The continuation of the MOU (Memo Of Understanding between the United States and Iran) Rally was rudely interrupted Wednesday afternoon during newly appointed Fed Chair Kevin Warsh’s press conference over comments made by Warsh (see below) which in turn sparked concerns over the direction of interest rates and the potential for a Fed Monetary Policy misstep. That concern was brief as Thursday the rally resumed. For the holiday-shortened week, all major indexes finished higher with the mid-cap Russell 2000 closing at all-time highs.
Investors pay more attention to the equity markets than fixed income (bonds) as historically they are more short-term volatile and long-term rewarding. This year is no different as the S&P 500 has risen 9.57% (excluding dividends) while the iShares Core U.S. Aggregate Bond ETF (AGG) has risen a mere 0.66%. That said, for any portfolio, other than those whose sole objective is long-term growth, in addition to less volatility than stocks, bonds offer predictable income and mitigate risk, something which is easy to forget in this FOMO market.
· Kevin Warsh Chaired his first meeting of the Federal Reserve’s Open Market Committee (FOMC) this past Tuesday and Wednesday which was followed by a statement about forty percent as long as those issued by Former Chair Jerome Powell. Of note within the statement as well as the press conference shortly after the conclusion of the meeting were the following:
o “This week’s FOMC meeting exemplified the very best of the Fed’s traditions: rigorous debate, open-mindedness, commitment to mission, responsibility, and accountability for performance.”
o “We recognize that inflation has been running well ahead of the Fed’s long-stated inflation goal of 2 percent that’s been going on for more than 5 years. Persistently high prices are a burden for the American people. But the recent past need not be prologue. I am pleased to report that members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability.”
o “This afternoon you also received the usual Summary of Economic Projections. It’s been the practice of this Committee for participants to submit these projections, and I have encouraged my colleagues to continue to do so. I, however, have refrained from offering any projections of my own – consistent with my long-held views on the SEP, at least as currently structured.”
o “On the 2 percent inflation objective, that is the Federal Reserve’s long-held objective of 2 percent. You’ve heard me say before I tend to focus on the left of the decimal point. Well, the two is the left of the decimal point.”
· According to Apollo Global Management, “since January, the entire S&P 500’s gains have come from just two corners of the market, AI and energy, while everything else is actually trading at less than where it started.”
· AI may be inflationary, at least for now. Tim Cook, outgoing CEO of Apple, during an interview with the Wall Street Journal, referring to the global shortage of memory and storage chips, stated that “we’re doing our best to mitigate the huge increases that are being passed to us, and we’ve been trying to shield our customers from the increases, but the situation has become unsustainable.”
· In addition to lower, inflation adjusted (real) returns, holding too much cash may create a behavioral trap whereas the investor becomes accustomed to its perceived safety, making it difficult to “pull the trigger” to get back into the market. He/she does not recognize that over the long-term cash seldom provides the income necessary to sustain one’s standard of living.
Economic Data That Drove Market Sentiment This Past Week…
· The Conference Board reported that its U.S. Index of Leading Economic Indicators edged 0.1% higher during May, after edging 0.2% higher during April. The US LEI has fallen 0.3% over the trailing six months, a substantial improvement from the 1.3% drop over the previous six months. According to Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators at The Conference Board, “the Leading Index for the US increased slightly in May, fueled entirely by positive contributions from financial components, especially stock prices and the interest rate spread.” (Source, The Conference Board)
· Retail Sales jumped 0.9% in May (6.9% y/y), after rising 0.4% in April. Spending on Motor Vehicle & Parts rose 1.2% during May (4.4% y/y) after sliding 0.9% in April. Retail Sales Excluding Motor Vehicles & Parts rose 0.8% during May (7.5% y/y), after rising 0.7% during April. Two key components of this report, Sales at Gasoline Stations rose 3.4% during May (26.5% y/y) after rising 2.4% in April as Restaurant and Drinking Place Sales slipped 0.1% during May (2.7% y/y) after edging 0.9% higher in April. Also of note was the 0.5% slide in sales at electronic & appliance stores (6.9% y/y) as well as the 0.4% bump in sales at grocery stores (2.3% y/y). (Source, U.S. Census Bureau)
· Industrial Production, a measure of strength in the manufacturing, factory and utility sectors, rose 0.1% during May (1.7% y/y), after rising by an upwardly revised 0.9% in April. Capacity Utilization rose to 76.2% during May from 76.1% during April, rising from 75.9% y/y. Manufacturing Capacity held at 75.7% during May when compared to April, but rose from 75.5% y/y. (Source, U.S. Federal Reserve)
· Housing Starts plunged 15.4% or by 215,000 to a seasonally adjusted annualized rate (SAAR) of 1,177,000 during May as compared to 1,392,000 in April (-8.7% y/y). The number of starts during May represented the lowest since May 2020, a period of COVID related lockdown. A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units built annually to account for household growth and to replace existing stock. During March, Single-family housing starts fell 1.9% or 17,000 to 882,000 from 899,000 (-6.7% y/y). Meanwhile, Multifamily housing starts fell 41.6% to 284,000 in May (-14.2% y/y) from 486,000 during April. Building Permits, a key barometer for future starts, slid 10,000 to 1,413,000 in May as compared to 1,413,000 during April (-0.2% y/y). (Source, U.S. Census Bureau)
· U.S. Export Prices rose 1.3% during the month of May (11.2% y/y) after climbing 3.5% in April. Import prices rose 1.9% during May (6.7% y/y) after rising 2.0% in April. Agricultural export prices rose 1.2% during May (5.5% y/y), after rising 1.7% during April. Non-Agricultural Export Prices rose 1.2% during May (11.8% y/y) after jumping 3.7% during April. Please note that import and export prices are not affected by tariffs as they are measured prior to taxes. (Source, U.S. Bureau of Labor Statistics)
Economic Reports scheduled to be released this week, include the following – on Wednesday, May New Home Sales; on Thursday, Initial Weekly Claims for Unemployment Benefits along with May Personal Income and Spending; and, on Friday, May U.S. Trade Balance, May Wholesale Inventories and the Final Reading on June Consumer Sentiment from the University of Michigan).
Several potentially market moving companies are scheduled to report earnings, to include FedEx (FDX), Carnival (CCL), KB Home (KBH), Micron Technology (MU), Jefferies Financial (JEF), Paychex (PAYX), Darden Restaurants (DRI) and McCormick (MKC).