Rather than merely summarize the insights of experts, it’s often more effective to let them speak for themselves. Occasionally, I prefer to share the economic analysis of Robert Genetski directly. Not only is he a long-time personal friend, but he is also one of America’s most knowledgeable and accurate economists. Major financial institutions rely on his insights, investors use his information to guide their decisions, businesses and organizations seek him as a speaker, public officials invite his testimony, and millions read his books. You can subscribe to his newsletter at ClassicPrinciples.com.
Here is his latest analysis (highlights added).
Market Performance Overview
Last week, stock performance was mixed. The Nasdaq gained 2%, reaching its all-time high, while the S&P 500 rose 1%. In contrast, small-cap ETFs and the Dow experienced slight losses.
Technical indicators also show mixed signals. The Nasdaq is currently the strongest index, while the S&P 500 remains uncertain around its 21-day moving average. The Dow appears technically weakest, having fallen below its 50-day moving average.
Economic Developments
Economic news was unfavorable. Inflation continues to exceed the Fed’s target, causing long-term interest rates to rise sharply. Moody’s AAA corporate bond rate has reached 5.3%, the highest in five months. Higher bond rates typically decrease stock values.
Financial markets responded to this news by adjusting their expectations for the first interest rate cut to July or September, with a second cut anticipated in December. As with Fed projections, these expectations are highly sensitive to the latest news.
One positive note is the stock market’s resilience. When stocks hold onto gains despite setbacks, it indicates that most investors remain optimistic.
The impact of the Fed’s policy on spending has taken longer than usual. However, prolonged inverted interest rate curves increase financial stress for businesses and consumers.
Key Developments
As highlighted in last week’s report, the March CPI rose faster than expected. Monthly inflation was reported at an annual rate of 4% to 5% for both the total and core (excluding food and energy), bringing yearly inflation to around 3½% to 4%.
Despite headlines praising March wholesale inflation as below expectations, the recent uptick remains significant. After declining to 1% – 2%, producer prices increased 3½% to 4% in the first three months of 2024.
Looking Ahead
Monday’s March retail sales report will provide the latest view of consumer spending. We expect overall retail sales to remain weak as consumers struggle with inflation. Although still moderate historically, the Fed reports the highest rates of credit card delinquency since 2013.
Retail sales data show only a slight gain over the year, with a downtrend for the three months ending in February. We expect continued overall weakness in retail as consumers battle credit card debt.
March retail sales will receive an illusory boost from rising oil and gasoline prices and will face downward pressure from weak auto sales. Vehicle sales were down at a 15% annual rate in March and 9% annual rate in the first quarter.
Also on Monday, the Homebuilders will release their April Index for new home activity. This Index is the most current and reliable measure of new home activity.
We were surprised when the March Index moved to 51 (slightly above breakeven). Builder confidence that mortgage rates would fall and attract new buyers drove the Index higher. We expect the recent surge in interest rates might lower the April Index below 50.
Concluding Thoughts
Pay particular attention to the increase in credit card use and rising credit card delinquencies. As previously reported, this indicates that highly praised consumer sales figures are based on spending money people don’t have, putting them into a credit trap where they can barely keep up with growing interest costs. This credit trap extends beyond credit cards to car payments and mortgages, reflected in the slowing housing and car markets.
Adding to the challenge, inflation has inched up again. Prices continue to rise above the Federal Reserve’s target rate. Even small inflation increases—3% or 4%—hit middle- and low-income consumers hard. This impact matters much more than stock market performance or GNP.
As the 2024 presidential election approaches, there is less time for Bidenomics to reverse negative trends and improve the “kitchen table” economy. The window of opportunity is closing.
