Things are happening fast in the market these days and it's got a lot of market pundits perplexed. It kind of reminds me of the teenage years where things are upside down some days and not everything makes sense all of the time.
Hence the inspiration for this week's musings, 1982 movie, "Fast Times At Ridgemont High." This film probably served as a cultural influencing piece for those of us who grew up in the '80s. Here's some trivia about the film:
By 1980s standards, this film was a commercial success. The budget was a laughable $4.5 million, probably because many of the stars in the film were up-and-comers and were largely "undiscovered" as of the filming. That certainly changed after the film's release, as it went on to gross $27 million at the box office and put many of the stars in the film on the map.
In the same vein as "E.T." and his Reese's Pieces, another unknown product was launched from "Fast Times." The checkerboard pair of shoes Spicoli (Sean Penn) wore in the film and beat against his head became a national brand after the film's release. We all came to know them as "Vans."
The mall scenes were shot at night after the mall closed, from 9:30 pm to 9:00 am. Many of the extras in those scenes were under 18 years of age, so only 10 minutes of shooting could feature any one of the extras due to labor laws at the time.
Nicolas Cage has a minor role in the film as one of Brad Hamilton's (Judge Reinhold) friends. Cage was originally was considered for the role of Hamilton, but the studio thought his performance was too dark. Also, he lied about his age. He was only 17 at the time, so they had to cut his part in the film down due to the aforementioned labor laws.
Here's what we've seen so far this week...
All I Need Are Some Tasty Waves. Just when the permabears were ready to feast on some market weakness last week, the market roared back this week. Equities are up at least 2% so far this week and it's partly due to the FOMC meeting.
The Fed met on Tuesday and Wednesday and made no changes to rates and no major change to their "Dot-plot" which continues to indicate at least 3 rate cuts this year. The Fed did increase their GDP expectations from their December data and slightly decreased their Unemployment projections from the previous data. This provided markets with some tailwind to resume the march higher. According to Powell's statements after the conclusion of the Fed meeting, it will be "appropriate to being easing at some point this year." Goldman Sachs is still in the camp that the first rate cut could come in June.
The possibility of 4 rate cuts was nearly eliminated with the March "Dot-plot" as only 1 FOMC member voted in favor or 4 cuts. However, in December, only 6 members voted for 3 rate cuts, while at this week's meeting that number increased to 9 members in favor of 3 cuts. This, plus the comments from Powell were taken as Dovish by equity bulls.
The permabears continue to point to rate cuts as a sign that markets have peaked. However, history tells a different story. There have been 20 occasions since 1980 where the Fed has cut rates when the S&P 500 Index was at all-time-highs. Of those, the S&P 500 was higher 12 months later 20 out of 20 times, with an average return of +13.9%. Three of those occurrences were just before COVID, so the likelihood that the cuts led to a downturn in the market is offset by the uniqueness of the pandemic. For the time being, we should heed the advice of the ever-wise Jeff Spicoli who said, "All I need are some tasty waves, a cool buzz, and I'm fine." Enjoy the equity wave for now.
Gee, Mr. Spicoli, I Don't Know. The frustrated history teacher at Ridgemont High, Mr. Hand, had some classic battles with our friend Mr. Spicoli over the course of the film. However, one vintage scene leading up to another Hand-Spicoli battle is when Mr. Hand is passing out the latest results of the history test. I feel like maybe he's talking to the permabears when he chastises the class on their results by asking, "What are you people, on dope?"
I jest because at some point the bears will be right, as markets rise and markets fall. However, there's plenty of evidence to be in the bull camp for now. We're near the end of Q4 earnings season and the revenue story has gotten lost in the shuffle. After stagnating for much of 2022-23, the fourth quarter showed 4% revenue growth for S&P 500 companies on a year-over-year basis. While that growth is below both the 5-year and 10-year averages, it is still higher than the previous two quarters, after what appears to be a bottoming out in Q2 of 2023.
For the first time since the 2nd quarter of 2022, the US Leading Index posted a positive month-over-month reading. The Leading Index is a composite of economic data designed to reveal a turning point in the economy. Part of the weakness of the Index over the past two years can be attributed to the inverted yield curve and manufacturing & housing weakness. While the yield curve remains inverted, housing data and some manufacturing data is improving. Both Building Permits and Housing Starts were higher month-over-month and better than expected. Existing Home Sales came in much stronger than expected with 9.5% growth month-over-month. The Philly Fed Manufacturing Index has turned positive and the S&P Manufacturing Index is trending in a positive direction.
New Orders were higher in last month's ISM index and we are now seeing evidence of that in the latest Trucking Tonage was up 4.3% in February, is now positive year-to-date, and is at the highest level since January of last year. New orders and shipping amounts are driven directly by the consumer. Tales of the death of the consumer are vastly overstated. Redbook Sales have been pretty steady so far this year at around +3%. Jobless Claims remain low at just above 200,000 which, as we have previously mentioned, is considerably lower than the +300,000 range we see leading up to recessions. Similar to a broken record, I feel the need to mention again, if consumers have jobs that means they have money in their pockets. If they have money in their pockets, they tend to spend. Like Mr. Hand who was perplexed by Mr. Spicoli's "truancy," maybe we should ask the recessionistas, are you going to participate in this strong economy? I can answer for them, "Gee, Mr. Spicoli, I don't know."
Mr. Hand instructs the next generation (i.e., me)...
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