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  • Scott Poore, AIF, AWMA, APMA

Things Aren't Always What They Seem

Overall this week, economic data releases have been positive, which may be the problem in the short-term. The markets likely got ahead of itself in the 4th quarter of least year with Fed rate cut expectations. Things may not be what they seem when it comes to the tough start.


The inspiration for this week's musings, "Edward Scissorhands," (1990) was a surprise hit at the box office. The film has a nice lesson that things aren't always what they seem. Here's some trivia about the film:

  • While the film cost $20 million to make, it grossed over $86 million at the global box office. It's also one of those films that's morphed into "cult" status among certain viewers of my generation.

  • From start to finish, this film is really the "baby" of Tim Burton. It was inspired by a drawing he made when he was a teenager depicting a man with sharp blades for fingers. In addition, the film's setting among suburbia was a nod to his childhood and the difficult he had gaining friendships as a child. In fact, the filming location was an actual suburb in Florida, completely unchanged, except for the neon exterior paint that Burton chose to have added.

  • Vincent Price's role as the original maker of Edward was originally intended to be much larger, but he was ill with emphysema and Parkinson's so his scenes were cut short.

  • The blond boy on the Slip "N Slide at the beginning of the film is Nick Carter of the Backstreet Boys. Though uncredited, he has confirmed this in several interviews.

  • Burton has stated on many an occasion that the film will not have a sequel and that doing so would rob the film of it's "purity."


Here's what we've seen so far this week...


Bull Market Done? As I pointed out a couple of weeks ago, markets tend to trade a little sideways in the 1st quarter of a Presidential Election year. Just like most investors who praise markets (and their advisor) when prices move higher and cuss markets (and their advisor) when prices decline, so too did the people of Edward Scissorhands new group of friends. When the suburbia folk realize Edward can help them with his talents (crafting hedges into shapes, cutting hair, etc.) they praise his strange appearance. When they see that he is human just like they are (with all of his personal faults), they fail to see his usefulness.


Markets don't always go straight up and that's typically when the permabears pounce. But, when we look at several key indicators that paint a more broad picture of the economy, we see a stronger economic picture than what recessionistas want us to see. First and foremost, we have to look at the health of the consumer. Jobless Claims came in this week much lower than expected at 187,000. If we look at different pre-recessionary periods (see graph) claims typically move into the 300k range prior to the past few recessions (excluding COVID).


Since the Fed started tracking wage growth, we see a different picture today from what we saw in 2007, prior to the 2008 Financial Crisis. In October of 2007, inflation began to exceed wage growth and wages has been on a downward trajectory. Today, we see wage growth exceeding inflation by at least 700 basis points. Most recently, wages growth has begun to rebound.


This translates into consumers having plenty of money on their pocket and feeling secure in the current jobs or the ability to find a new job. The JOLTs Job Openings, thought on the decline from record heights during COVID, are still at a historically elevated level of more than 8 million available jobs. As such, Redbook Sales are measuring 5% growth year-over-year, versus the beginning of the 2008 Financial Crisis at flat before falling off the cliff.


Next, we need to look at the broad financial conditions to see how the economic is faring. Currently the Chicago Fed's National Financial Conditions Index is -0.56. This indicates loose financial conditions favorable to corporations and individuals. Is we look at prior recessionary periods, the Index has moved into positive territory (tight financial conditions) within a few months preceding the last 3 recessions (excluding COVID). The Risk component of the index (see in Red in the graph) turns positive when the market senses trouble ahead, and yet, the Risk component is negative (-0.24) as of Thursday's release.


The other broad indicator is the St. Louis Fed's Financial Stress Index. Like the preceding index, this one will turn positive when conditions tighten. The current reading on the Financial Stress Index is -0.68, while previous recessions showed higher levels. In December of 1999, the Index turned positive and began to struggle to stay negative a few months prior to the 2000 Dot-com Crash. In 2007, two months before the market reached all-time highs, the Index turned significantly higher versus the current reading.


Just when the market seemed to be headed lower earlier this week, the strong economic data may have helped the market come to terms with Fed rate cuts happening further out into the future. Retail Sales came in stronger than expected in December (+0.6 vs +0.4% expected). The Fed's GDPNow measurement for 4th quarter GDP turned up to +2.5%. Lastly, consumer expectations of inflation turned lower to 2.9%. This paints the backdrop of a solid economic picture. Is everything rosy? No - both the NY Empire State Manufacturing Index and the Philly Fed Manufacturing Index turned markedly lower in recent weeks. However, the more telling information is that the expectations of a Fed rate cut in March moved from 76% one week ago to only 46% currently. The market likely got ahead of itself in the rate expectation area and markets have had to adjust. As of this writing, the S&P 500 Index is looking to close today at all-time highs (not seen since January 3, 2002. Can all of these conditions change? Absolutely - in a heartbeat. But, given the information we have today, things still look solid from an economic standpoint.


Here's one of my favorite scenes of when Edward tries some "lemonade"...


 

Disclosures


The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.


Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.


Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.


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