Stocks Reach New Heights on Cooler Inflation Data

Jeff Buchbinder:

Hello everybody, and welcome to the latest LPL Market Signals podcast. Jeff Buchbinder here, your host for this week with my friend and colleague, Dr. Jeffrey Roach. How are you today, sir?

Jeff Roach:

Hello. Hello. Glad to be on this edition.

Jeff Buchbinder:

Glad to have you. Glad to talk a little bit of economy after talking markets with Lawrence Gillum. We're going to do a little more economy than markets this week, but we will mix in both. It is Monday, May 20, 2024, as we're recording this early afternoon, you see these lovely disclosures. Here is our agenda for the week. We certainly can celebrate another positive week as we've been doing, really for all of May, even into late April. Fourth straight positive week for the S&P 500. So we'll tell you about that. Next Jeff's going to provide some context for the latest inflation data and tell us if it was actually as good as maybe the market thought it was. Next, we will talk economy, give you a little bit of a sneak peek into the second half outlook as we start writing our midyear.

Jeff Buchbinder:

That won't be out for another, what, five weeks, five, six weeks or so. But we are starting to lay out the draft. So give you a little sneak peek as to how we're thinking about that right now. And then last, preview the week ahead as we always do. NVIDIA's earnings on Wednesday, no doubt the highlight of the week in an otherwise pretty quiet economic calendar. So we'll start with the market recap. Fourth straight positive week for the S&P. All-time highs for all three major indexes. We actually had an all-time high and 40,000 on the Dow. Dow's up five straight weeks, NASDAQ and S&P up four straight weeks. Here's the chart of the S&P. And you see here, just straight up and to the right. Really strong bound off of those late April lows that pullback it.

Jeff Buchbinder:

You may have even forgotten it happened <laugh> by now. But the S&P did pull back about five and a half percent. We've gotten all that back and then some, we're even up a little bit here on Monday afternoon as we're recording this. From a technical analysis perspective, you probably need a pullback. You probably need a little bit of a breather here, but momentum is so strong, and breadth is so strong that you know, maybe it's, maybe it's not this week. Maybe it comes soon, but probably not right now. I never pass up a chance to put in a hundred-year chart. And the Dow's, the Dow's, that's awesome. The Dow's 40,000 milestone gave me just the perfect excuse to do that. So this is a hundred-year chart of the Dow. And you see from 1932 the Dow was around 40.

Jeff Buchbinder:

It was actually 41. So close enough. From 40 to 40,000 in 92 years, if I did the math right on that. You know, if this doesn't convince you to stay long over the long term <laugh>, I don't know what will. The average or an, you know, average annualized gains like 9%. So if you weighed out these pullbacks you're going to get this long-term average return. It's been that way for the last hundred years, and it'll probably be that way for the next hundred. Here's the 10-year yield. I put this in here because I think this is really the key to why we rose last week. The bond market's interpretation of the cooling inflation data. We're down from 4.70 here about a month ago to 4.4. And you know, kind of holding in that range today in Monday trading. So you know, we really want to see 4.4 or lower on the 10-year. So that really ties into the inflation outlook, Jeff, which you'll get to here in a little bit. If the economy slows and inflation comes down, really good chance that we keep yields in this range or even see them move lower.

Jeff Roach:

We're in the 4.4s, even as we record Jeff, but I was also going to say one little thing on your hundred-year chart. You know, I was talking to an LPL advisor recently, and I was telling him about my teenager getting his first official job where he is actually, you know, on a payroll, not just you know, doing an odds and ends kind of job in the neighborhood. And he encouraged me never too early, set up a Roth IRA, I might take this chart when we're done and show my teenager this graph and say, Mr. Buchbinder here reminds you, start early and you'll end well with a chart like that.

Jeff Buchbinder:

Amen. Hopefully we will all have hundred year runs in investing, although I know that's probably a lot to ask <laugh> certainly need some help from the man upstairs. But that is cool. Yeah, we're big fans in LPL Research of long-term investing, certainly. We do, you know, manage around the edges tactically. And you certainly have the opportunity to generate some excess returns by rotating within the market, you know, which is why we talk about this slide here every week. Mm-Hmm, <affirmative>. But generally speaking you know, staying long over the long term is the way to go and the earlier start, the better. So thanks for bringing that up, Jeff. In terms of sectors last week, it was really all about tech. You see tech up almost 3% but real estate snuck in there.

Jeff Buchbinder:

It's, people don't talk about it a lot, but real estate actually has a lot of tech in it because you've got data centers and wireless cell towers. In fact, those technology areas within real estate are about 35% or so of the sector. So to some extent, as tech goes, real estate's going to go, but obviously lower rates help real estate as well. So that was a winner. One of the losers last week, well, it was flat, was consumer discretionary. And Jeff, you've talked a lot about how consumers spending we'll talk about this more in a bit, but consumer spending is now facing the headwind of consumers having spent excess savings, right, from the pandemic. So now you've really got, especially for those living paycheck to paycheck, you've really just got the sort of traditional earnings as support. You know, not so much those stimulus checks that were still sloshing around. Mm-Hmm,

Jeff Roach:

<Affirmative>. Mm-Hmm. <affirmative>, right? That's right. And just a reminder too, you know, since this is a public facing podcast, it's great to continue to point traffic toward the lpl.com and the dropdown for the Research tab. We did a really interesting blog, our team did on real estate, Jeff, as you highlighted with data centers, but also think about long-term trends on healthcare and the long-term demand for that. That's also an important sub-sector within CRE, commercial real estate. So wanted to take this opportunity to point traffic toward our lpl.com Research portion of the website.

Jeff Buchbinder:

Yeah, good call out, Jeff. I mean, we're still cautious on real estate overall, but if you look within all the different segments, you know, some of them actually look quite interesting. Maybe not office, but some of the other segments look quite interesting. And certainly, we recognize there are opportunities there. Something else we've noticed recently is you know, solid moves in the Asian markets, right? We've been talking about Japan for a long time but look at Hong Kong up over 5%. One of the big economic stories last week was the stimulus in China to support their property markets. That certainly helped the tone of trading over there and is a reason why emerging markets were strong last week. You know, emerging markets and developed international markets are attractively valued, but you really need more than just low valuations.

Jeff Buchbinder:

And in emerging markets, we're starting to get it. So that has caught our attention. Still cautious, like real estate, still cautious on emerging markets but you know, an area that is starting to work. So turning to fixed income, and again, this is really why markets did so well last week. I think it's because bonds rallied as rates came down on the tame, relatively, tame CPI inflation data. You know, you end up, I think the 10-year yield at one point was down like 15 basis points last week before it came off a little bit off of those lows. So good gains for bonds, really pretty much across the board. You know, this isn't really good for the inflation story, but we also saw some strong rallies in commodities. Industrial metals is tied to China, right? Industrial metals surged. The Bloomberg metals index up almost 5%. Same thing with precious metals. So you know, it's not really an area we do a lot of investing in. But for those of you who do play in those areas certainly the charts look really good. And well, Jeff, you and I talked about this earlier today. There's actually support from the demand side and the supply side. Mm-Hmm. <Affirmative> in copper.

Jeff Roach:

Yeah, it's interesting. So we often say this has been around a long time, but we talk about Dr. Copper because of its ability when you, when you track the movements in copper to get a good sense in what's happening in business and construction, industrial demand you know, kind of where we are in the cycle. So that's why, you know, there is certainly some benefit of tracking copper. Can be a little bit misleading. A lot of tariffs w-hen you think about copper over the years, over the many cycles. There could be certainly some political reasons for why you see a little bit of those gyrations in prices. But in the near term, as you said, demand seems to be an interesting story. Not quite ready to call a top there as many analysts say. And then in addition to that, the supply constraints is certainly adding to the upward pressure.

Jeff Buchbinder:

Yeah, absolutely. And then you know, you got the weaker dollar, which helped international equities and commodities last week. You know, this is really the setup you want, you want global equities doing well, right? Not just the U.S. and then you want the dollar ideally to weaken. And that can really create a you know, almost a perfect cocktail for rising equity markets. Essentially, the international markets and the dollar can kind of confirm the gains in the U.S. and strengthen the foundation for U.S. equities and frankly for bonds as well. So we'll keep watching the dollar. It looks like it's maybe starting to turn as we get closer potentially to Fed rate cuts. So let's turn to inflation, Jeff. And certainly that plays into whether the Fed is going to cut this year and when they'll start. So you know, I guess we'll start with just, you know, maybe put the CPI data last week into context. What does it mean for the Fed and this inflation trajectory that's so important for markets right now?

Jeff Roach:

Yeah. So the reason why I circle, if you're looking at the chart here, right to the right, I have that 2.13 circled. That corresponds to the stickiest components of inflation. So taking out food and energy, the volatility there, taking out the housing components, since some of that is somewhat of an imputed number. It's not a real number that hits consumers pocketbooks. So that core CPI ex housing, Fed has often called that and other market participants and investors call it super core. What I like to say is, instead of adding more to the jargon, what I just say is it's the stickiest and stickier components. And that's why it's so important to watch that. We saw that start to ease up last week. And that's why we saw yields particularly on the 10-year dip low in a pretty sweet spot, as you said earlier in the podcast, Jeff.

Jeff Roach:

You know, one thing I think is interesting, you know, for those healthy eaters among us, outright declines in prices for fruits and vegetables and meats so you're starting to see things ease up a little bit. Now, granted, on a levels basis, where we are today relative to where we were February 2020, clearly pretty, pretty dire straits there. But in terms of watching the rate of change, that's what matters most in terms of Fed policy because of the rate at which you know, the banking sector looks at the Fed and where their fed funds target, and all the ramifications that goes into CD rates and mortgages, et cetera. That's why we look at rates of change, even though it can be a little bit confusing and frustrating when you think about all the dollars you're spending at the grocery store still, and when you see your latest auto or home insurance bill.

Jeff Roach:

But I think that the 2.13 is something that markets certainly applauded and something that we've been talking about. I think our expectations as we, you know, think about the latter half of the year is that inflation clearly is easing, we're starting to see that. And now granted the upside surprise in January didn't ease up because we had upside surprises in February. We had the same thing in March. So I think we're not necessarily saying, this is a convincing kind of report. I think Fed's going to be saying, all right, great. We had three bad months. Now we need a few good months to offset that. But markets respond. And it said, all right, well, maybe there is hope the Fed can actually ease up on monetary policy later this year. This report says, hey, we're making that more likely than where we were even a week ago.

Jeff Buchbinder:

Yeah. And they still have a few months to look at these numbers before they get close to the election. So still could sneak in a cut before November. I know a lot of people think they'll, you know, they'll hold off doing anything right before the election. So maybe September, December are the two cuts, or if not, if it's just one, maybe just maybe just December. Yeah. So, you mentioned sticky inflation, Jeff, so this is another look at that, more of a, yeah,

Jeff Roach:

Just a key takeaway. We don't need to necessarily spend a lot of time on that, but it really is, it just kind of explains some of the narratives that's been, you know, going back and forth, particularly in the last two months. And that is this, that, you know, this timetable where we thought, okay, the Fed could potentially ease sometime this summer, that clearly is not going to happen because of the stickiness that we're seeing in these gray and orange lines are basically saying, hey, what does the trajectory look like? A three-month annualized, six-month annualized, and then that darker blue line, the year over year number that gets all the attention. And the argument is, do we believe the uptick in the annualized shorter-term numbers and the markets? I think rightfully so, in my view, it's an aberration. We're going to see inflation below 3% on a fairly stable level, you know, later this summer. And so that's where, you know, you saw that flat lining, the gray and orange, you know, that flat lining is what created a little bit of exuberance or maybe a little less pessimism in the markets.

Jeff Buchbinder:

Yeah. That core services ex housing year over year number is still in a pretty good spot. So if you can just, you know, stabilize these short-term readings in the near term, those inflation numbers could look pretty good. Yeah.

Jeff Roach:

Yeah. It boils down to the debate was that were those hot prints, particularly in January, a sign of a new trend or not? That's the crux of the matter. I think it's not a sign of a new trend. Clearly certain investors did, hence you had that choppiness as we showed in the very beginning of the podcast with that 5% dip.

Jeff Buchbinder:

Yeah. If those car insurance payments keep going up the way they are, some people are going to just get rid of their cars <laugh>. So, that'll stop one way or the other because those are some of the biggest inflation numbers I've ever seen. I also noticed, so my daughter took me to Sweet Green you know, the salad place over the weekend. And when I was going into the office five days a week, I would sometimes eat at the one downtown. And I remember the salad I used to get was about 10 bucks right before lockdown. That same salad four years later is over $13. So there's an example, and I know there are many others, of a 30% increase in price from, let's call it December 2019 to you know, to present, right?

Jeff Buchbinder:

Yeah. Inflation is cumulative. So even though it's slowing, it's still a drag on, you know, consumers pocketbooks right now compared to where it was a few years ago. And this is, I think, you know, related to why, you know, Biden's not doing better in the polls, just remember inflation and income are historically very good predictors of election outcomes. So of course, it goes without saying that Biden wants to get prices at the pump down, he wants to get inflation down in general and needs you know, that real income, inflation adjusted income, to rise and lower inflation could help him do that. So it's a little early to look at the election <laugh>, but, well, it's not too early to look at the second half, Jeff, because we're, you know, in the back half of May. So we've just put together our first draft for the Midyear Outlook, probably earlier than we should have, but that's what we did <laugh>. So I thought it'd be kind of fun for you to give folks a sneak peek of you know, your take on the economy in the second half and then tie in the Weekly Market Commentary for this week, which can be found on lpl.com.

Jeff Roach:

Yeah. You know, so much of this is tied to, you know, how much do we feel like consumers have pulled forward demand particularly on goods and that spending splurge, right? Partially driven by excess savings, partially driven by just extra cash that a lot of homeowners got when they refied and the magnitude of that influence. And so, you know, our point is that eventually that is going to show up in the numbers, the fact that we have seen particularly really, really hot growth numbers last year. And you know, our view is that that's hard to sustain particularly when you know, we were starting to see these excess savings dip. And so, you know, you think about where we sit here in April, you know, we got retail sales numbers as you said, we're recording this in the afternoon on the 20th.

Jeff Roach:

So last week we got retail sales numbers. Some of the important line items, we call the control group, helps us think about where the economy is going into the second quarter, how comfortable consumers are because they're the engines, the growth engines here of aggregate demand going out buying services, et cetera. You know, we are starting to see that slow down. So, April retail sales control group was a little bit soft, meaning that you know, in the gray area, these boxes where we say, you know, it's not a dramatic downturn, we'll have a little bit of an uptick in Q2. And that's why you see a little bit of, you know, a growth after the surprise of Q1 where inventories and trade had a pretty nasty drag on growth.

Jeff Roach:

You know, that'll reverse a little bit in Q2, but we are definitely seeing consumers starting to slow down. They've said that buying plans have slowed down. So, that's the key takeaway here. The good news though is barring any exogenous shock, you know, we think that this slowdown could be fairly measured, that would be somewhat of the soft landing. You know, we think that's certainly a newer you know, view on things. One thing that I want to tie in this graph with the comment about inflation, so basically the stickiness of inflation. We've talked about how that kind of pushed out the Fed's timetable. I think in the same way the excess dollars that consumers had access to pushed out the timing of a slowdown. So Fed's timing pushed out, slow down, pushed out. We'll start to see that, I think the latter half of this year. And we explain that when we will publish, I think soon after the July 4th weekend, right? Or that July 4th holiday. I think that following week is when we actually will publish our Midyear Outlook for 2024.

Jeff Buchbinder:

I think that is the tentative plan, wait for confirmation <laugh>, because we sometimes push that data around. So slow economy, but it certainly doesn't sound like the recipe for recession, which is good. I know one of the biggest reasons why the consumer has held up so well is because of the mortgage refi boom. So what does this chart tell us, Jeff?

Jeff Roach:

Yeah. Well, I think this is a little bit of a sneak peek for those of us that anticipate and look forward to digesting and parsing out every word that comes out of the Jackson Hole Economic Symposium where global central bankers from around the world show up, hosted by the Kansas City Fed, out in Jackson Hole, Wyoming. Very, very important conference for investors because central bankers use this as a platform to communicate a lot of things. Their topic this year is reassessing and reevaluating the transmission of monetary policy, meaning, okay, we raised rates pretty aggressively, nothing happened. Well, that's a little bit simplified. The point is, Fed raised rates aggressively in a very short period of time, and we didn't have any potential cracks or any emergence of cracks in the system.

Jeff Roach:

Consumers kept spending, businesses kept growing, markets kept rallying. Well, how does that happen? Bottom line, the economy is less interest rate sensitive now than they probably have ever been, particularly because we have a lot of fixed rate mortgages in the system. We also have a lot of homeowners that aren't even mortgage holders at all. They're without a mortgage. That's the orange portion of that bar line. And so it's just important to remember and in this sense, the magnitude of influence of an economy right now that's less sensitive to interest rates, hence central bankers around the world will want to talk about that. And that transmission mechanism, the upcoming Jackson Hole Symposium, when I say upcoming that's not until mid to early August. But in my view, Jeff, it's never too early to start talking about Jackson Hole

Jeff Buchbinder:

That's been market moving before. And who knows, maybe it will again. I guess, you know, this doesn't mean that monetary policy doesn't matter, right? You still are influencing the economy, maybe not as quickly, but you're still influencing the economy over time by having a higher rate. And we've now been presumably above neutral, right, in a restrictive rate stance from the Fed for a while, and we're going to stay there for a little bit longer, <laugh>. So, you know, it will contribute to cooling inflation, but maybe not as much as the Fed had expected it to if you go back two or three years.

Jeff Roach:

Yeah. And then I think the key will be as you said, JB, we still do believe this is extremely important, all the tools at the disposal of the central bankers. But we're realizing that if you have a portion of the economy that's less interest rate sensitive, then monetary policy will influence different areas of the economy very differently. Hence that's kind of the key takeaway, particularly for business owners, understanding your customer, right? Knowing what segment they're in, are they going to be most sensitive to an interest rate change or not? Some have not. And that's kind of the key. It's a very heterogeneous impact from monetary policy.

Jeff Buchbinder:

Absolutely. Which kind of feeds into the idea of a rolling recession in which we

Jeff Roach:

Yes.

Jeff Buchbinder:

We already did, kind of already had that. So this chart, Jeff, I know, tries to put in perspective how big the refi boom was and how much people kind of got in their pockets from refinancing.

Jeff Roach:

Yeah, that's right. So it's no surprise that we had a lot of refi activity, but we had to wait a little bit till more data came in on some of the granular components of what was happening in the last few quarters. And what's interesting is to realize the magnitude of influence that the refi activity in recent years was in greater magnitude, higher than even pre-Great Financial Crisis when mortgage lending standards were quite low. Now, granted you almost have a little bit of the best of both worlds. We had much tighter lending standards, as we all know looking at the senior loan officer opinion survey that the Fed puts out. But in contrast to what we've seen in past, we had tightening standards, but still of course that was, you know, post the implementation of when the Fed started hiking.

Jeff Roach:

But we had a pretty massive refi boom. And the bottom line, the key takeaway here is a lot of millions of people have a lot more money in their pocket. And that's why I put there the monthly payments on average of 220, clearly a lot more. This is a median across the whole country. But you put that amount across the country that gives folks, in addition to access savings, the ability to pull forward demand and spend a lot more than what we typically saw as trend growth for both services spending and goods spending.

Jeff Buchbinder:

Yeah, the stock market probably pulled a little of this good news forward too, because we have been on quite a run as we talked about earlier. So yeah, so this is a big lift. This is, I think this is a really important point. You know, I often cite the financial obligations ratio because people were able to refi, they're locked in at lower percentages of you know, debt service costs relative to their disposable income. So there's that orange line, right? That's the mortgage piece, but even the other piece, consumer debt service ratio is not, you know, it's kind of range bound.

Jeff Roach:

Yeah, that's right. And it just kind of shows you that, you know this is the reason why Chair Powell's premonitions and forecasting did not come true, right? Hey, we need to be aggressive. It'll cause some pain. Well, it caused pain for some people, but not broadly speaking because of this right here. You have historically low debt service costs on your median household, and that certainly has protected the households quite nicely. It's provided a nice cushion, hence markets have responded favorably because of that cushion.

Jeff Buchbinder:

Absolutely. So let's move on to preview the week ahead Jeff, before we wrap up. So, I mean, it's all about NVIDIA for me. You know, maybe I'm biased as an equity strategist as opposed to an economist. You probably are, you know, more interested in some of the data, maybe the Fed minutes. What should investors be watching for this week on the economic calendar?

Jeff Roach:

Yeah, I'll be watching and parsing the minutes. I'm not sure if the minutes are going to do much like they have done sometimes in the past. We've had so much Fed speech the last week, and of course there was more this week. Yeah, sorry, and this week. But, you know, you think about how much additional information we might get out of those minutes. We've had a pretty chatty Fed you could say. And so I'm not sure if there's a lot more additional information, might be fleshed out a little bit more. I'm, you know, I'm interested in the new home sales numbers on the 23rd, because residential investment was very important, added to growth in the first quarter. Probably continue to add to growth the rest of this year, but I'm going to be watching and closely looking at the new home sales numbers, just because as you know, Jeff, when we heard from DR Horton, Pulte, Meritage, some of those folks that have in-house mortgage financing, perhaps interesting way to offset the headwinds from high mortgage rates.

Jeff Roach:

It's a lot better when you have in-house mortgage financing. But we look for residential investment to continue to kind of hum along. And this will be something that I'm watching closely month in and month out on the new home sales. And then I'll say this, Jeff, you and I talked about this earlier, but you know, University of Michigan has given us some inside scoop on, you know, the psychology of the consumer, you know, where are they feeling the pressure points. And it's interesting, this is a revision or more data has come in. This is the final estimate for the month of May. We get a preliminary estimate earlier when University of Michigan has enough survey respondents to put their index together. But as more and more data come in, they finalize that estimate. But University of Michigan, one year inflation expectation, still three and a half percent, not good. That's the tough part. So again, this is the perception from consumers, not the actual numbers, of course. But it's certainly important for kind of the expectations of how comfortable consumers are feeling going into the summertime and going into the latter half of this year.

Jeff Buchbinder:

Yeah, I guess consumer confidence in general has been a little bit soft too, but that can sometimes be a contrarian indicator. I mean, people generally will just complain <laugh>, frankly, almost no matter what the environment looks like. So, I'm not sure that survey is necessarily bad news. I mean, it's, you know, it's a bad number. It's been going in the wrong direction, but I wouldn't interpret that to mean that inflation is going to just re-accelerate and, you know, kind of take Fed cuts off the table.

Jeff Roach:

Yeah. Yeah. Well, it actually is a good reminder that this has been the case really for the last year at least, where you can listen to what businesses and consumers are saying, and then you track the money, right? Watch where the money goes. And there's definitely been two very different stories. People have been pretty pessimistic in the surveys, but if you track the money flow, watch what they're doing, watch what they're spending, clearly you can see you know, they're spending those dollars. They're not as pessimistic as they say they are with their words.

Jeff Buchbinder:

Yeah. And I'm sure, I mean, the homeowners, like we talked about before, are probably, you know, seeing the world through rosier glasses <laugh> than the renters. And the higher income levels are clearly carrying this economy more so than the lower income levels. So that's something else to think about. We look at overall numbers, but certainly there is you know, some dispersion depending on how you slice and dice the data. So that all said, we still want better inflation expectation numbers. Hopefully we'll get them, but it might just take us a month, <laugh>, we'll see. So yeah, beyond that, it's earnings and NVIDIA on Wednesday. So we'll be watching that really closely. That stock is big enough to move the market <laugh> and to move all the AI names. So certainly rather see them move them up rather than down.

Jeff Buchbinder:

But that won't take away from the fact that this has been a great earning season. I'll probably recap all the numbers for you when we're back next week. So we'll be recording next week on Tuesday after the Memorial Day holiday. So we'll use that opportunity and this opportunity to reflect on those who gave the ultimate sacrifice for our country. We thank them for our freedom. So thanks Jeff for bringing the economic content to the podcast this week. And certainly, mixed in some markets, Dow 40,000 four week win streak for the major averages. Pretty, pretty good market. Let's hope it continues. So thanks everybody for joining as always, we'll be back with you next week for another LPL Market Signals. Take care, everybody.