Recessionistas are in full force expecting an end to the recent bull market, but their understanding of market conditions may be misplaced. Investors are always dealing with a troublesome headline or internal bias when it comes to markets.
The inspiration for this week's musings is Billy Joel's "Pressure," (1982) was a late edition to "The Nylon Curtain" album. Joel was stuck trying to come up with another song idea for the album when a friend remarked, "Well, you look like you're under a lot of pressure." Here's some trivia about the song:
"Pressure" peaked at number 20 on the U.S. Billboard charts and one of 3 hits on "The Nylon Curtain," helping the album get nominated for a Grammy for "Album of the Year" and selling more than 2 million copies.
The video for "Pressure" was directed by Russell Mulcahy, who also made Joel's video for "Allentown." Joel wasn't a fan of music videos at the time and left everything to Mulcahy. Joel went along with everything during the shooting, even though he had no idea what was going on.
A lyric in the song goes, "All your life is Channel 13, Sesame Street." That is a reference to New York stations WNET (channel 13) which aired the PBS show Sesame Street. Joel would later go on to appear on Sesame Street to sing another hit "Just The Way You Are."
"You have to learn to pace yourself
You're just like everybody else
You've only had to run so far
But you will come to a place
Where the only thing you feel
Are loaded guns in your face
And you'll have to deal with
Here's what we've seen so far this week...
You Have To Learn To Pace Yourself - Pressure. Markets are on pace today for a 3rd consecutive positive week. Bears keep trying to find data points, when isolated unto themselves, could point to some trouble brewing. However, if we step back and take a deeper look, things aren't so bad.
The first measure of 4th quarter GDP came out today and beat expectations. GDP was up 3.3% for the 4th quarter, which was higher than 2.0% expected, but lower than Q3's measure of +4.9%. However, the primary measure of economic growth shows a leveling out from the massive recovery post-COVID and is more in-line with pre-COVID growth. The Fed's preliminary look at Q1 GDP for this year came in today at +3.0%, which means growth may be here to stay.
What hasn't leveled out yet is the amount of cash in household assets. U.S. households have $18 trillion in cash, which is up from the $13 trillion held pre-COVID. U.S. households are in decent financial shape and the labor market is very accommodative. As we pointed out last week, jobless claims do not look like other pre-recessionary periods and job openings are still a plenty. In fact, the size and frequency of layoffs softened in 2023.
This means the consumer is able to spend in stable fashion and the numbers are bearing that out. Personal Income was higher in Dec by +0.3%. Personal Spending was higher than expected for December (+0.7% vs +0.4% exp.). So far this year, Redbook Sales have remained elevated by +5% versus this same time last year. Another big release this week was the Fed's favorite inflation barometer, the PCE Price Index. It showed no change on a year-over-year basis (2.6%) and no change on a month-over-month basis (0.2%).
Bloomberg's Financial Conditions Index shows that the current economy is the most accommodative for consumers in the last 2 years. As we pointed out last week, other similar measurements show equal results. The Chicago Federal Reserve's National Financial Conditions Index is -0.57, which declined even further last week, indicating loose financial conditions. The St. Louis Fed's Financial Stress Index also declined further last week to -0.80. Neither index points to worrisome conditions like other pre-recessionary periods have indicated.
And You'll Have To Deal With Pressure. Some things to keep an eye on primarily are inflation and interest rates. More than likely, the market got ahead of itself on Fed rate cuts.
March probabilities have moved to a 52% probability of no rate cut. That stood at a 70% probability of one rate cut just 4 weeks ago. In addition, May's FOMC meeting now has only a 36% probability of a rate cut, which was previously 70% just one month ago. The reality is that it's looking more and more like there will be no rate cut considered until the June FOMC meeting. All eyes will be on the Fed's comments next week after their first meeting of 2024.
We could see some changes to inflation over the coming weeks and months. It has largely to due with the conflicts in the Mediterranean and shipping routes. Houthi militants are causing havoc in the region by firing on container ships.
As a result, ships are diverting to other, safer means of passage, which is increasing shipping length and costs, thereby causing shipping rates to go up after plummeting for most of 2022. This is not a situation to necessarily panic over, but something to keep an eye over the next few weeks. Overall, economic conditions are favorable for the consumer and there's no real need to be concerned unless that changes. After all, the consumer is nearly two-thirds of GDP.
Here's the strange video from "Pressure"...
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