Has the Fed miscalculated the resilience of the consumer, or have they just not paid attention to inflation? In our humble estimation, now might be a good time for the Fed to rethink their recent hawkish stance.
The 1985 movie, "Weird Science" serves as this week's inspiration. If you survived the trauma of being a teenager in the '80s and '90s, this film should appeal to you. Here's some trivia about the film:
By 1980s standards, this film was a commercial success, earning more than $38 million worldwide at the box office on a lean budget of $7.5 million. The movie served as a launchpad for some of the actors in the film. Some names that no one really knew at the time, ended up becoming considerable stars: Robert Downey, Jr. and Bill Paxton had only small roles in previous movies. This was Kelly LeBrock's 2nd film. And, Anthony Michael Hall had only been in one film prior to this, "Sixteen Candles," but was about to explode onto the Hollywood scene.
Many don't realize that this film was a John Hughes movie. He wrote the script in only 2 days. He wasn't happy during filming because "Weird Science" interfered with another project of his that he cared more about filming. However, Universal gave him a deal where he could direct his more-valued project if he started this one first. His other more valued project? Just a little film called "The Breakfast Club" (a film that we've already mused over).
Vernon Wells, who plays the Lord General (lead biker) in this film, reprises nearly the same character he played in "Mad Max 2: The Road Warrior" (1981). He wears nearly the same make-up, mohawk, mesh tank top, and studded leather in both films.
The behind-the-scenes shenanigans were just as interesting as the ones portrayed in the film. Robert Downey, Jr. and Robert Rusler (Max) joked about defecating in other actors' trailers throughout the shoot. They eventually did in one female cast member's trailer and when questioned by John Hughes in front of everyone on the set, Downey responded, "No, but I sure wish it was me who did it."
Here's what we've seen so far this week...
You Forgot To Think About Growth. The Fed has had a problem ever since floating the idea that fewer rate cuts and longer until the first cut were likely outcomes. On March 27th of this year, NY Fed Governor Waller stated, "In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data."
Since his speech, the market began pricing in only two rate cuts that may not start until September and the S&P 500 Index is off more than 4%. The Fed's viewpoint would be all well and good with robust growth, but now it appears that growth is slowing. It reminds me of the scene in "Weird Science" when Gary and Wyatt try to replicate the success they had in making Lisa. They make a major mistake, though, and Lisa scolds them, as follows:
Lisa: "You had to be big shots didn't you. You had to show off. When are you gonna learn that people will like you for who you are, not for what you can give them. Well, in your race for power and glory, you forgot one small detail."
Wyatt: "We forgot to hook up the doll."
Lisa: "You forgot to hook up the doll."
Has the Fed miscalculated? The Atlanta Fed's GDPNow model had shown a +2.9% growth rate for 1st quarter GDP as of Wednesday. Yet, on Thursday, Q1 GDP was shown to have only grown by 1.6%. I won't whitewash it...that's not a great number and a considerable miss. The positive is that Consumer Spending was relatively stable. Federal Government Spending, however, declined substantially - something the Fed should have accounted for in their estimations.
Treasury Secretary Yellen on Thursday indicated that there may be a revision to Q1 GDP, as she stated, "The headline figure was off a little bit but for reasons that are peculiar and not really indicative of underlying strength." Another bright spot in the GDP number is Residential Fixed Investment (housing) has been a drag on U.S. growth, but that reversed sharply higher in Q1. This morning, the Fed's preferred measure of inflation for March came in as expected (+0.3%).
So far, markets are absorbing the number in stride as early returns suggest there's no shock value to the report. In fact, equities are flirting with a positive return for the week for the first time in 4 weeks. Regardless of whether the GDP number gets revised or inflation trends higher, clearly the Fed should have been more careful about being too dovish in December and/or too hawkish recently. The internet is already in "mock" mode as several have posted an AI version of Fed Chairman Powell in the famous "Dark Night" scene where the Joker sets bombs off in Gotham Hospital.
Making Up Some Stuff? After some recent weakness in equities and the GDP report, you'll likely begin to hear a lot from the permabears about why you should adopt the classic moniker, "Sell in May and go away." However, the historical data indicates that the widely held belief is not a good investment strategy.
Since 1950, the returns of the "Sell In May" strategy have actually cost investors during an Election Year. The average return is +2.3%, with at least a 77% probability of success. In fact, the only years where the "Sell In May" strategy could be taken somewhat seriously is during a Mid-term year, and that has only a 52% probability of success.
In fact, over the last 10 years, only twice was the market lower during the May to October period. In other words, you had an 80% success rate if you just ignored the "Sell In May" so-called investment strategy.
Meanwhile, the underlying economic data still remains positive. Jobless Claims remain low compared to prior pre-recessionary periods. The report on Personal Spending this morning came in higher than expected (+0.8%).
Durable Goods Orders for March showed a nice increase, while Wholesale Inventories decreased. If we go back to our trusted National Financial Conditions Index and Financial Stress Index, those two measures continue to show no signs of stress as in previous pre-recessionary periods. For those of you with younger sibling syndrome, you can appreciate the move of the permabears to hype the negative, just as Wyatt's older brother Chet did in "Weird Science" when he threatened, "I'm gonna tell Mom and Dad everything. I'm even considering makin' up some @$#%&!" Have fun with that.
You forgot one small detail...
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