Losing Sleep

Weekly Newsletter: March 11, 2024

Spring is always the promise of better and warmer days ahead. The only drawback is the hour loss of sleep. The economic data was promising as well but with a few caveats and asterisks. Top of the charts was the employment data that far surpassed estimates yet again. The caveat is the large revision lower than last month’s blowout number. After accounting for the revision, the new jobs created were not as terrific. Wage gains were minimal and the unemployment rate rose to a multi-year high. Fed chair Powell’s congressional testimony offered the promise of lower rates at some point this year. Again, with the caveat that the “when” is rather indeterminate. More than the employment report, this week will have inflation data that the Fed hopes has not lept too far forward. The expectation is that inflation continues to decline toward the Fed's 2% target, but many consumers feel prices continue to spring forward. Will the Fed spring into action at their next meeting in two weeks? This week’s economic data could provide answers.

Lawmakers made their pitch to Chair Powell that lower rates will help the average consumer. Not necessarily a surprise, but the consumer is still faced with higher bills at the grocery store that should show up in the inflationary figures later this week. Retail sales will also be released this week. More than various surveys about how consumers feel, the sales figures are a better indicator of what consumers are doing. After dipping last month, this month's figures should show a jump of 0.7% and could have an impact on the Fed’s decision to cut rates later this year. Much of what gets reported this week (and a bit from last week) will go a long way to determine whether the Fed cuts rates sooner or later. If inflation remains a concern, later is likely the outcome. If inflation comes in much better than expected, rates will likely fall in anticipation of a Fed cut coming early in the summer.

Investors always have something to worry about. Whether the inverted yield curve that has been in place for over a year or financial stresses that are near decade lows, the bond market usually is a better indicator than stocks. That said, the bond market today is still worried about a recession (the inverted curve) and inflation (rates still high). The bond model has been pointing to higher rates for quite some time. Whether that comes to pass remains in the hands of the Fed. There are a few pundits that opine the next Fed move is higher rates rather than lower. An outlier opinion, but one that is gaining some credence among investors.

The little stocks are getting their day in the sun. Since early November, the equal-weight SP 500 has had the same return as the tech sector. The chatter is certainly about the Magnificent 7 and artificial intelligence, but the market is beginning to believe that smaller is better. Is this the “broadening out” of the rally that investors have been hoping for or just a break from the “bigger is better”? The next few weeks could determine which is the better path. Certainly from a valuation perspective, small stocks provide a better “value” than large stocks. But the growth and interest remain firmly with the large stocks. Long-term returns would argue that smaller and value stocks should perform well over the next few years, but history would also weigh on the side of physics. An object in motion stays in motion unless acted upon… Enter the Fed.

Interest rates and inflation are likely to be center stage this week as inflation data along with retail sales are released. Expect more volatility around those releases as investors continue to determine the direction of interest rates.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.