HOW I SEE IT – by Bruce

 

15 Plus Times/Economic Growth Glitch/Long and Strong

Equity markets swinging from January 1 - the Dow has been up and down 15 plus times in 25 days. Volatility through sector rotations - like software - as AI battles to lead. Program trading gone wild - is this the new norm?

Positives. AAII investment sentiment survey - 39.7% bullish/ 31.3% neutral /29% bearish - bullish reading dropping - AI now likely the cause.

RBC CM Pulse of the Market – “From sleepy to slightly squishy. First, reporting season stats have come in slightly squishy in our view, suggesting to us that the choppy price action in the S&P 500 of late has been around more the geopolitical concerns. Second, what we read in earnings call transcripts this past week continue to suggest that the macro backdrop is mixed, though we are not seeing any indications of major problems. Third, the thing that jumped out the most to us in our other updates was the slight down tick in optimism on the stock market outlook in the latest Conference Board Consumer Confidence Survey.”

Charts - Crypto taking a plunge. There will be losses – margin calls - takes time to sort out.

Charts - Commodities - taking a breather too - oil, copper natural gas, silver all corrected.

Charts - Kevin Warsh - Fed nomination has cooled some uncertainty and the US dollar fears. Macro backdrop remains positive for gold.

Ned Davis Research - “Hotter than expected PPI inflation last week was one data point justifying the Fed holding rate steady. Yields have always risen in the months around a new Fed chair. Almost all this strength we have seen in the US economy the last nine months has come from a sharp drop in the personal savings rate. A falling savings rate is bullish short term.”

Jim Paulsen – “A US economic growth glitch - A growth glitch would likely create some stock market turbulence but would also likely bring far greater accommodative policy support ultimately paving the way for a broader stock market advance. Many anticipate GDP growth to be driven by tax cuts and AI related productivity gains. On average, Wall Street strategists expect a 10% gain in the S&P 500 index this year and earnings expected to rise by about 15%. Powell described US economy is expanding at a solid pace and on firm footing to start the year. He noted that the economic outlook has clearly improved and has continued to surprise with this strength justifying a cautious approach to future interest rate cuts. A recession this year appears unlikely. Bond prices go still - A rare condition exists in the financial markets - relatively high-top quintile stock market volatility compared to bond market volatility. This has typically proved to be a good for stock market.”

Fidelity - “January ended with S&P 500 up 1.5% placing it squarely in the middle of the performance pack. Encouraging the baton pass from the Mag 7 to broader markets. Global rotation and alternatives are rising.”

Bull market check - is long and strong. We are now in month 40 of the current cyclical bull market. S&P 500 is well above historical trend lines reflecting bullish sentiment, strong earnings and accommodated policy. The five-year CAPE ratio sits at 32x putting evaluations in upper percentiles - however this is backed by 5-year EPS CAGR of 14%, all-time high margins, and tight credit spreads. The market is in the fact priced for success. Earning season 165 companies reported - 79% have beaten expectations.”

Fidelity - Mark Schmehl - “Are early in several powerful themes. Capital is misallocated. The opportunity set is expanding - not shrinking. This is not a time to be timid.”

Dr. Ed Yardeni - “Headline GDP has been artificially inflated by trade volatility. Bond yields are signaling slowing economic momentum. Consumers are propping up spending by running down savings. Earnings expectations look optimistic relative to corporate behavior. Policy support remains restrictive, but that may change.”

Tom Lee – “Reached a point where I think the continued rise in precious metals is sending a bad signal for stocks. If precious metals take a breather. It’s a good sign for stocks. I think the stock market is tracking our view of a three-phase market. A rally at the start of the year - decline that feels like a bear market possibly driven by the new Fed - a 10% drawdown possibly - and then we rally the final quarter - S&P 500 target 7700. Keep in mind there’s upside to that because the rule of the first five days was positive & January barometer was positive.”

Negatives. Ned Davis – “Falling savings rate is short-term bullish, but it tends to be bearish long-term when the level is low. High evaluations, low savings rate does not matter until it does, but it is too powerful to ignore.” Higher intermediate demand inflation as tariff passed through progresses is an upward risk to final demand producer prices, and consumer prices in the month ahead. Weaker dollar is also an inflationary risk. Could the Fed be in a pickle if the labor market weakens more.

Fidelity. “What to watch. ERP is below average meeting less cushion for disappointment. Long bonds remain weak, unreliable for diversification. Warsh -  Fed nomination could reshape market expectations around QE, inflation and monetary transmission.”

Brian Westbury - “In the near term we expect Powell will keep rate cuts on pause through his departure in May but that Warsh will restart rate cuts when he takes over. We would like to see Warsh quickly shift the Fed against abundant reserves and QE, as well as paying against paying banks interest on reserves. Unfortunately, investors should expect any moves to unwind these policies will arrive gradually. But at least Warsh will put those changes on the table.”

Investment strategy – “Don’t let the noise of others opinions drown out your own inner voice. And most important have the courage to follow your heart and intuition.” Steve Jobs

Stock of the Days: CVX, UNP, DFY, GOOG, IGV

 

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