“I learned long ago, never to wrestle with a pig. You get dirty, and besides, the pig likes it.” -George Bernard Shaw
In my investing career, I've wrestled a lot of pigs. It is a dirty business and you rarely come out on top. Or with a clean portfolio.
In my case, this typically means being contrarian for contrarian sake. We can't invest in stocks we cover and have fairly tight compliance around stocks we don't cover, so this usually occurs with ETFs.
My biggest nemesis is the natural gas ETF UNG. I don't even want to look at my batting average. I just know it's bad. But every time that darn thing “feels” over sold, I dip my toe in . . . and then generally lose.
You can’t tell yourselves all sorts of stories about why you are making an investment, but regardless of what you tell yourself . . . even if you put lipstick on a pig it is still a pig.
Back to the Global Macro Grind . . .
It is not an overly busy week of economic data in the U.S., but we will get some key data that is relevant to the consumer:
- Tuesday – March Consumer Confidence with consensus at a slightly acceleration to +107;
- Wednesday – MBA Mortgage Purchase Applications . . . will rates backing up start to negatively demand again?;
- Thursday – March Michigan Consumer Sentiment final with consensus here also at a slight acceleration to +76.8; and
- Friday – February Personal Spending and Income with consensus assuming a M/M deceleration in both (consistent with challenging Y/Y comps).
We discussed this in detail in our Q2 Macro Themes presentation on Thursday (ping if you want access to the replay), but the U.S. economy continues to be bifurcated.
On the positive, we are entering a stage of easier comps in a lot of economic data in the U.S.
We have seen this already with most of the February data being less bad than January and, also, accelerating on a M/M basis. The early March data appears to be continuing this trend and coming in better than February. So, that’s good.
But, and this is a big but, the lower end consumer continues to struggle, which is not so good.
The key reason for this is that the balance sheet for the bottom 50% of households in the U.S. in terms of net worth has turned upside down since the beginning of the rate hiking cycle.
Specifically, since Q1 2022, or just two years ago, the bottom 50% of households have added some +$105K in consumer debt on average.
Meanwhile, their net assets have declined by just over -$30K. This all comes at a time when credit card interest rates and card balances remain near all-time highs.
Recognizing the continued weakness in the lower end consumer, or really median consumer, may be one key reason that Jay Powell continued to be adamant about rate cuts in the foreseeable future.
As we highlight in the Chart of the Day, the problem is that three or four cuts are probably not enough to make much of a difference.
We noted on the chart:
“Rates moved from 0 to 5% at the fastest pace ever, leaving little cumulative borrowing in between. For households or small business vulnerable to rates who were viable at 0%-2% but are progressively bleeding out at 5.5% … is 1 or 2 or 4 cuts really going to make a difference? (they need like 15 cuts!). For that cohort, the bleed is likely to continue.”
We have obviously seen this in real time with the recent disappointing earnings announcements from Dollar Tree DLTR and Five Below FIVE (on our Retail Team’s short bias list), which are both retailers that serve the lower end consumer. Inflation was specifically noted by the DLTR management team:
“ . . . persistent inflation and reduced government benefits continue to pressure the lower-income consumers.”
For these companies, inflation is a factor on both the supply side and the demand side. This is unlikely to alleviate anytime soon, especially with the CRB Index and oil already up near 10% in the YTD. (Which, perservely, is good if you are long of inflation in your portfolio like we are.)
The challenges facing the low end to lower middle end consumer are certainly important to monitor. And the “pigs” in the U.S. stock market, that you don’t want to wrestle with, may well continues to be those companies that sell into this demographic.
But this doesn’t change the economic reality of Q2, Q3, and Q4 of 2024, which are heavily weighted to #Quad2 and #Quad1 outcomes. In fact, on a monthly basis, six of the next nine months are projected to be either #Quad1 or #Quad2 in our models.
That should be a decent environment to keep risk on, albeit somewhat selectively.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 4.12-4.39% (bullish)
High Yield (HYG) 77.18-78.00 (bullish)
Investment Grade (LQD) 107.31-108.99 (bullish)
SPX 5120-5272 (bullish)
NASDAQ 16,035-16,518 (bullish)
RUT 2037-2115 (bullish)
Tech (XLK) 205-212 (bullish)
Insurance (IAK) 112.84-116.03 (bullish)
S&P Momentum (SPMO) 77.78-81.36 (bullish)
Healthcare (PINK) 29.65-30.59 (bullish)
Shanghai Comp 3010-3094 (bullish)
Nikkei 38,895-41,138 (bullish)
BSE Sensex (India) 71,731-73,804 (bullish)
DAX 17,823-18,405 (bullish)
VIX 12.55-14.99 (bearish)
USD 102.91-104.72 (bullish)
Oil (WTI) 78.91-83.62 (bullish)
Nat Gas 1.60-1.90 (bearish)
Gold 2139-2187 (bullish)
Copper 3.92-4.18 (bullish)
Uranium (URA) 27.00-29.29 (bullish)
MSFT 413-434 (bullish)
AAPL 168-178 (bearish)
AMZN 173-182 (bullish)
META 483-515 (bullish)
GOOGL 139-155 (bullish)
NFLX 603-636 (bullish)
TSLA 160-183 (bearish)
NVDA 860-951 (bullish)
Bitcoin 61,501-70,903 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
