Dow 40K and Beyond – Another Rapid Rundown

For those of you who would prefer to listen:

The Stock Market hit a fresh, all-time high this week. The S&P 500 cleared 5300 for the first time. The Dow reached a new, major pinnacle of 40K. The rally continued. All that seemed to matter to the Market was that Fed Chair Powell signaled the next rate move will, in all likelihood, be down, and not up. It was off to the races for stocks with a historic Friday finish. There’s nothing like some big round numbers to get the Bulls excited. Hats and champagne were present on the floor of the exchange. No matter how you slice it, the continued strength for stocks is quite impressive.

The US Economy has been extremely resilient despite so many pressures. Corporate earnings have come in better than expected and consumer spending still appears healthy with a low unemployment rate. Inflation data reported this week was mixed, but there were few signs of reheating, and the Market anticipates more economic cooling as the year progresses.

There were 2 major inflation measures reported this week. One was the Producer Price Index (PPI), and the other was the Consumer Price Index (CPI). PPI reflects the change in price that Producers receive. CPI reflects the change in price that we Consumers pay. There’s a linkage between the 2. But it’s not always direct. April PPI came in hotter than forecast, with higher inflation for both services and goods. PPI was up an annualized 2.2%, the largest increase in over a year. Gasoline prices led the charge, up 5.4%.

When it comes to inflation measurement, CPI is the one that the Market focuses on most. The cost of shelter has been watched closely. It’s where inflation has remained stubbornly high. The Headline CPI came in a bit cooler than expected in April while Core CPI, which strips out food and energy prices, was in line with expectations and down from recent months. The annualized core inflation of 3.6% was expected. But considering it fell from last month’s 3.8%, improvement is happening. This was the lowest Core CPI report since April of 2021. It’s not anywhere near the Fed target of 2%. But it’s moving in the right direction. The Market really liked that. 

Restaurant price increases remained at 0.3% month-over-month. They’re still high, but the rate of increase has slowed. More on that in a minute. Airfares actually decreased 0.8% in April. The rate of price increases for auto insurance fell too. Prices were still up 1.8% from March. Insurance has proven to be one of those sticker shock charge increases. Payers aren’t happy. Nobody wants to pay for insurance, well, until you need it. When you need it, you’re glad you have it.

Inflation has been an issue in America since inception. Just think about how much you paid for a Coke when you were 10. The point is proven, no matter your age. We became a bit immune in the 21st century as we effectively imported deflation from China for the first 2 decades. Inflation was really low. No more. How about this for inflation measurement: McDonald’s menu. There’s been quite an increase in 10 years. A Quarter-Pounder Meal, which comes with fries and a drink, cost $5.39 in 2014. Today it’s $11.99. That’s a 122% increase for the same thing. A 10-piece Chicken McNugget meal costs $10.99. That’s an 83% increase from 2014 prices. Medium fries have gone from $1.59 to $3.79 today. The biggest kicker, perhaps, is the price of a McDouble. It nearly McTripled.

The average American is struggling to keep up. It’s not just food. We all know how expensive housing is in America. But how about this: since 2019, rental costs have increased 30% while wages have increased just 20%. In New York City, rental prices increased nearly 9% last year alone, while wages increased just 1%. The average rent in the United States is $1226 per month. In California, it’s double that. In fact, of the Top 25 most expensive cities to rent in America, 22 of them are in the Golden State. That probably surprises few.

To combat the inflation, the Fed aggressively raised interest rates and has been hammering home the “higher-for-longer” message. But something interesting happened this week. Treasuries rallied. Yields fell. If you recall, Bonds have inverse relationship between yield and price. Expectations for a Fed rate cut accelerated. Despite the fixed fashion of the front-end of the curve at 5%, which the Fed oversees, the 10-Year Treasury yield has been falling. That’s the Market doing it. The benchmark 10-Year yield hit 4.35% this week. It was 4.75% a couple weeks ago. This is great news for those looking for mortgages and car loans which had been squeezing people’s ability to borrow. It also reduces the cost to service America’s ballooning Federal debt, which is now approaching $35 Trillion. The Market likes that too.

A solid, but cooling US Economy is what keeps a bid under this Market. Bad news is now good news. At least from a Market standpoint. April retail sales came in flat. There was no growth. The Street expected a rise of 0.4%. March was revised down too. This came after a 1% increase in February, which was the highest in over a year. This report is another piece of evidence the Economy is cooling and the inflationary pressures are lifting.

Home Depot missed expectations. The company said it was hurt by a delayed start to Spring. It’s also experiencing softness in certain larger discretionary projects, and higher mortgage rates. The CFO said its customers are in a waiting game, deferring projects amid a higher rate environment. Whirlpool and Wayfair affirmed this too, saying consumers are cutting back spending on big-ticket items. McDonald’s and Starbucks have been seeing pickier and more value-minded customers. 

Walmart is always a bellwether for consumer spending. It’s the largest retailer in the country. America shops at Walmart. The low-cost leader reported a double-beat and raised its outlook for the rest of the year. Walmart has seen an increase in customer base, benefitting from high-income shoppers hunting for lower prices. The company also experienced serious growth in digital advertising. E-commerce jumped 22% in Q1. Walmart saw strong unit growth in fresh food and said grocery inflation has slowed. People seem to now be bypassing fast food for dining at home. That was a takeaway from McDonald’s a couple of weeks ago. McTripling prices will do that.

The price of Oil has fallen quite a bit of late, a big surprise considering the constant geopolitical threats overseas. Most of it is demand driven as the Market is well supplied. That translates to lower prices at the pump, another key inflation measurement for Americans. That should help the continued CPI slide in May. It also comes at a significant time as the American people hit the road in size with the Summer driving season kicking off Memorial Day. That’s next week!

Back to the Market:

The rally has been impressive. Perhaps most of all has been the participation. It’s broadened way beyond Tech. There’s been a lot more going on beneath the surface. The meme stocks are back. Those unprofitable, speculated stocks that surged during Covid caught fire again this week. Both GameStop and AMC doubled in price on Tuesday with a crazy, speculative fever. Robinhood, the online broker popular with younger investors, had its 3rd highest volume day this week. AMC and GameStop accounted for nearly 35% of the total trading volume in just one day. They rose and then they fell. Keep in mind, these stocks are still down 80% from their 2021 highs. 

It’s great that younger people are embracing the Market. But the casino-like behavior is not necessarily a good thing. A chunk of the population embraced Wall Street during Covid, when sports were shutdown. It brought a gambling tone to trading. The last time we saw this level of speculative activity was 2021, which led to the 2022 correction. Bank of America’s latest Global Fund Manager survey indicated that investors are the most Bullish since November of 2021. That was a bubble top. So, there’s that. 

There has been a great deal of movement in precious metals. The price of Gold and Silver continue to soar. Copper too. Gold is at new, all-time highs. Commodities have been sleepy strong in 2024. That sends the message that inflation is still not tamed. But the economic data does suggest slowing which is generally deflationary. On top of the retail slowdown, railroad activity has slowed too. The Fed has much to consider. The Bond Market sees cuts ahead. The Stock Market is celebrating the now.

The Dow Jones Industrial Average is one of the oldest US stock indexes. It was first launched in 1896. It took over a century for the gauge to reach 10K. That happened in 1999. Subsequent milestones occurred much quicker. 20K was reached in 2017 and it took less than four years to climb to 30,000. That, during a global pandemic. Getting to Dow 40K was just over three years. Each 10,000 points also just gets easier, with things less meaningful in percentage terms. But it sure looks and sounds good.

The New York Stock Exchange celebrated its 232nd birthday on Friday. It was born under a buttonwood tree in Lower Manhattan at the corner of Wall and Broad. The year was 1792. George Washington was our President. From the Industrial Revolution to this Digital Age, it’s fueled and financed our nation’s growth. The US Stock Market has been the greatest wealth creator in American history. Compounded interest is the 8th wonder of the world, according to Einstein. “He/(she) who understands it, earns it. He/(she) who doesn’t, pays it.” Einstein was a genius. You don’t have to be a genius to benefit from investing for the long term.

Finally, our extended Bedell Frazier Family lost someone special. His name is George. He sure was a good one. George is survived by his wife Ginny and their beautiful family. He and Ginny were avid readers and then listeners of this weekly piece. I envision George looking down on us with a smile, in his shiny golden 49er jacket. I’m proud to have known him. He is certainly missed.

Have a nice weekend. We’ll be back, dark and early on Monday.


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