_00: Another positive week for stocks mostly came about exclusively because of last
0:12
SPEAKER_00: Monday's favorable price action.
0:14
SPEAKER_00: The indexes then barely moved from Tuesday through Friday on a lack of impactful
0:19
SPEAKER_00: economic data releases and fewer interesting earnings reports.
0:24
SPEAKER_00: Continued improving optimism about the timing and frequency of Fed interest rate
0:28
SPEAKER_00: cuts in the afterglow of the previous Friday's Goldilocks jobs report drove stocks
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SPEAKER_00: solidly higher on Monday.
0:37
SPEAKER_00: This capped the S&P 500's best three-day run of the year so far and took the index
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SPEAKER_00: back above its technically important 50-day moving average.
0:48
SPEAKER_00: The positive momentum initially persisted into Tuesday,
0:52
SPEAKER_00: sending the S&P 500 spiking briefly above 5,200 for the first time in a month.
0:59
SPEAKER_00: But it began to tail off as the session wore on,
1:02
SPEAKER_00: reflecting some mixed minor earnings reports and rising geopolitical tension in
1:07
SPEAKER_00: Gaza and Ukraine.
1:09
SPEAKER_00: The major stock indexes ended up virtually unchanged on the day.
1:14
SPEAKER_00: The rally ran out of steam in a snoozer of a session on Wednesday,
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SPEAKER_00: with stock prices hardly budging all day.
1:21
SPEAKER_00: With Q1 2024 earnings season now past its peak and no major economic data until the
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SPEAKER_00: Consumer Price Index CPI a week away,
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SPEAKER_00: markets were lacking any real mood-swinging catalysts.
1:35
SPEAKER_00: Apart from the release of some low-level economic data,
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SPEAKER_00: potential geopolitical developments,
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SPEAKER_00: which by their very nature tend to rarely be market positive,
1:45
SPEAKER_00: and maybe some chattering Fed officials throwing their two cents into the interest
1:50
SPEAKER_00: rate cut timing debate.
1:53
SPEAKER_00: On Thursday morning,
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SPEAKER_00: the Bank of England fell in step with the Fed and the European Central Bank,
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SPEAKER_00: announcing no change to local interest rates.
2:01
SPEAKER_00: Weekly U.S.
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SPEAKER_00: unemployment claims data showed a meaningful increase, bolstering interest rate cut hopes.
2:09
SPEAKER_00: Once again,
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SPEAKER_00: though,
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SPEAKER_00: there was no real spark in stock markets one way or another,
2:14
SPEAKER_00: although we saw a bit more green on the screen than we had the day before,
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SPEAKER_00: with the S&P 500 able to hold above the 5200 level this time.
2:24
SPEAKER_00: A fourth consecutive day of virtually no change in stock prices on Friday saw a big
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SPEAKER_00: fall in the highly dodgy Consumer Sentiment Survey reading,
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SPEAKER_00: which basically asks Joe Public how he's feeling about things and what his
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SPEAKER_00: considered expectations are about the economic growth trajectory and his guesses
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SPEAKER_00: about the future rate of retail inflation over various upcoming future time horizons.
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SPEAKER_00: In as much as a big influence on the responses to this survey could very well be
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SPEAKER_00: TikTok videos,
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SPEAKER_00: boneheaded Facebook posts,
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SPEAKER_00: and partisan political nonsense,
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SPEAKER_00: its value as a meaningful data point is to say the least highly questionable,
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SPEAKER_00: and the market mostly treated it with the contempt and disrespect that it deserves.
3:15
SPEAKER_00: I've been asked a lot recently about the relationship between inflation and
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SPEAKER_00: interest rates and how and why this affects the outlook for stocks.
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SPEAKER_00: And I want to give a quick explanation here on the eve of the latest inflation data
3:28
SPEAKER_00: of how to think about it.
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SPEAKER_00: It's actually all about the straightforward math surrounding real interest rates.
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SPEAKER_00: The real interest rate is simply the Fed funds rate
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SPEAKER_00: set by the central bank at its periodic meetings, minus the rate of retail inflation.
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SPEAKER_00: So that is currently 5.375 minus 3.5, which is 1.875%.
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SPEAKER_00: Real interest rates have obviously been mostly climbing as the inflation variable
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SPEAKER_00: has been steadily falling and nothing has happened on the Fed funds rate for quite
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SPEAKER_00: a while.
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SPEAKER_00: However,
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SPEAKER_00: this trend has been leveling off somewhat lately as inflation is kind of flatlining
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SPEAKER_00: and there have been no changes to the Fed funds rate for nine months now.
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SPEAKER_00: It is what happens next to real interest rates that will determine the timing and
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SPEAKER_00: extent of future Fed rate cuts and thereby the likely prospects for the U.S.
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SPEAKER_00: stock market.
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SPEAKER_00: If inflation were to resume its rapid decline,
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SPEAKER_00: then real rates would obviously rise and the risk of a serious economic slowdown or
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SPEAKER_00: even a hard landing would increase and potentially negatively impact company
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SPEAKER_00: earnings and thereby stock prices.
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SPEAKER_00: In this circumstance,
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SPEAKER_00: the Fed will need to quickly and maybe severely cut interest rates to try and avoid
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SPEAKER_00: this outcome.
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SPEAKER_00: Note that I say it will need to rather than it will want to.
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SPEAKER_00: As long as the cuts have the desired effect of avoiding a recession,
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SPEAKER_00: then a soft landing will have occurred and the stock market will be very happy
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SPEAKER_00: indeed and likely charge higher.
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SPEAKER_00: But if the Fed is too late or too timid with its cuts and fails to stop the
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SPEAKER_00: damaging effect of higher real interest rates on potential earnings,
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SPEAKER_00: then stocks could have a very long way to fall since this scenario is not even
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SPEAKER_00: close to having been priced into current levels.
5:32
SPEAKER_00: This is the needle that the Fed has to carefully thread.
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SPEAKER_00: If the rate of inflation remains stubbornly static or even shows signs of shifting
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SPEAKER_00: higher again,
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SPEAKER_00: then real rates will obviously remain unchanged or even begin to fall a bit.
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SPEAKER_00: In those circumstances,
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SPEAKER_00: there will be zero inclination on the part of the Fed to make any rate cuts at all,
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SPEAKER_00: since reducing interest rates under these circumstances will only shrink the
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SPEAKER_00: downward pressure on inflation and risk setting up a doom loop of high inflation
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SPEAKER_00: and higher but uncuttable interest rates,
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SPEAKER_00: which will obviously not please the stock market.
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SPEAKER_00: We'll learn more this week.