It was a winning week on Wall Street. The losing streak is over for stocks. This was the first weekly gain in 7 for the S&P and 8 for the Dow. It’s been a while. It seemed like forever. Patience keeps getting tested. Corrections and Bear Markets are a grind. This one has been relentless. It’s sort of soothing to see the green on the screen heading into the Holiday weekend. It was a good week for stocks.
There are growing signs that the US Economy is weakening. Q1 GDP was revised down to a larger contraction than previously reported. The Economy shrunk by 1.5%. It was a complete reversal from Q4, which grew nearly 7%. That’s all in the rearview mirror. What’s ahead keeps slowing. Of the last 19 major economic indicators, 13 have missed Street expectations. Earnings season has shown companies declaring hiring freezes and layoffs. The list keeps growing. The Economy is projecting a return to growth of roughly 3% in the current quarter. Consumers keep spending. But behavior is changing. What they’re buying is the key. How long they maintain the level of activity matters too.
Memorial Day weekend is considered the unofficial start to Summer and the Summer driving season. AAA (The American Automobile Association) just released their holiday weekend forecast. 39.2 Million Americans are expected to travel over the holiday weekend. That would be an 8% increase from last year. “Based on our projections, more Americans will be taking to the roads and skies this Memorial Day weekend than in the last several years,” AAA stated in the report. “People are looking forward to that special trip, spending time with family and friends.” The most popular route will be a road trip. 35 Million Americans plan to hit the road. Car travel is expected to increase by 5% this year, despite the high gas prices. The national average for unleaded is $4.60 heading into the weekend. It’s $1 more than it was when Russia invaded Ukraine in February. That shot fuel prices higher around the globe. The worst-hit region is Europe. Remember, gas prices were already on the ascent before the war in Ukraine. The average price increase for gas is $1.56 from Memorial Day weekend, 2021.
Americans will fly the friendly skies this weekend with large crowds. 3 Million will travel by air to get to their destinations. The surge in air travel has steadily increased since Thanksgiving. It’s expected to be a 25% increase in traffic from last year. Flights are expected to account for nearly 8% of travel this weekend. It’s expected to not only eclipse the pre-Covid traffic in 2019, but airplanes will also carry their largest percentage of Memorial Day travelers in over a decade. There will also be a 200% increase in travel by bus, train and boat. The American people will be out and about this weekend.
75% of Americans polled by the consumer analytics company Numerator say they plan to cut back on their Memorial Day spending due to inflation. 85% said they plan to buy meat for the holiday weekend. Half say they will grill on Monday. 3 out of 4 plan to buy beer. 44% will be purchasing wine. One of the reasons for spending cuts is due to lodging. Hotel rooms across popular travel destinations have increased in price by 42% compared to last year. Americans are paying more for less. Restaurants are crowded and prices are higher. But finding workers is still difficult. We are paying higher prices for less service. That can’t continue.
The housing bubble just got pricked. There has been a shrinkage in housing demand. That has been evident in the mortgage applications data. It was inevitable as cheap money kept chasing properties since the Covid lows. Rising rates made mortgage payments much higher. 3% mortgages became 5% mortgages in just half a year’s time. 5% mortgages buy a lot less house. Pending home sales were down for the 6th straight month, with a decline of 9% from a year ago. The homes that are selling have been sitting on the market longer than prior. 1 in 5 sellers lowered their asking price in May. That’s new. The white-hot Housing Market had been used to all-cash offers way over asking. The best cure for high prices is high prices. That’s where demand shrinks. It’s happening.
Looking for signs of peak inflation? Prices need to first stop going up before they can go down. That seems to be happening. Prices on clothes and appliances fell in May. Used car prices have fallen too. Those taking flight this weekend might find that rental car prices have decreased by 16% since last year. The lowest average rate is around $100 a day. That still doesn’t seem low…
Perhaps more important: The Fed’s preferred inflation gauge just slowed. The Personal Consumption Expenditures (PCE) price index (say that fast 10 times) increased 4.9% year-over-year. That fell from March’s 5.2% annual increase. This was the first slowdown for the PCE since 2020. The Fed believes this is the most accurate measure of US inflation. The PCE is more comprehensive and factors when consumers substitute cheaper goods for more expensive ones. It tracks purchases of big brand items versus generics. It also looks at higher-end items within a category like a filet versus ground beef or fresh produce versus frozen. Americans have been trading down in 2022 as inflation soared.
The Market liked the May PCE report. It supports the thesis that peak inflation has passed or is in the process of passing. More time and evidence will be required for certainty. But the Market likes what it sees and prices things in advance. The reason is simple, reduced inflation will allow the Fed to be less aggressive with rate hikes this year. Chair Powell has committed to keep raising short-term interest rates until inflation is “coming down in a clear and convincing way.” This is a start. Inflation is likely peaking on a year-over-year basis. But it is still well above the Fed’s 2% objective. Our sense is a slide to 4% is doable by year-end. The Fed is locked in with plans for ½ point hikes in June and July. After the July meeting, the Fed is likely to become more data-dependent regarding future rate hikes. That’s a direction the Market should be ok with.
Inflation has been a shock to the economic system. We’ve been so accustomed to low prices for years. The United States has effectively been importing deflation for 2 decades, largely due to innovative technologies and cheap labor from Asia. This has been a huge tailwind for consumers. It worked well until it didn’t. Covid exposed the vulnerabilities in the system. Supply chains got disrupted. The trend has shifted back to onshoring manufacturing at home. The cost of production and manufacturing in the United States is high. But the costs of dependence on other countries cannot just be measured in Dollars alone. National security comes with a cost too. We are learning that the hard way. It’s a critically important yet seemingly inconvenient truth. We’re going to have to get used to it.
There have been some positive developments in the Market, which provide reasons for optimism. The Bond Market was the first tell, as yields fell. That was a sign of slowing inflation due to the slowing Economy. This helped cool the relentless selling of stocks. The Dollar reversed its parabolic move too, which has also been a reprieve. The deep oversold conditions and sentiment extremes created the set-up that “it’s so bad, it’s good.” Some beaten-down stocks had intraday reversals higher on bad news. These are all signs of a bottoming process. Although encouraging, we view this week’s price action as an oversold bounce rather than a bottom. Things are moving in the right direction. It’s still a process. We won’t know the bottom is in until it’s firmly in the rearview mirror. This week was encouraging. But the gains also came on low volume ahead of the holiday weekend.
In 1868, a Civil War veteran named General John Logan ordered the decoration of Union graves with flowers on May 30th. He wanted to commemorate the sacrifices of the Civil War soldiers who gave their lives for the nation. It was originally called Decoration Day. It was renamed Memorial Day and declared a Federal holiday on the last Monday in May in 1968 and went into effect in 1971. The Market will be closed on Monday, in observance of those that made the ultimate sacrifice for our nation. Our office will be closed too in their honor.
Have a nice weekend. We’ll be back, dark and early on Tuesday.
Mike
