For those of you who would prefer to listen:
The rally on Wall Street continues. The Dow and S&P keep hitting fresh, all-time highs. It’s happening in an environment of crisis and extremes. This year has witnessed growing fears of an economic slowdown, inflation, high interest rates, expanding wars overseas, natural disasters and an exceptionally divisive and unpredictable Presidential election campaign. So of course, over the first three quarters, it turns out the S&P 500 had its best performance this century. It’s defied logic and seasonality with a green August, September and so far, October. It’s been a remarkable year for investors. There’s also this: There’s nothing like price to change sentiment.
The Market is unemotional. It focuses on facts, particularly the Bond Market. But investors are. The consistent hitting of new, all-time highs has gotten people Bullish again. In fact, according to the Investors Intelligence report, which we follow very closely, there are now the largest number of Bulls in 2024. Conversely, there are also the fewest number of Bears on the year. It undercut the previous low for Bearish sentiment recorded in July, right before the August correction. I hear it all the time, “why is the Market up with so many problems everywhere?” The longer you do this you realize; The Market tends to go against the grain of consensus. It tends to slaughter the herd of “experts”. You can’t outsmart the Market.
With so much going on, and a month before the Presidential election, this week I decided to deliver another rapid rundown:
Hurricane:
A category 5 storm in the Gulf named Milton touched land on Florida’s west coast this week. Nearly 3% of U.S. GDP was in Milton’s path. AccuWeather warned that economic losses from the storm could exceed $200 Billion. 3 Million people were without power. The roof at Tropicana Field blew off. 23 Million people live in Florida, accounting for roughly 7% of the nation’s total. Milton trailed Helene which had already devastated America’s southeast just 2 weeks ago.
Several fuel terminals in the area shut off supply ahead of the storm. Gas stations ran out of fuel as people evacuated in droves. Disney closed its Orlando parks on Wednesday. The company’s earnings are expected to be impacted by as much as $200 Million. Universal Orlando Resort and SeaWorld Orlando also closed, while cruise operators Royal Caribbean and Carnival made changes to their schedules. Retailers throughout the region closed stores in the storm’s path. It will take a while before the full damage from Milton can be tallied. These once in a generation storms seem to be annual events now.
Florida’s Citrus industry got hit again. It is still trying to recover from Hurricane Ian in 2022. Production from Florida’s Orange groves fell 60% that year. On the upswing, Orange production grew 19% this year, with 846K tons produced. But that’s still just half of what Florida produced before Ian. The top 5 Orange producing counties account for 70% of state citrus production. 4 of them were directly in Milton’s path.
Inflation
It’s stopped going down. After peaking at 9% in 2022, the rate of inflation had consistently declined. Until now. Economic data reported this week showed hotter than expected. This, on top of last week’s blowout jobs report have cemented bets that the Federal Reserve will go for a ¼-point rate cut next month. Treasury yields jumped, with the 10-Year firmly back above 4%. It was 3.6% a month ago. There’s now a 10% probability of no cut at all. It was 2% a week ago. Another ½-point cut is off the table.
The September CPI (Consumer Price Index) came in a bit higher than estimated on both headline and core measures. Shelter and food contributed over 75% of the monthly increase, though shelter inflation eased from the large rise in August. Prices for medical care, airfares, and used cars were also higher. Gas prices fell a substantial 4.1% month-to-month. But that was due to lower Oil prices. The price of Oil has steadily risen since as tensions in the Middle East boil. That will lead to higher prices at the pump ahead. Commodity prices have been back on the rise and insurance costs never fell. In fact, in the wake of the hurricanes, they keep going up. That’s very inflationary.
Wars Around the Globe
Wars in Ukraine and the Middle East show no signs of ending. In fact, it’s seemingly about to get worse with Israel and Iran. It’s been nearly 2 weeks since Iran launched the aggressive attack on Israeli soil. There hasn’t been a response yet. While the Market waits for clarity, Israel intensified its air and ground offensive in Lebanon.At the same time, Hezbollah continues to fire missiles into Israel. More military activity is expected over the weekend.
It remains unclear whether or how Israel does respond to Iran’s October 1st missile barrage, but the topic is a criticalrisk of serious escalation in this Mideast conflict. Iran’s Oil facilities are an obvious target. That possibility sent the price of Oil skyward, with volatile price action this week. There’s also been speculation of Israel attacking Iranian nuclear facilities, which could send this conflict into a nuclear world war. That would be beyond dangerous, but unfortunately cannot be ruled out. The Market certainly has not priced such an event in.
Corporate America & Consumers
Earnings Season provides the opportunity to see how Corporate America is performing. More than anything else, it’s earnings that drive stock prices. It’s also a critical measurement of the American Consumer, which accounts for 70% of economic activity. Election uncertainty has been highlighted by CEOs on their conference calls. It’s weighing on their abilities to forecast and invest not knowing what the regulatory and tax environment will be. It’s weighing on Consumer confidence in spending. There’s clearly a slowdown in place.
The Big Banks generally kick off Earnings Season and JP Morgan did so with quite a statement: The soft-landing was achieved. America’s largest financial institution said the Economy remains strong for both consumers and companies. The bank indicated the Federal Reserve achieved the desired but difficult soft landing with lower inflation while maintaining healthy growth. “These results are consistent with a soft landing,” Chief Financial Officer Jeremy Barnum said. “That’s pretty consistent with this kind of Goldilocks economic situation.” The Market sure liked this perspective. It’s certainly not shared by all.
Pepsi led things off on the Consumer side. Its results offered some cautious takeaways. Earnings beat, but revenues missed. That’s important. Earnings can be managed by cutting costs, but revenue is the true measurement for demand. PepsiCo cut its outlook for 2024 organic revenue growth and called the performance in North America “subdued.” The company reported that volume for both its food and beverage divisions declined 2%. The Pepsi CEO said on the conference call that the American Consumer is “very challenged”.
Domino’s reported an earnings beat but revenue was light. The world’s largest pizza chain clipped its outlook for global sales growth for the rest of the year, citing a “challenging macroeconomic environment.” Dominos has slowed its new store rollout due to the economic environment. In January, the company planned on opening over 1,000 new stores in 2024. Now it sees 800 or so. Restaurants have been forced to bring back value meals and promotions to keep customers. Consumers have been shifting toward less profitable products, Domino’s said.
Travel and air traffic seem to be slowing a bit. This, from Delta Airlines this week. Revenue will likely rise between 2% and 4% from a year earlier, compared with estimates of a 4.1% increase. It does see a strong Holiday season ahead. Getting there will likely be bumpy. Delta warned it expects a 1-point revenue hit from lower demand before and after the election. CEO Ed Bastian said, “Consumers will, I think, take a little bit of pause in making investment decisions, whether it’s discretionary or other things. I think you’re going to hear other industries talking about that as well.” That’s certainly a theme that keeps building.
Costco reported its September same store sales jumped 9% compared to last year. The company saw a rush in demand ahead of Hurricane Helene and the pending port strikes. Online sales grew a whopping 23%. It’s likely to show another bump in October, ahead of Milton. While other retailers have struggled in 2024, Costco continues to gain America’s share of the wallet.
Robots & Driverless Cars
In case you needed a reminder we’re in the Digital Age, Elon Musk showcased it Thursday night in Hollywood. The walking, talking 6-foot tall Optimus robots stole the show. They danced and served drinks. Musk said they can do pretty much anything you want. He has visions of robotic cooks, babysitters and lawn mowers. He also thinks they’ll cost less than $30K. The robots were a big hit. Unfortunately for Tesla, the main event was the robo-taxi launch, which failed to impress Wall Street. One person called it a “lovely toaster on wheels”.
Elon Musk has built a track record for hype. His first self-driving prediction came in late 2016, when he said that Tesla expects to take a cross-country autonomous road trip in 2017. He has since predicted that self-driving is just a year away every year since. Even Musk admits he tends to be overly optimistic. But self-driving is getting closer to a reality; Well, at least for Tesla’s competitors. Google’s Waymo is completing more than 100,000 rides a week without a driver. You see them on the streets of San Francisco all the time.
The Waymo approach has achieved a near 75% reduction in crash-causing injuries when compared with human drivers. This, according to the company. With over 22 Million driverless miles driven, Waymo has experienced 46 fewer accidents than would be expected by a human driver in San Francisco and Phoenix. Waymo was approved by California’s DMV back in 2021. Tesla’s autonomous vehicles are not. Uber is adding self-driving cabs from Cruise while partnering with Waymo and is investing in Nvidia-backed automated driving start-up Wayve.
While competitors use laser-based radar, ultrasound, and optical cameras for their self-driving vehicles, Musk believes all that is needed are optical cameras and a neural network. In other words, he sees it as eyes and a big brain, with Tesla’s artificial-intelligence computers acting as driving instructors, building computer code as they receive data from Tesla vehicles on the road. It’s still very early days, but innovation is running rampant. Artificial Intelligence is moving at such a fast clip that it’s nearly impossible for Main Street to keep up.
Demand for America’s Debt
Some really good news: There were very successful Treasury auctions this week. The bid to cover was higher than the 6-month average. Dealers were able to take down less than recent auctions. Both foreign and domestically, demand was strong for America’s debt. The yield curve has steepened of late. The Fed has taken down the front end of the curve with the September rate cut. The hotter economic data had the Market drive the back-end higher. The short-end of the Yield Curve = Fed Policy, whereas the Long-end is trading on economic expectations. Despite $35 Trillion in debt and no plans to pay it off, there’s still strong demand for America’s debt.
The Market is generally unemotional. The Bond Market is about facts and math. It just wants to make sure it gets paid. The Stock Market can get a little emotional, as excitement builds from innovative themes. It’s counterintuitive that the Market has not reacted much to the hurricanes and the wars and the election uncertainty. As long as corporate earnings keep growing and American consumers keep spending, the Market will ignore most anything else. But it won’t take much to disrupt that trend. As we mustn’t ever forget, the Market takes the escalator up and the elevator down.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
