The long-anticipated stock bear market and economic recession just hasn’t materialized. The Federal Reserve has gone on the most aggressive raising of interest rates in more than a generation in an attempt to stamp out inflation. That has resulted in some distortions in markets. However, in spite of three of the four largest bank failures in the history of America, as well as a litany of other bad news both political and economic, things are stubbornly holding together in our financial marketplace. Recently analysts at Citibank and Bank of America have thrown in the towel on their bear-market opinion of our marketplace. Driven by a new AI enthusiasm that manifested in blow out earnings numbers reported by Nvidia, major stock indexes have firmed up near the highs of the last year and a half. Wall Street analysts that are still bearish are now throwing in the towel and raising their guidance for the end of the year price of the S&P 500.
So now that all of the Wall Street analysts are comfortable that the stock market is going higher, we start getting nervous and looking for cracks in the dam. Of course, we are back to the strange dichotomy that bad economic news is good news for the stock market because it means the Fed will stop tightening and maybe start loosening. Another strange part about the current situation is there are plenty of cracks in the dam – if you are looking. We showed you this chart of larger corporation bankruptcies a couple weeks ago…
Through April bankruptcies are running hotter than the entire last decade – so what about May? It looks even worse…
That is not a good look and is obviously running counter to the Wall Street analysts giving up on their bear market expectations. One of the most concerning things about corporate bankruptcies is that they are happening with much of the debt priced at lower interest rates. With interest rates rocketing higher, we are concerned about Wall Street’s ability to refinance their debt when it comes due. Well, very little of it has come due recently – and there is only a gradual increase over the next few years of corporate bond maturity. In an approximately $10 Trillion corporate bond marketplace, less than $1 Trillion will have to be refinanced in 2024 and about $1 Trillion will have to be refinanced in 2025. This is good news – there is no huge wall of refinancing that will have to happen at these higher interest rates.
There is some bad news as other indicators of economic activity are also showing slowing…
- After tumbling last month, The Dallas Fed's Manufacturing outlook survey was expected top bounce in May... but it didn't. The Texas Manufacturing Outlook survey dropped from -23.4 to -29.1 (vs -18.0 exp). This is the 13th straight month of 'contraction' (below zero) for the index
- Conference Board's measure of labor market tightness worsened notably (less jobs plentiful vs hard to get) in May...
- 5% of consumers said jobs were “plentiful,” down from 47.5%.
- 5% of consumers said jobs were “hard to get,” up from 10.6% last month
- The Bureau of Economic Analysis reported that GDI (Gross Domestic Income) was -2.3 percent in the first quarter of 2023, and -3.3 percent in the fourth quarter of 2022. That's recession territory, but GDP isn't.
- US home prices show annual decline for the first time since 2012
It appears as though Congress has come to an agreement on the debt ceiling – which some day will become a travesty of epic proportions – but now the markets can move past the political grandstanding that has been keeping a check on things. For now, the bulls are firmly in control and the short-selling that has accumulated by speculators will probably provide fuel for the near term to keep stock prices higher. We continue to monitor the macro environment for issues that may affect asset markets and we are certainly detecting more storm clouds accumulating on the horizon…
Regards and good investing,
Greyson Geiler