ANGLES.

Another positive week for stocks mostly came about exclusively because of last Monday’s favorable price action. The indexes then barely moved from Tuesday through Friday on a lack of impactful economic data releases and fewer interesting earnings reports.

Continued improving optimism about the timing and frequency of Fed interest rate cuts in the afterglow of the previous Friday’s Goldilocks Jobs Report drove stocks solidly higher on Monday. This capped the S&P 500’s best three-day run of the year so far and took the index back above its technically-important 50-day moving average.

The positive momentum initially persisted into Tuesday, sending the S&P 500 spiking briefly above 5200 for the first time in a month, but it began to tail off as the session wore on - reflecting some mixed minor earnings reports and rising geopolitical tension in Gaza and Ukraine. The major stock indexes ended up virtually unchanged on the day.

The rally ran out of steam in a snoozer of a session on Wednesday with stock prices hardly budging all day. With Q1 2024 earnings season now past its peak and no major economic data until the Consumer Price Index (CPI) a week away, markets were lacking any real mood-swinging catalysts apart from the release of some very low-level economic data, potential geopolitical developments (which, by their very nature, tend to rarely be market-positive) and maybe some chattering Fed officials throwing their two cents into the interest rate cut timing debate.

On Thursday morning, the Bank of England fell in step with the Fed and the European Central Bank, announcing no change to local interest rates. Weekly U.S. unemployment claims data showed a meaningful increase, bolstering interest rate cut hopes. Once again, though, there was still no real spark in stock markets one way or another, although we saw a bit more green on the screen than we had the day before, with the S&P 500 able to hold above the 5200 level this time.

A fourth consecutive day of virtually no change in stock prices on Friday saw a big fall in the highly-dodgy Consumer Sentiment Survey reading which basically asks Joe Public how he’s feeling about things and what his considered expectations are about the economic growth trajectory and his guesses about the future rate of retail inflation over various upcoming future time horizons.

Inasmuch as a big influence on the responses to this survey could very well be TikTok videos (see ARTICLE OF THE WEEK below), boneheaded Facebook posts and partisan political nonsense, its value as a meaningful data point is, to say the least, highly questionable and the market mostly treated it with the contempt and disrespect that it deserves.

I have been asked a lot recently about the relationship between inflation and interest rates and how and why this affects the outlook for stocks and I want to give a quick explanation here, on the eve of the latest inflation data, of how to think about it. It’s actually all about the straightforward math surrounding real interest rates.

The real interest rate is simply the Fed Funds rate (set by the central bank at its periodic meetings) minus the rate of retail inflation. So that is currently 5.375% - 3.50% = 1.875%. Real interest rates have obviously been mostly climbing as the inflation variable has been steadily falling and nothing has happened on the Fed Funds rate for quite a while. However, this trend has been leveling off somewhat lately as inflation is kind of flatlining and there have been no changes to the Fed Funds rate for nine months now. It is what happens next to real interest rates that will determine the timing and extent of the future Fed rate cuts and thereby the likely prospects for the U.S. stock market.

If inflation were to resume its rapid decline, then real rates will obviously rise and the risk of a serious economic slowdown or even a hard landing will increase and potentially negatively impact company earnings and thereby stock prices. In this circumstance, the Fed will need to quickly (and maybe severely) cut interest rates to try and avoid this outcome. Note that I say that it will “need to” rather than it will “want to”.

As long as these cuts have the desired effect of avoiding a recession, then a soft landing will have occurred and the stock market will be very happy indeed and likely charge higher, but if the Fed is too late or too timid with its cuts and fails to stop the damaging effects of higher real interest rates on potential earnings, then stocks could have a very long way to fall since this scenario is not even close to having been priced in to current levels. This is the needle that the Fed has to carefully thread.

If the rate of inflation remains stubbornly static or even shows signs of shifting higher again, then real rates will obviously remain unchanged or even begin to fall a bit. In those circumstances, there will be zero inclination on the part of the Fed to make any rate cuts at all since reducing interest rates under these circumstances will only shrink the downward pressure on inflation and risk setting up a doom loop of high inflation and higher-but-uncuttable interest rates which will obviously not please the stock market one little bit.

We’ll learn more this week.

OTHER NEWS ..

Coming Up: A Very Risky Time? .. Goldman Sachs analysts issued a note last week saying that they believe investors may be underpricing U.S. election risk. The way things are looking, we are unlikely to have a fully settled outcome immediately after polling day in November, with recounts and political posturing possibly heading to the courts with a non-trivial risk of political violence around the election and afterwards.

In 23 states (including the swing states of Arizona, Michigan and Pennsylvania), provisions exist for automatic or mandatory recounts if the margin between the two candidates is within certain parameters, typically 0.5%. Meanwhile, 41 states will permit the losing candidate to petition for a recount if he says he believes that there was fraud or some kind of mistake in the return of votes. Given the elevated level of rhetoric and the sheer number of conspiracy theory believers in the country right now to play to, this provision is likely to be very heavily leaned on by the loser candidate.

The stock market is going to hate all this and increased volatility is a certainty if things pan out as many fear they will.

Very Bad To Much Worse .. Things just keep getting worse for Boeing. Now the U.S. Securities and Exchange Commission (SEC) is scrutinizing statements made by the embattled planemaker about its safety practices following a near-tragic January accident aboard one of its 737 Max 9 planes earlier this year.

The SEC investigation is focused on comments by the company and its executives that may have misled investors. The probe, which is examining statements before and after a panel blew off during an Alaska Airlines flight on January 5th, adds to an ever-growing monster pile of legal problems facing Boeing, whose stock has lost about one third of its value in 2024.

Sinking Deeper .. The share of U.S. home mortgages considered seriously underwater (defined as where the loan balance is at least 25% more than the market value) ticked up to roughly one in 37 homes last quarter, according to real estate data firm ATTOM. Mortgages generally become seriously underwater when someone overpays for a home or when it is purchased with such a small downpayment that there is no sufficient buffer if the property falls in value.

The proportion of underwater homes is very much higher in southern states with the homeowners in the worst shape living in Kentucky, Mississippi, Oklahoma, Florida and Louisiana.

ARTICLE OF THE WEEK ..

I am sure I don’t need to tell any of the savvy readers of this weekly report not to ever take any financial advice from any of the absurd “Finfluencers” on the cess-pool that is Tik-Tok, but just in case you know anyone who may be thinking about it, here i…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

Last week saw a pretty dismal month of April finally come to an end with most indexes suffering a >4% loss for the month, the first monthly setback of the year. But stocks enjoyed a second consecutive week of higher prices after a wild ride that navigated some big earnings reports, a Fed interest rate decision meeting and a Jobs Report.

The bulls remained in the driver's seat from the previous week on Monday as the recently-shaky stock prices of Apple and Tesla continued their recent recoveries and helped drag all the indexes modestly higher on the day, taking the S&P 500 to its highest level for a couple of weeks, ahead of a tsunami of Q1 earnings reports.

There was a tangible change of mood however on Tuesday as stocks seemed absolutely determined to move lower ahead of Fed chairman Jerome Powell’s press conference the next day which suddenly had the feel of a possible big downside catalyst. Any excuse would do and when the normally-overlooked data point of the Employment Cost Index came in a tad hotter than expected and the very flawed statistic of Consumer Confidence came in colder, this was all that was needed to trigger a big spike in Treasury yields and a major selloff in stocks that sent the indexes plunging.

Before markets opened on Wednesday, Amazon came out with a very robust earnings report, but Starbucks and CVS disappointed and their respective stock prices all responded accordingly. The market in general, however, basically did nothing all morning, holding its collective breath ahead of hearing from Powell and taking a largely as-expected Job Openings and Labor Turnover Survey (JOLTS) report in its stride.

There was of course no change made to the Fed Funds interest rate, everyone knew that was going to be the case. The press conference was interesting though, as Powell skillfully threaded the needle, remaining absolutely on message that there will be interest rate cuts coming at some point, it’s just a matter of when. While acknowledging that recent data had shown inflation stickiness to be a real thing and that this was hampering the Fed’s ability to cut interest rates right now, he scornfully laughed off the idea that the next move would be to raise rates.

Stocks and bonds initially lapped this all up and indexes exploded higher and bond yields fell hard as soon as Powell appeared to rule out a rate increase, with the S&P 500 jumping 1.2% in a matter of minutes. But stock prices then quickly reversed back lower to finish a smidge down on the day after seeming to recalibrate his message as actually having been; ok, we aren't about to raise interest rates, but we are still a long way from having enough confidence that inflation is under control to lower them anytime soon.

Wall Street’s mood swung back to positive on Thursday and stocks rose nicely with the rate hike boogeyman apparently dead. But there was a little caution in the air as there were still plenty of wildcards to be negotiated before the relative safety of the weekend, with earnings from Apple (AAPL) after the bell and a big Jobs Report the next day.

The Apple earnings report, the final one this season from the big guns, showed continued sales declines around the world and ongoing challenging conditions in China, but nothing was as bad as had been feared. This saw the stock price shoot higher in the after-market, helped by the announcement of a dividend increase and the biggest stock buyback in history.

Pre-market on Friday, we learned from the Jobs Report that payrolls rose 175k in April, somewhat below expectations but still very solid. The unemployment rate was 3.9%, a fraction above both estimates and the previous month and, importantly for inflation optimism, wage growth rose only 0.2% month-to-month, below the 0.3% prediction.

If Wall Street could have created a perfect jobs report in a laboratory, it would have looked just like this. Stocks screamed higher and Treasury yields plummeted, boosted by both the Apple data from the night before and the impeccable Jobs Report before taking something of a cold shower around lunchtime, but all the indexes still closed solidly higher on the day and back into the green for the week. Tuesday’s misery and pessimism suddenly seemed a million miles away, emphasizing the exhausting data-addicted rollercoaster nature of the markets right now.

The interest rate futures market swiftly pulled forward the most likely month for the first rate cut to September from December, with the probability of a second cut in 2024 now priced at about 50/50.

Wall Street seems unable to stay in the middle right now when it comes Fed expectations. It seems to constantly gyrate from the glass is completely full (six or seven interest rate cuts in 2024) to there’s nothing left in the glass at all (the next move is an interest rate increase) spending very little time anywhere in between and had convinced itself over the past couple of weeks that Powell could put rate hikes back on the table at this meeting, only to see him reject the idea out of hand.

OTHER NEWS ..

Finally! .. The term “Magnificent Seven” has been finally retired by analysts and the financial media as there’s overdue acceptance that Telsa (TSLA) ain’t exactly magnificent since, despite a recent rebound, over a third of the company’s value has evaporated just in 2024. This has resulted in Tesla’s rank by market capitalization now falling to #12.

So, for the moment, the elite group of largest U.S. companies is now being referred to as “The Big Six.” (MSFT, AAPL, GOOGL, AMZN, NVDA and META) Unlike the Mag-7, which was being dragged down by TSLA’s dismal performance, the Big Six are generally in well-defined multi-year uptrends.

Hero To (Almost) Zero .. Peloton (PTON), the poster child of a pandemic 2021 darling that then became a disastrous POS stock, fell to new all-time lows last week as a calamitous earnings report showed deepening losses, collapsing revenue and the number of both equipment purchasers and subscribers falling by the tens of thousands. The company announced the departure if its CEO, Barry McCarthy and a fifth round of layoffs, this time slashing 15% of the remaining global work force. The stock price has fallen 98.4% from its peak in July 2021.

Another One Bites The Dust .. Billionaire Changpeng Zhao (CZ to his crypto buddies and the formerly-fawning media), founder of the world’s biggest crypto exchange, Binance, was sentenced to four months in prison, a significantly lighter punishment than requested by prosecutors who hoped to send a message about rampant crime in the crypto industry. His incarceration means that both of the former top dogs of crypto world (CZ and SBF) are currently felons behind bars on fraud and other criminal convictions.

THIS WEEK’S UPCOMING CALENDAR ..

While there’ll still be plenty of earnings reports to feast on this week, things will be quieter on the economic data front.

Earnings releases will include Disney, Uber, AirBnb, BP, Occidental Petroleum, BioNTech, Warner Bros., Anheuser-Busch, Palantir Technologies, Tyson Foods, Ferrari, Honda, Roblox, Wynn Resorts and NRG Energy.

Economic data to watch includes the Federal Reserve's Consumer Credit Data and the University of Michigan's Consumer Sentiment Index

The Bank of England will announce a monetary-policy decision this week and is widely expected to keep its target interest rate unchanged.

ARTICLE OF THE WEEK ..

Got money to spend? How to best do that.

LAST WEEK BY THE NUMBERS ..

Last week’s market color courtesy of finviz.com

Last week’s best performing U.S. sector: Utilities (two biggest holdings: Next Era Energy, Southern Co.) - up 3.8% for the week.

Last week’s worst performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 3.3% for the week.

* SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest U.S. companies. Its price rose 0.8% last week, is up 7.6% so far this year and ended the week 2.3% below its all-time record closing high (03/27/2024)

* IWM, the Ru…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

The Federal Reserve remains in a holding pattern, circling the airport until a safe runway opens up on which to land the plane, following an absolute deluge of earnings reports and important economic data last week. Stagflation, anyone? Use of this rather scary term that is reminiscent of a 1970s stock slump is probably premature at this point, but the chances of a “worst of both worlds” outcome of simultaneous stubbornly high inflation and rapidly slowing economic growth do appear to have increased a little over the last few weeks.

In terms of last week’s earnings, the market took Meta/Facebook and a loaded pistol behind the woodshed, but lavished confetti and a lot of love on the likes of Microsoft, Alphabet/Google and even Tesla, which was enough to help carry the indexes higher for the first week in four.

Following a quiet weekend on the newswires and a technically very oversold condition, the six-day losing streak for stocks finally came to an end on Monday with an impressive rebound led by NASDAQ tech and Small Caps ahead of a slew of earnings reports from a number of big-time names, to recover some of the ground lost from the previous week’s miserable performance. This added strength to the idea that a 5% decline from recent highs might be viewed as simply a retreat from unsustainably over-optimistic expectations thereby removing excess froth, rather than a sudden and more fundamental negative turn. Later in this report, I’ll discuss what might change this view.

The feel-good vibes continued into Tuesday, as some stellar earnings reports came out, accelerating the recovery in stock prices, again powered primarily by NASDAQ tech and Small Caps.

Predictably however, 2024’s biggest POS stock, Tesla (TSLA), bucked the earnings trend after-hours on Tuesday with a disastrous report, showing that profits collapsed, the cash-burn rate rocketed, sales missed expectations and margins shrank in a marketplace that seems to be falling out of love with the company’s product. However, a hefty 43% decline in the stock price since January has a lot of calamitous news already baked in and the stock actually rallied hard on the announcement that the firm was being forced to bring forward the launch of some new, cheaper vehicles and that is working on some form of licensing agreement for its self-driving technology with a “major automaker”.

The two-day rally cooled off on Wednesday, with stocks taking a breather and closing unchanged ahead of Meta/Facebook (META) taking the baton with its report after the closing bell. Meta’s report was kind of the mirror image of Tesla’s. It mildly beat expectations on revenue and doubled its profits from a year ago, but upcoming scenarios (like massive imminent capital expenditure resulting from yet another apparent pivot towards the latest shiny object - this time from the metaverse to AI) worried Wall Street and the stock got pounded hard in after-hours trading.

Thursday morning’s estimate for Gross Domestic Product (GDP) disappointed, showing that the U.S. economy likely grew at an annualized rate of 1.6% in Q1 2024, well below the 2.4% expectation and a significant slowdown on its recent pace.

Traders extrapolated some of Thursday’s data into expectations for the next day’s inflation report and didn’t like what they saw. Market interest rates spiraled higher again, partly driven by the futures-driven expectation of when the first interest rate cut is most likely to be now being pushed out to December. The annihilation of Meta/Facebook’s stock price continued and the indexes were rattled and got beaten up pretty badly.

Two of Meta/Facebook’s Magnificent Seven cohorts, Microsoft (MSFT) and Alphabet/Google (GOOGL) fared much better when their earnings releases hit the markets after the closing bell. Pretty much everything to do with Microsoft looked great and handily beat expectations, especially in the cloud computing arena. Alphabet/Google’s results were so impressive that the firm was even able to announce its first-ever dividend and also a stock buyback. Again, cloud computing was at the forefront of the good news.

On Friday morning, we learned that the Federal Reserve’s go-to Core Personal Consumption Expenditures (PCE) price index measure of inflation remained zippy, increasing 0.3% from the prior month and 2.8% from a year ago, but all pretty much in line with expectations. This allowed Wall Street to properly celebrate the previous night’s earnings when the market opened and stocks enjoyed a jolly day to cap a nice week.

It’s important to understand that the rally from the October lows did not stall because things went suddenly “bad.” It happened because they aren’t as good as everyone was hoping they would be and those hopes were very, very optimistic. Given that, what is it that would turn this pullback into something more sustained and damaging?

* Growth slows. If growth rolls over, we could be looking at stagflation. In stagflation, the S&P 500 could quite easily trade down to a level of 15X multiple of earnings. That implies a decline of over 1,000 points from here. Growth is the single most important influence on the economy and if it meaningfully slows, look out below. The key indicators to watch: new payrolls, unemployment rate (both coming out this week).

* Rate hikes back on the table. The heavy lifting for the October-March rally was driven by markets assuming that rate hikes were over. If this turns out to not be true, it’ll create a major valuation reset and a give-back of the entire rally is not off the table. The key indicator to watch: futures market rate cut expectations (see FEDWATCH INTEREST RATE TOOL, shown below and every week in this report).

* Oil price spikes. The conflicts in Russia/Ukraine and Israel/Hamas spreading regionally would guarantee this, but there are other possibilities including the disruption of global shipping and OPEC supply cuts. Rising oil would increase headline inflation and the optics and politics of high oil and higher inflation would likely eliminate any possibility of a rate cut. The key indicator to watch: WTI crude oil prices, especially a move towards or even beyond $100/barrel.

* AI enthusiasm wanes. While AI enthusiasm hasn’t been the reason stocks have rallied, it has contributed to the magnitude of the gains and that’s why it matters. If doubt about the transformative power of AI starts to creep in, that will add downward pressure to prices in the tech sector which will gravely impact the major indexes, which are very tech-heavy. There’s no doubt that we are now entering the “show me” phase of AI, a phase that crypto for instance hasn’t managed to get out of for years. The key indicator to watch: Nvidia’s stock price (NVDA). It’s the darling of AI enthusiasm and the firm’s earnings on May 22nd will be watched closely.

The general macroeconomic set-up is still positive for stocks. However, we cannot lose sight of the fact that that can absolutely change and these are the four factors that we’ll be watching for any sign of that.

OTHER NEWS ..

Sector Takeaways .. What can the relative performances of particular sectors tell us about the stock market as a whole .. ?

* The fact that both the Consumer Cyclical and Consumer Defensive sectors are both rated as underperforming emphasizes growing investor concerns about the outlook for the health of the consumer in 2024,

* the strong underperform ratings on Real Estate and Utilities reiterate there are ongoing worries about a “higher-for-longer” Fed policy rate,

* the outperformance rating of Energy underscores upside inflation risks, and

* the neutral performance rating on Technology and Communication Services suggest the market leaders of 2023 are taking a breather here in Q2 2024.

No Shrimp On The Barbie For You, Elon .. An Australian court ordered X/Twitter to remove graphic videos of a brutal Sydney church murder and its associated promotion of Russian-generated, dangerous and false conspiracy nonsense. CEO Elon Musk pointedly refused to…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

Interest rate cuts are beginning to look like a mirage; the closer we seem to get to them the more they seem to recede into the distance. By the end of last week, the most likely Fed interest rate at the end of the year according to futures markets was 5.125% (see FEDWATCH INTEREST RATE TOOL below). With Fed Funds currently sitting at 5.375%, this now implies just one solitary Fed rate cut of 0.25% between here and New Year’s Eve.

As a result, stocks fell for the third straight week and tech-heavy NASDAQ stocks in particular were brutalized, suffering their biggest weekly decline in 17 months. The so-called “Magnificent Seven” stocks lost a total of over $950 billion in market value last week.

The great stock market rally of 2023-2024 is showing signs of possibly unraveling under pressure from growing uncertainty surrounding interest rates, economic growth and corporate earnings as well as geopolitical concerns and even the first faint signs of nervousness about the domestic election campaign.

Iran’s largely impotent retaliatory strike on Israel over the preceding weekend didn’t really move the needle much as far as markets were concerned on Monday. Oil prices actually shifted a little lower and stocks began the day meandering around aimlessly before suffering an afternoon collapse led by Big Tech after a hot Retail Sales report sent market interest rates ripping even higher, with the 2-Year Treasury yield breaking up through 5% and the 10-Year reaching its highest level since mid-November.

Mixed economic data overnight from China added to the jitters on Tuesday morning. Also, Fed chairman Jerome Powell seems to have pivoted to a much more cautious stance since his last public pronouncements in March. He essentially said at a moderated Q&A session in Washington that, due to steadfast inflation during Q1, a Fed policy of higher-for-longer interest rates has now become not only a possibility, but in fact the most likely path forward.

Despite this potential double-whammy, alongside Iran vowing to retaliate against any future Israeli retaliation to last weekend’s Iranian retaliation to Israel’s recent deadly attack on an Iranian consulate inside Syria, stocks took a perhaps surprisingly sober view of things and hardly moved, although less surprising was that there was was no respite from ever-increasing market interest rates/falling bond prices.

Stocks made a half-hearted effort to rebound early on Wednesday but soon gave up and looked pretty exhausted as prices sank again in another down-day for most names, led by weakness in Big Tech in general and Nvidia in particular, as some of the day’s earnings reports disappointed and traders seemed to be replaying Powell’s comments over and over in their minds and becoming more and more uneasy each time.

Earning reports released on Thursday looked a lot rosier but once again, stocks failed to hold on to early gains in the face of continuously rising market interest rates, finishing essentially flat-to-a-bit-lower for the day.

Investors woke on Friday to the news that Israel had attacked Iran. Upon closer inspection, however, it appeared that that strike had been just about as ineffectual as Iran’s attempt on Israel at the weekend. After a brief spike, oil prices moved lower, indicating a lack of excessive concern on the part of markets which seemed to feel, perhaps ironically, that the chances of an escalation were lower after the attack than they were before it.

Rather than a panicked response to more bombs dropping in the Middle East, Friday resembled just a standard recent financial market trading day, which meant that traders turned their focus back onto concerns about higher for longer interest rates and some mixed earnings reports, which resulted in another plunge in stock prices, with the tech-heavy NASDAQ-100 in particular getting pummeled (AI market darlings Nvidia and Super Micro Computer were the two worst performers, falling 10% and 23% respectively in a matter of hours), capping the index’s worst week since November 2022.

This also represented a sixth straight day of losses for the S&P 500 index, the longest such streak of the year, shedding about 4% of its value during that time and sinking back down below the psychologically-important 5000 level that it first surpassed to a very loud fanfare back in early February.

When markets decline like this, investors get nervous, even if it’s after such a fantastic run as we’ve experienced over essentially the past 15 months. But based on facts, the only thing that’s really changed in this market recently is that actual events and data haven’t lived up to what were unrealistically positive expectations, which is something I will say I have been warning about for a while.

The stock market was priced for perfection at 5200 in the S&P 500 but it has been forcefully reminded that the environment is not perfect and stocks declined accordingly. Positively, this pullback to below 5000 may have started the process of re-setting expectations to something a bit more realistic.

At these levels, the S&P 500 is starting to more appropriately reflect the fact that:

* 1) the outlook isn’t as good as markets previously thought, but

* 2) is still broadly positive, because the following statements remain generally true as we speak: Growth is solid, inflation is still declining (slowly and jerkily, but it’s still happening), the next move on interest rates is still most likely to be a cut and AI enthusiasm broadly continues.

Until those four statements aren’t true, dips like this are likely to be relatively shallow and short-lived and investors will most likely be ultimately rewarded for holding their nerve.

OTHER NEWS ..

In The Dark .. Netflix was once the “N” in the group of dominant so-called “FAANG stocks”, which were ultimately replaced by the “Magnificent Seven”, an elite club that Netflix was not invited to join. Things have looked up lately for the streaming service, though and last week the company announced that it had added 9.33 million new subscribers in Q1 2024, crushing the consensus prediction of 5.1 million.

However, Netflix accompanied this spectacularly good news with the shock announcement that, going forward, it plans to stop providing quarterly membership data and average revenue generated per member. That stunned analysts on the earnings call, since these have always been the metrics that investors used to judge the company’s investment-worthiness.

Wall Street does not like the sense that it is being kept in the dark and the initial reaction to the blowout earnings report was to punish the stock which fell almost 7%.

Sinking .. Existing home sales in March posted their biggest monthly drop in more than a year, the National Association of Realtors said Thursday. The 4.3% decrease from February in a >7.0% mortgage rate environment was the largest percentage decline on a monthly basis since November 2022.

Didn’t get into Harvard, Princeton or Yale? .. Your next best option isn’t necessarily the most “prestigious” college that accepted you. Right now, high school seniors are deciding where to enroll in college next year, a question that’s taken on added urgency recently. The cost of tuition is soaring – currently a four-year degree could easily cost a family more than a quarter of a million dollars – and good jobs are becoming harder to come by for college grads.

Bloomberg News analyzed hundreds of US colleges to determine the 10-year Return On Investment (ROI) of attending each school and found that in many cases public universities offer better returns than many elite private colleges. Here’s what they came up with for every university.

UNDER THE HOOD ..

Shorter term indicators continued breaking down last week. Recent observations of lackluster Demand and increasing Supply have given way to a corrective phase. Supply has gained momentum.

All three of the major technical gaps have now been filled as the index fell below the key 4,982 level on Friday. The Fear & Greed I…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

In the end it proved to be a rotten week for U.S. stocks. A geopolitical shadow hung over markets the whole time with American officials warning of an imminent Iranian reprisal for Israel’s recent deadly air strike against a consulate in Syria, which kept the price of oil very perky. Meanwhile domestically, the big news was more hot inflation data and a slowly-emerging troubling concern about the prospects for interest rate cuts in 2024.

JPMorgan Chase CEO Jamie Dimon used his annual letter to shareholders on Monday to add his voice to the quietly growing chorus of those warning that the Fed’s next move might not be an interest rate cut at all, but rather a rate increase. He listed factors including ongoing fiscal spending, increased U.S. remilitarization, restructuring of global trade, continued geopolitical unrest and the capital demands of a new green economy as inflationary factors that could feasibly result in interest rates in fact moving higher this year, contrary to the conventional wisdom that interest rate cuts are just around the corner.

Stock traders, however, appeared to be biding their time to start the week, preferring to focus more on the eclipse and swapping highly dramatic (!!) New York earthquake stories ahead of U.S. inflation data out later in the week and prices barely moved on what was the second-lowest trading volume day of the year so far.

Tuesday was no different, another lackluster trading session for stocks with indexes little changed for a second straight day. Market interest rates continued their relentless march higher with the 2 year, 5 year and 10 year Treasury yields all touching new highs for the year. This pushed bond prices lower.

Pre-market on Wednesday, the release of the Consumer Price Index (CPI) measure of retail inflation showed that stubborn upward price pressures persisted in March, appearing to slam the door shut on any lingering hopes of a Fed interest rate cut in either May or June, especially since the May CPI reading is scheduled to come out on the same day as the Fed's June decision. Even the probability of a cut in July was pretty much reduced to a toss-up (see FEDWATCH INTEREST RATE TOOL below).

March CPI rose 3.5% from a year earlier, higher than forecast and a meaningful pickup from February’s 3.2%. So-called Core prices (ex. food and energy) rose 3.8% from a year earlier, unchanged from the previous month but above expectations. This was the third consecutive hotter-than-anticipated inflation reading and reinforced the fact that, while inflation is not showing signs of rebounding, its decline has definitely stalled.

The stock market’s verdict was swift and brutal, it headed straight into free-fall right from the opening bell. The “zero-interest-rate-cut-in-2024-in-fact-expect-interest-rate-increases” theory of Jamie Dimon and friends suddenly did not seem so fanciful after all. Indeed, once ex-Treasury Secretary Larry Summers endorsed the theory on Bloomberg TV after seeing the inflation numbers, this particular elephant in the room suddenly started to become visible to everyone.

Those Treasury yields soared higher again, deeper into new 2024 record territory, sending bond prices spiraling even lower. Even the often-overly-optimistic futures market-driven expected total number of interest rate cuts in 2024 ticked down from three to two (remember, as recently as January, these same markets were assuming seven!).

The inflation picture got a bit more muddled on Thursday morning, when CPI’s cousin, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers, actually came in a touch softer than expected. This helped stop the bleeding to a certain extent as both stock and bond prices stabilized following the rout of the previous day, indeed the NASDAQ in particular had something of a healthy pop, helped by Amazon’s stock price hitting a new all-time high.

Friday was the official kick-off of the Q1 2024 earnings season and the traditional curtain-raiser of earnings and forecasts from some of the major banks could be described as mixed at best. With spiking fears of an imminent flare-up in the Middle East conflict and the ongoing intertwined inflation and interest rate concerns, stock markets swiftly resumed their sharp downward trajectory and by the close, Friday’s nosedive had proved to be even worse than Wednesday’s.

Although it was clearly responsible for a major selloff in stocks last week, I want to put forward the case that the March CPI number was not, of itself, quite the destructive negative game-changer that many seem to now be fearing.

Contrary to what you may be seeing on TikTok and on the more wacky fringes of Fox Business, we are not yet witnessing a rebound in inflation. Just that the decline has stalled. Annualized rates are heavily dependent on the base number from a year earlier and even the 0.4% monthly increase was actually 0.359% if taken out an extra decimal place meaning that it was in fact only one hundredth of one percent away from actually meeting the expectations of a 0.3% increase, which might well have elicited a less dramatic market response.

Higher interest rates and elevated inflation do not of themselves mean stock prices are in danger of falling. The keys are growth and earnings, which we need to watch very closely since the safety net of imminent interest rate cuts is now likely gone. If Q1 2024 earnings are strong and economic growth remains stable, then stocks can still move higher despite lofty market interest rates and limited or even no Fed rate cuts.

With “higher for longer” interest rates as a result of inflation’s stickiness, the dominance of tech will likely continue to fade, most probably making way for sectors like financials (Friday’s earnings notwithstanding), consumer defensive, healthcare and energy. This could lead to a more unified, less fragmented stock market that could be a rising tide that lifts all boats.

It’s entirely possible that last week’s experience will soon be either a) a rather forgettable speed-bump in a continuing upward march in stock prices or, b) the turning point that brought the October 2023-April 2024 rally to an end. Which it is will be determined by how earnings and economic growth shake out in the coming weeks.

OTHER NEWS ..

Front-Running? .. Unlike the Federal Reserve, the European Central Bank (ECB) seems quite happy to show that it is poised to kick off the global interest rate-cutting cycle among major economies very soon. It strongly hinted on Thursday that this would happen in June, which would likely front-run the Fed.

Air Contrast .. The share price of Boeing fell hard last week after a whistleblower claimed it took a number of shortcuts (including using Dawn dishwashing liquid as a lubricant for fitting a door) to speed up the assembly of the 787 Dreamliner and that the model is at severe risk of aging prematurely. The plane maker had earlier called such accusations “inaccurate” , but delivered the fewest aircraft in a quarter since mid-2021.

This is in stark contrast to the fortunes of one of the firm’s largest clients, Delta Air Lines whose forecast for this quarter blew past Wall Street’s estimates. It’s largely a function of well-heeled passengers willing to pay top fares rather than price-conscious flyers shopping for basic economy toward the rear of the plane. Revenue from the group of these more affluent flyers jumped 10% annualized last quarter, compared with 4% for the main cabin.

More Delinquency .. U.S. credit-card delinquency rates have hit a record level. Almost 3.5% of balances were at least 30 days past-due at the end of December, according to the Philadelphia Fed. That’s the highest figure since 2012. About 10% of borrowers now have an account balance that exceeds $5,200 and credit scores are getting worse.

The numbers signal added pressure on household finances in an era of swiftly increased interest rates. Only about one-third of cardholders pay their balance in full ever…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

Despite a valiant comeback effort on Friday, stocks endured a mostly jittery week and ended lower as some generally-accepted market narratives began to shift. Good news for the economy is finally becoming good news for stocks. The S&P 493 (without the so-called Magnificent Seven) is finally looking in good shape relative to the S&P 500 (which is dominated by the Magnificent Seven) and, according to an emerging heresy straight from the mouth of a leading Fed official no less, we may not be getting any interest rate cuts at all in 2024!

Trading on Monday was thinner than usual with many markets around the world still closed for Easter. Inflation figures released when the market was closed the previous Friday did little to bring forward the expected interest rate cut start date. The market-driven probability of a June rate cut briefly dipped below 50% for the first time and is now considered to be a coin flip (see FEDWATCH INTEREST RATE TOOL below). Market interest rates spiked higher, driving both stock and bond prices lower.

The retreat in stock prices accelerated on Tuesday with all indexes declining substantially as traders grew more anxious about higher market interest rates and the possibility of a “too-hot” Jobs Report on Friday. It also didn’t help the inflation outlook that oil prices shifted significantly higher to multi-month highs as the temperature of the Middle East conflict rose after Israel killed seven food aid workers in Gaza including American, British, Australian and Polish citizens and simultaneously launched fatal airstrikes on an Iranian consulate in Syrian sovereign territory.

On Wednesday, the fall in bond prices caused by the increasing market interest rates started looking more like a rout. The deadly Taiwanese earthquake caused some brief concern in the chip space, but giant chip producer TSMC quickly reported only a negligible effect on production, successfully calming market nerves, but Intel sank over 8% in a matter of minutes on poor profit and sales data, obviously unrelated to the earthquake.

Fed chairman Jerome Powell pretty much came right out and said it in a speech at Stanford; a soft landing seems to be happening and that just because the path to 2% inflation is bumpy doesn't mean we're off it. This encouraged a few dip buyers to finally move in to stabilize things and take most stock prices a smidge higher for the session after a pretty rough couple of days.

Thursday started out with the indexes chugging along nicely until that well-known Fed big-mouth, the Minneapolis president Neel Kashkari (who has never met a media microphone that he could resist speaking into) suggested that if progress falters in the fight against inflation, there may well be a grand total of zero interest rate cuts in 2024. This possibility has always been whispered about in hushed tones on the fringes, but for a senior Fed official to come out and openly put it out there caused havoc in an already nervy market and stock prices tumbled far and fast.

Friday was Jobs Day, with the critical data release from the Bureau of Labor Statistics coming out before the market open. We learned that job growth surged in March, as employers added 303k new positions, almost 100k more than expected and January and February’s job creation was revised upward. Unemployment ticked down to 3.8% but, importantly for inflation calculations, average hourly earnings fell to the lowest level in nearly three years at 4.1% annualized. This was the 39th consecutive month of job growth in the U.S. which has seen a total of 15 million new jobs added over that time and the unemployment rate has been not been above 4% for over two years now.

With the U.S. economy now showing signs of re-accelerating and recession risk seemingly as far away as ever, a relieved stock market took prices solidly higher in response - erasing the previous day’s losses but not those of the week as a whole.

Interestingly, this upward move in stock prices was in violation of the recent conventional formula of; strong economic data = higher inflation risk = a delay in interest rate cuts = lower stock prices. As I have alluded to of late, this old school line of logic appears to be breaking down in an environment where the Fed is showing signs of tolerance of >2% inflation, at least for a while. The updated formula would now seem to be; strong economic data = less chance of a damaging recession = improvement in earnings outlook = higher stock prices.

The shaky news last week did not really threaten the pillars upon which the rally since October has been built, but with the S&P 500 currently priced for perfection and at such very high valuations (21X earnings, vs. a long term average of around 19X), it doesn’t need to be game-changing to cause a correction of a few percent.

The merest suggestion of a challenge to an accepted orthodoxy (in last week’s case, that of the assumption of multiple interest rate cuts in 2024 following Kashkari’s comments) can have a swift and nasty effect on stock prices. In other words, there’s ample room for disappointment with markets at these levels. Wall Street seems to be beginning to take the view that the chances of a 5%-10% pullback are probably greater in the short term than the chances of a further 5%-10% rally.

Even if stock prices are able to continue higher, there are signs that investors may finally be tiring of Big Tech in general and the Magnificent Seven (which has frankly shrunk to the Fab Five now) in particular and looking to move into into other sectors that have more reasonable valuations.

OTHER NEWS ..

Tesla Crashing .. Tesla continues to get battered as a shockingly lower sales report on Tuesday saw a record miss of even the most pessimistic of estimates which, along with higher inventory data, confirmed that the world is rapidly falling out of love with the company’s products and very possibly with a very distracted Elon Musk’s unhinged antics as well. Then on Friday, Reuters reported that Tesla’s long-held plans for a new lower price-point ($25k) vehicle have been scrapped although this was initially denied by Musk in a rather detail-free tweet that simply accused Reuters of lying.

Tesla is the worst performing stock in the S&P 500 index this year, indeed if you had bought the stock at the beginning of the year, you’d be down about 34% on that trade on Friday, while the S&P 500 (of which Tesla is a major component) has moved up 9% over the same time frame.

In other Elon news, Fidelity last week cut the valuation of its position in X/Twitter by 5.7% from just a month earlier. That now implies a 73% drop in the company’s value since his 2022 purchase.

Insurance Premium Storm .. U.S. home insurance rates are expected to reach a record high this year, with the biggest increases occurring in states prone to severe weather events. The average premium for homeowners’ insurance in the U.S. is expected to hit $2,522 by the end of the year, driven largely by intensifying natural disasters, rising reinsurance costs and higher fees for home repair. That figure would represent a 6% increase over that of 2023, and follows a roughly 20% increase across the past two years. 

One of the motivations to buy a home is the idea that housing costs will remain relatively fixed or stable, compared to renting, but this trend of regular and meaningful insurance rate hikes is up-ending that narrative.

UNDER THE HOOD ..

With the S&P 500 considerably overheated and overbought on a fundamental valuation basis and the threat of volatility on the rise, three potential technical downside “gap fills” were in play for the index in Q2 , the lowest of which is 4,982, which would mean a roughly 4.3% further pullback from Friday’s closing price.

While the long-term market uptrend remains firmly intact, several short-term factors increase the probabilities of an overdue pullback. In the context of the healthy long-term trend, any short term turbulence that arises is likely best viewed as just that.…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

Stocks edged ever so slightly higher in a rather uninspiring, holiday-shortened week that brought a spectacular, record-filled first quarter to an end, but the weekly gain was almost entirely due to a solid performance on Wednesday. This was the fifth quarter out of the last six that both the S&P 500 and the NASDAQ-100 have advanced. Bizarrely, the week's biggest and most important economic data point was released while stock markets were closed on Friday.

In the absence on Monday of any major economic updates or significant earnings reports, stock-specific concerns rippled through markets. As well as the Boeing C-Suite falling apart, technology stocks took a dive after the European Union's European Commission opened formal non-compliance investigations against Apple, Meta/Facebook and Alphabet/Google. Shares of Intel and Advanced Micro Devices stumbled on China-related news. Most major indexes traded lower on the day.

Not all earnings reports are created equal and that of UPS is regarded as a particularly important barometer for the economy as a whole. So when we heard a pretty grim near-term outlook from the parcel delivery giant on Tuesday (which didn’t even take into account the logistics-damaging fallout from the Baltimore bridge disaster), stocks took a negative turn to finish up the day in the red, despite earlier gains and a quite encouraging Durable Goods report.

The bulls regrouped on Wednesday and carried the indexes nicely higher to new all-time records. The process of month/quarter-end positioning by large financial institutions and some sideline-sitters and FOMO-sufferers finally caving in and playing catchup before the end the quarter was considered to be a part of the explanation for the northward trajectory of stocks.

With markets closed for Good Friday, Thursday was the last trading day of a barn-storming first quarter, with stocks having notched their best start to a year since 2019 (more about that in my Q1 2024 Quarterly Report coming later this week).

The third and final Gross Domestic Product (GDP) revision for Q4 2023 was raised to 3.4%, confirming that the U.S. economy performed even more strongly at the end of last year than previously thought. It ended up being a quiet session with traders seemingly comfortable with their positioning and allowing Q1 2024 to play out uneventfully with indexes essentially flat on the day, ever so slightly higher for the week and, fittingly, reaching yet another all-time record high for the S&P 500 for the 22nd time in about 60 trading days to end the quarter.

While stock markets were closed on Friday, the Personal Consumption Expenditures (PCE) price index was released. The core version is what the Fed uses to gauge what it views as the true inflation figure and it came in right in line with expectations, rising 0.3% in February for a 2.5% annualized rate.

There was some pushback last week against Fed chairman Jerome Powell’s apparent embrace of imminent interest rate cuts. Federal Reserve Governor Christopher Waller told the Economic Club of New York that there is no rush to cut interest rates. He added that he’d want to see “at least a couple of months of better inflation data” before cutting, while also noting the strong economy and robust hiring as further reasons to wait. But a couple of months of data takes us handily to the June Fed meeting and investors anyhow have a tendency to dismiss what Waller says as he is regarded to be on the Fed’s more hawkish wing.

Instead there was a continued confidence last week that the Federal Reserve may well begin reducing interest rates as soon as June (see FEDWATCH INTEREST RATE TOOL below). Some bond traders are even cautiously beginning to reload their bets on that being the case, despite being badly burned by the same narrative just a couple of months ago. 

Even those of you who don’t follow financial markets closely are probably hearing a lot of things like:

* “Banks are about to collapse because of commercial real estate exposure.”

* ”U.S. deficits are so bad, foreign investors will stop buying U.S. Treasury bonds and the dollar is doomed”

* “Consumers are out of savings and retail spending is about to collapse.”

* and the big one .. “If you don’t own a lot of tech, you’re going to underperform.” 

There could well be an element of potential truth in each of these statements, including the last one where, sure, if you didn’t own a bunch of tech in 2023, you most likely did underperform. But facts show that it’s not really true this year and tech is not even the standout sector so far in 2024 (both energy and financials have done just as well). Never forget that today’s media, both regular and financial, is headline-driven and click-hungry. Scary or shocking headlines are what grab attention, but more often than not, these headlines don’t match the full extent of what is almost always a far more complex reality.

Stay skeptical out there!

OTHER NEWS ..

Baltimore Bridge Fallout .. The tragic accident and deadly bridge collapse in Baltimore last week risks disrupting global supply chains and could even possibly have an impact on the level of U.S. inflation, according to experts. It is also poised to leave thousands without work for a while and will doubtless lead to claims hitting insurance companies’ inboxes that will run into billions of dollars and likely be tied up in courts for many years.

Docks in New Jersey and Virginia face the threat of being overwhelmed by traffic that’s being forced away from Baltimore, which is one of the busiest ports on the U.S. East Coast, particularly important for imports and exports of automobiles and coal. 

At the very least, the incident will result in some economic data being “noisy” for the next few months and that could be a problem, given the high importance of such data on assessing the prospects for an economic soft or hard landing and its impact on stock prices.

Chocolate Meltup .. Cocoa is now more expensive than copper. The futures price for the commodity extended its surge - reaching $10,000 for the first time ever - as a supply crunch grips the market and chocolate manufacturers fight over the short supply of beans. $10k cocoa is becoming a problem. Prices have spiked due to a drought combined with a lack of professionalized cultivation in Ghana (the world’s second largest producer of cocoa beans) in particular, where the crop is still grown overwhelmingly by poor smallholders who are just making enough to subsist, lacking the means to re-invest in their plots.

BNP Paribas has even downgraded Hershey's stock because of it. For now, at least, these increases are unlikely to be passed on to the consumer. But if these prices are here to stay, Ozempic might not be Big Chocolate's only problem.

He’s Baaaaaack! .. Adam Neumann is back again. The Israeli ex-founder of WeWork made an offer of about $500 million for the wreckage of the company that once paid him a billion dollars just to walk away, potentially adding another dramatic chapter to the saga of the troubled startup.

UNDER THE HOOD ..

A more unified advance appears to be underway as most technical measures of Demand/Supply, breadth and momentum remain elevated. There is evidence of investors accumulating even the most beaten-down stocks, most of which are lying around in the Small Cap segment of the market, which is an overall positive sign for the market.

These soaring measures of breadth and momentum do, however, come with their own risks. They are now pushing into levels that are historically contrarian (i.e. where things have taken an abrupt turn for the worse in the past), pointing to elevated reversal risks. Unless, of course,“this time it’s different”.

The S&P 500 is trading above 5,200 at a never-before-sustained valuation multiple of 21.5X the expected current-year earnings of the component stocks. Another 10% gain from here would take the S&P 500 to just shy of 5,800, which would mean an extremely stretched multiple of 23.8X. Conversely, a 10% pullback from here w…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

Wall Street was in a very optimistic mood last week, boosted by a highly positive take on the outcome of the Fed interest rate-setting meeting on Wednesday and its quarterly “Dot Plot” projections. AI confidence continued to thrive and the process of global interest rate cuts finally got under way in Switzerland. The upshot was the best week of the year so far for stocks.

Nvidia’s Developer Conference on Monday, which showcased spectacular new chips aimed at extending the company’s dominance of AI, briefly distracted Wall Street from its laser focus on Wednesday’s Fed meeting (see below). Along with Alphabet/Google’s announcement that it is in talks with Apple to build its artificial-intelligence engine Gemini into the iPhone, it powered a rally as Big Tech partied like it was 2023. Even poor old Tesla managed to get in on the act. Most of the indexes moved higher as a result.

On Tuesday morning, an era came to an end when the Bank of Japan became the last major central bank in the world to abandon negative interest rates. It moved its target range up to 0.00% to 0.10%, its first rate increase since 2007. U.S. stocks staged an afternoon rally after a shaky start, led again by Big Tech to notch another positive day.

Wednesday was Fed Day. As recently as December of last year, March 20th had been circled on everyone’s calendar as the assumed kickoff date for six or seven interest rate cuts in 2024. Those days are long gone, market-driven probabilities now point to June or even July as the most likely starting point for maybe just two or perhaps three cuts this year.

Not wanting to front-run the Fed, the market sat on its hands in advance of the entirely predictable announcement at 2pm ET of no change to interest rates, choosing instead to focus on the quarterly “Dot Plot” projections from individual committee members which, relative to December’s plot, predicted higher inflation for longer, stronger economic growth, lower unemployment and an unchanged median forecast of three interest cuts in 2024 (and projecting three more in 2025, down from four in the previous quarter’s plot) although an increasing number of committee members are now looking at no more than two cuts this year.

Chairman Jerome Powell’s press conference was a masterclass at saying absolutely nothing new and Wall Street decided to take the Dot Plot to mean that the Fed will tolerate slightly higher inflation for longer, keeping summer interest rate cuts on the table and Goldilocks still alive.

Stocks ripped higher in the last hour and a half of the day’s trading as a result and the trio of the S&P 500 index, the NASDAQ and the Dow Jones Industrial Average all closed the session at new record highs, the first time that has happened since late 2021.

On Thursday morning, the Bank of England held interest rates steady in the UK but another era began when the Swiss National Bank surprised everyone by cutting its rates by 0.25%, becoming the first major central bank to do so since the hiking cycle began at the beginning of 2022. Wednesday afternoon’s momentum followed through with U.S. stocks continuing to march higher on the back of the Fed’s continued three-rate-cuts-in-2024 projection, deeper and deeper into record territory.

With no major economic data and very few earnings reports on the docket, trading was muted on Friday as the bulls took a breather, even though the NASDAQ still managed a small gain on the day to set yet another new record high.

The fact is we’re going to exit 2024 with interest rates likely above 4.50% and that is absolutely not where we thought we’d be when this stock market rally began. So far, the economy has had enough impetus to withstand this, but that will not last forever.

The trick to a soft landing is the Fed being able to cut interest rates before the economy begins to lose momentum and that is why rate cuts sooner rather than later are so positive for markets, as they reduce the chance of a slowdown.

It’s for this reason that the most important economic data lately hasn’t been inflation, it’s the growth metrics starting to show signs of a loss of momentum. If data consistently starts to show that economic growth is cracking - but the Fed can’t cut interest rates in time because of sticky inflation - then the chances of a hard landing will rise sharply and that’s the biggest negative we all need to watch for going forward.

If the S&P 500 was at 4,000 or even 4,500, a slowdown wouldn’t be so worrisome. But it’s at 5,234, and if economic data begins to roll over, a >10% pullback can feasibly happen very quickly and even then, it’s tough to say we’d be at levels of solid support. The point here is that we don’t need real recession risk to cause a meaningful pullback. Just legitimate growth concerns could do it, given where valuations are.

Bottom line, we need to focus on growth. Acutely slowing growth is the rally killer we need to watch for. High inflation and higher interest rates aren’t, of themselves, rally killers. It’s that both of them make a slowing more possible and that’s the real problem.

For now, however, the bullish drumbeat of generally still-solid growth, largely falling inflation, impending Fed interest rate cuts and seemingly endless AI enthusiasm is alive and well and many major stock indexes are breaking new highs almost daily as a consequence.

OTHER NEWS ..

Still Risky .. Investors got a big wakeup call last week that the dangers of, and the fraud and bad actor risk associated with, crypto investing have not gone away, even now that Bitcoin (BTC) is available in a nice, user-friendly and regulated ETF wrapper. The BitMex crypto exchange said it was investigating “unusual trading activity”, including possible misconduct, that led to a flash crash in BTC on its platform after hours on Monday evening. At one point, the price of BTC against Tether’s USDT stablecoin fell to as low as $8,900 on BitMEX while it was trading above $66,000 everywhere else.

It appeared that this was one big “whale” investor, or perhaps a few, heavily selling BTC steadily over a few hours in what seemed to be a very planned and co-ordinated fashion. Over 400 bitcoins were dumped over the course of two hours.

Happy Talk .. Finland was crowned the world’s happiest country for the seventh consecutive year in the global life-satisfaction rankings, but a sharp drop in living standards among young Americans meant that the world’s biggest economy failed to make the top twenty happiest populations on earth for the first time ever.

Denmark and Iceland remained second and third, respectively, in The World Happiness Report unveiled on Wednesday by the United Nations Sustainable Development Solutions Network. The United States tumbled from 15th to 23rd in the world, “driven mostly by a large drop in the well-being of Americans under the age of 30,” the report said. The results are based on three-year averages, reducing the impact of changes over a single year and is based on factors such as gross domestic product, a sense of freedom, life expectancy, perception of institutional and political corruption in society, having someone to count on, generosity and levels and intensity of violence and crime, including political violence. Among specific age groups, Lithuania topped the world ranking for children and people under 30 (the U.S. came in 62nd in this category), while Denmark is the world’s happiest nation for those 60 and older.

UNDER THE HOOD ..

While the longer term uptrend has remained solidly in place from a technical standpoint, in the short term there had been signs in the last few weeks suggesting that a pullback in the major price indexes was increasingly likely. In the context of such a robust long-term market uptrend, any such pullback would even be viewed as a welcome rest for apparently overheated stocks and serve as an opportunity for the underinvested.

But last week many of those slightly shaky short term indicators actually began to repair themselves quite impressiv…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

It was a jittery week for stocks during which data was released that confirmed that the American consumer may be putting the brakes on spending and that the rate of inflation is decelerating at a slower pace. Markets chose to focus on the fact that stickier inflation likely means higher for longer when it comes to interest rates and that drove stock prices lower for the second week in a row.

After a quiet weekend on the newswires and with CPI and PPI inflation due out later in the week with the potential to impact interest rate cut expectations and perhaps remembering how last month’s surprise CPI print tripped everyone up, stock markets took a wait-and-see attitude on Monday, the fourth anniversary of the official declaration of the COVID pandemic, and prices were barely changed.

On Tuesday the Consumer Price Index (CPI) measure of retail inflation emphasized this continued stickiness. Both the core and headline readings rose 0.4% in February, which was slightly up from the previous month and higher than estimates, for a marginally lower year-on-year rate of 3.8% for the important core number. Prices particularly jumped for used cars, air travel and clothes. This buried the hope that the surprisingly high January figure had been some kind of seasonal one-off blip in an otherwise steady downward march in the rate of inflation.

The near-certainty required by the Fed that 2% inflation is around the corner before embarking on meaningful rate-cutting clearly remains elusive, but Wall Street seems to have finally made its peace with this fact and, led by the tech sector, stocks moved higher on the day with the S&P 500 closing back in record high territory for the 17th time this year on the back of a “it could have been worse” mentality for CPI.

The wait-and-see approach resumed on Wednesday with CPI’s wholesale cousin, PPI, due out the following day to give the Fed a second look at the state of inflation and its last before this week’s interest rate-setting meeting. Stocks spent the day hugging the unchanged line on lighter than usual trading volume.

On Thursday morning, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers came in hot as well, up 0.6% in February for an annualized 1.6% rate, the highest in six months and double what had been forecast. We also learned that Retail Sales somewhat rebounded in February, up 0.6% for the month, but this increase was below estimates. It also only helped in part to reverse a significant downwardly-revised 1.1% fall in January.

The twin disappointments of inflation data and slowing consumer demand proved disheartening to Wall Street as it gives the Fed continued cover for its delay in cutting interest rates and ignited the conversation around a first cut now being in July instead of June (the market-driven probability of an interest rate cut in June swiftly collapsed from 90% to 59% last week). The most popular market-projected number of interest rate cuts in 2024 fell last week to three, finally bringing it into line with what the Fed has been saying for months (see FEDWATCH INTEREST RATE TOOL below).

Remember, only a matter of weeks ago there was an almost-universal assumption that the rate cutting process would begin in March and that there would be at the very least six rate cuts in 2024. Those expectations are distant memories now and stock prices slumped on Thursday and then continued falling on Friday, which was also a so-called “triple-witching” day when the expiry of a huge pile of derivatives and futures contracts amplify price swings. All this dragged the indexes into lightly negative territory for the week.

Is there some calmness ahead for markets? Above 5100 in the S&P 500 index, all the positives (Goldilocks economic data, summer interest rate cuts, still-falling inflation) are now mostly already priced in, unlike when the index was at, say, 4000. So, while the simple reinforcement of those concepts may help support the market and justify these levels, it’s unlikely to - of itself - drive things materially higher from here, particularly as economic momentum slows.

Yet as discussed before, meaningful downward movement is going to require something actually bad to happen to scare off the dip-buyers. An example would be if the evidence becomes strong that inflation isn’t slowing anymore, that economic growth is struggling or that the Fed definitely won’t cut in the summer. None is this is being indicated right now, Last week’s mildly disappointing CPI and PPI reports certainly did not qualify as such a development.

So without a big catalyst of some kind, things could well just stay relatively rangebound for a while, simply churning while we wait for the next big trigger to tip the scale one way or another.

OTHER NEWS .. (SOCIAL MEDIA EDITION)

And So It Begins .. The U.S. presidential election is just eight months away, a highly unpopular - but now confirmed - rematch between Trump and Biden. From now on, when either candidate mentions publicly-traded companies, investors need to pay attention.

On Monday morning, Trump said in an interview, "I consider Facebook to be an enemy of the people." Meta/Facebook stock promptly fell more than 4%, having run up about 40% this year and hit an all-time high just days earlier. The stock's decline served as perhaps the first reminder this cycle to investors that election risk really is a thing.

Historically, elections have been generally good news for U.S. stocks‌. The S&P 500 is rarely more buoyant than when a sitting president is up for reelection - in the ten prior instances of this since 1952, the index has never finished down that year, with the average return standing at 12.2%, a premium of over 2% on a typical year.

However, the sheer unpredictability of what will come out of the mouths of these two old men, as well as the ease with which they can both shamelessly U-turn on previously-held positions whenever it suits them (Trump and TikTok being the latest example), makes this election year particularly intriguing on Wall Street.

Clock Ticking For TikTok? .. The U.S. House of Representatives passed a bill on Wednesday that would require China's ByteDance to divest TikTok or face a ban of the social media app in the U.S., impacting 170 million users who spend an average of 97 minutes per day on the app (much more than is spent on any other social media platform - users spend less than an hour a day on average on Instagram, Snapchat or Facebook, for example).

The absurdly-named Protecting Americans from Foreign Adversary Controlled Applications Act prohibits “distributing, maintaining, or providing internet hosting services for a foreign adversary controlled application (e.g., TikTok)." The bill was introduced by House Republicans who said the app could pose a national security threat due to its ties to ByteDance, TikTok's Chinese parent company, citing concerns China's government could potentially require it to share data. After passing with bipartisan support, the bill moved to the Senate, where its progress could potentially be slowed down somewhat by increased scrutiny and more probing questions about the possible unintended consequences of the legislation.

The regulation could also apply to other social media companies that are "controlled by a foreign adversary and [have] been determined by the President to present a significant threat to national security," but is currently targeting only ByteDance and TikTok by name.

UNDER THE HOOD ..

Market breadth, uptrend participation, and Demand intensity continue to broaden, despite the indexes hitting some speed-bumps over the last couple of weeks. Buying power has been in an uptrend since mid-January and continues to dominate Selling pressure, which is locked in a sideways range.

Since the start of 2024, the S&P 500 index has essentially been been closely tracking an up-trending straight line with remarkably little divergence and there is currently no real reason for investors f…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com

Stocks took a long road to nowhere, ending the week right back where they started it - with a sharp fall and then a solid comeback rally with yet more new all-time highs reached at one point. In the end, however, the S&P 500 just missed out on achieving a 17th week of gains out of the last 19.

Markets floated gently lower without real directional conviction on Monday, with a lack of any real catalysts ahead of (in order of appearance) Super Tuesday, Fed Chair Jerome Powell’s testimony to a House committee, Biden’s State of the Union address and the Jobs Report, all later in the week.

Sentiment turned properly negative on Tuesday, due in large part to an intensification of the ongoing splintering of the so-called Magnificent Seven, with both Apple and Tesla tanking hard, primarily as a result of increasingly concerning negative trends in sales in China for both firms. Contagion spread to to other corners of the tech and tech-adjacent space and all the indexes, particularly the tech-heavy NASDAQ, took a significant dive.

Super Tuesday also pretty much cemented the matchup that no-one wants; Trump/Biden II in November. It would be naïve to think that there is not going to be associated uncertainty and volatility in late summer and into the fall (or potentially even earlier) and most likely for weeks or even months afterward. Markets have not yet factored this in.

Wednesday saw Powell show up in Congress, presenting us with the ludicrous spectacle of a highly intelligent chairman of the Federal Reserve being grilled by some of the financially illiterate law-makers that put the economy in peril every few weeks by risking government shutdowns through grandstanding and political posturing.

Predictably, he stayed entirely on message; rates have peaked, they will be cut, but it’s not happening soon because the Fed needs more proof inflation is going to get to 2%. Which of course was saying absolutely nothing new and Wall Street took a kind of “nothing-to-see-here” attitude to his words and instead proceeded to try and repair the damage from the previous day’s selloff, with the S&P 500 clawing back about half of the week’s losses.

On Thursday, the European Central Bank held interest rates steady at 4.0%. Markets now expect the first rate cut in the EuroZone will come in June. Jerome Powell Day Two in Washington DC saw him go a little further than on Day One, stating that the central bank is “not far” from being confident enough to cut rates and these rate reductions “can and will begin” this year. U.S. stocks responded positively, resuming their rally from the previous day and completing a full recovery from the losses of Monday and Tuesday to reach yet more new all-time highs.

The Jobs Report on Friday proved ambiguous, showing an increase in payrolls of 275k in February, topping forecasts, but both the January and December numbers were revised downwards and the unemployment rate moved up to 3.9% (a two-year high). Average hourly earnings, watched closely as an inflation indicator, rose just 0.1% on the month and 4.3% from a year ago, lower than both estimates and January’s rate. Biden’s spikier-than-expected State of the Union speech from the previous evening gave Wall Street nothing to focus on one way or another.

Traders eventually opted for the “glass is half empty” interpretation of the employment data, perhaps in combination with some profit-taking from recent gains. Momentum petered out, particularly in tech names and the S&P 500 shifted lower to finish the week almost unchanged.

The market’s relentless rally, in which it embraces even the mostly slightly bullish news and ignores any bad news, is raising the question: can anything make the stock market decline? The answer, of course, is “yes,” but in order for this market to decline, something actually bad has to happen. Negative nuance is no longer enough.

What kind of bad things are we are talking about here? Knowing this not only helps when looking for red flags pointing to a possible big decline but also when trying to differentiate between what is just a healthy pullback of a few percent which can help create a springboard for further advances and a true and sustained change of direction for stock prices.

There are a few, but the four main categories are:

* AI turns out not to represent a fundamental change in business productivity or profitability (so much of the rally is built on this premise). In the end, AI will have to make non-tech companies money and it’s not yet clear exactly how many end-user companies will be able to utilize AI to actually meaningfully increase revenue and/or produce substantial and sustainable cost savings.

* Economic growth decelerates or even contracts to a level that threatens the earnings growth of major U.S. companies. That’s very different than the rather gentle easing that we are currently seeing.

* The Fed explicitly or even implicitly rules out any interest rate cuts this year and in fact appears to be even entertaining the idea that the next move in rates may actually be higher again. If there is no negative impact from high rates on the labor market and inflation is in large part continuing to decline, then there’s simply no urgency to cut interest rates preemptively and take a risk with a bounce-back in inflation.

* Consumer inflation reignites and begins a persistent move higher again. So far all we are really seeing is something of a flatlining of the rate at which inflation is decreasing.

This is the stuff to watch out for.

OTHER NEWS ..

Elon’s Vengeance .. Poor old Elon Musk had yet another rough week. He fell below Jeff Bezos on the Global Rich List (mostly as a result of the diverging performance of their respective stock holdings), there was an embarrassing email dump from OpenAI with whom he is having a childish toxic spat, Tesla’s stock keeps on crapping out (not helped by arsonists successfully targeting a production plant near Berlin) and he is facing yet another big lawsuit, this time by four former top executives of Twitter, who are demanding $128 million in unpaid severance.

The executives, former CEO Parag Agrawal, former CFO Ned Segal, former chief legal officer Vijaya Gadde and former general counsel Sean Edgett filed the lawsuit in California federal court on Monday. The lawsuit contends that, as his $44 billion takeover deal neared its completion in October 2022, Musk tried to back out but failed and then concocted a made-up reason to fire the four executives simply to get out of paying them the severance packages to which they were all legally entitled (he cited “gross negligence” and “willful misconduct” as reasons).

The executives were running Twitter at the time when the company sued Musk to force him to close on the deal to which he had earlier contractually committed, but had then unsuccessfully tried to squirm out of and “for their efforts, Musk vowed a lifetime of revenge,” the lawsuit said.

It added; “Under Musk’s control, Twitter has become a scofflaw, stiffing employees, landlords, vendors and others. Musk doesn’t pay his bills, believes the rules don’t apply to him and uses his wealth and power to run roughshod over anyone who disagrees with him.”

Want A Job? ..There are some new positions available where work-from-home is unlikely to be an option. NASA is seeking new astronaut candidates for the first time in four years. Competition, unsurprisingly, is always fierce. In 2020, there were more than 12,000 applicants for 10 positions. This year is likely to be a crowded race as well, but America’s return to the moon is providing more opportunities for astronaut missions.  

Stay-at-home dad duties .. The share of fathers caring for their households were higher in western states than those in the South, according to the Burning Glass Institute. Alaska, Oregon and New Mexico topped the list of states with the highest ratio of men—age 18 to 59—who weren’t in the labor force, with a child under 14, had a working spouse and were the main caregiver…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com