S2 E6: US Stocks - Exit Stage Left?

The S+P 500 has risen by +50.8% since the October 2022 low.  The XLK S+P Information-Technology ETF has risen by +88.0% since the October 2022 low.   And since just last October the NASDAQ-100 Index has risen by +31.2% .

The last six-months of this massive bull move in US stocks has been driven by three themes: 

·       Expectations of Fed rate cuts in 2024 

·       AI and chip stocks 

·       The perception that the Consumer is "strong" 

Two of these themes have IMPLODED, and the other has run its near-term course, leaving the US stock market VERY VULNERABLE to profit-taking and an economic-reality-check sell-off. Get the inside scoop and prepare to take some "protective" and "defensive" moves. 

Transcript

Speaker 1 0:01

Hi Greg Weldon, back again with Money Markets and New Age Investing, and today we have to talk about the stock market. It reminds me of one of the old cartoons Exit Stage Left here in Stocks and you could see a liquidation move. It brings me back even to the old movie One Flew Over to Cuckoo's Nest and Nurse Ratched Medication time, gentlemen. In this case, it's liquidation time. Gentlemen, you're sitting on huge profits here in stock indexes, going really back to 2022 and more so, even more directly, october of last year. And when you talk about the things that have driven the stock market higher here, when you look at the NASDAQ, for example, since October 26th of last year to the high in March 21st of last month, 31.2% gain the S&P equally up. The XLK, which is the information technology sector, since 2022 is up 80-something percent. So, in that context, when we look at where we are now and it's unfortunate I didn't do this podcast over the weekend. I wanted to, but I wasn't feeling that well, because today stocks are getting hit as we're talking this, and for my hedge fund family office, institutional and retail audience, we have been bearish on the stock market and actually short the index futures for the last week or so. So, in that context, the theory behind this is that you have some massive profits and a market that was built on three tenets, three main themes of this bull market in the stock market going back to the 2022 low and, really more importantly, this most recent push to a new all-time high since October of last year. Number one rate cut expectations. Number two, ai and the chip stocks, the XLK leading the way. And number three, that the consumer remains strong. Well, I can tell you that at least two out of those three are fully false narratives, and I'm going to tell you why in great detail in about two minutes. I would say that AI was certainly a bullish factor for a small percentage of stocks, but really, in the bigger picture, you could say that AI is a destructor of jobs, different than the 1990s technology revolution that created new jobs, even though it destroyed jobs. I just don't necessarily see the creation of the same amount of jobs by AI. That's going to be destroyed by AI. And in that context, it's almost ironic, if not perverted to some degree, that the rally has been built upon a thought process that's going to be economically damaging to the standard of living to a lot of people. So let's put that aside for now.

Speaker 1 2:49

Let's start with the rate cut expectation, because when you go back to when we go back to here we go October 26th, the Fed funds contract for the end of this year, the implied rate that the market expected to see from the Fed currently 5.25 to 5.5 is the range. There's a midpoint, obviously. So that is the range, though the rate expectation in October was 4.95. So you were looking for something like a rate cut or two by January of this year. January 12th that had dropped to 3.8. You were expecting six or seven rate cuts of 25 basis points from the Fed this year. You're expecting the Fed funds rate to be below four by the end of this year, from five and a half, if not 375. That to me, was ludicrous, and I said as much at the time. That to me was ludicrous and I said as much at the time. Currently, now, the rate has gone back up, as inflation has not proven to fall all the way back to two. We said it wouldn't, we said it would be a higher low and we said it would start to rise again around this time frame. And bam, here we are and it's starting to rise again. We said inflation would bottom.

Speaker 1 4:01

But since January and that low of 3.80 on the end of 2024, fed funds futures, the current level today, actually as we go here on April 30th, is a new high of 5.19, which is part of the reason the stock market is getting hit today, even though I wish I'd been able to do this podcast over the weekend. But we're hitting you now there's still time because you really haven't even broken the lows from last week in the NASDAQ. It's just a bad day today, but you're not. You have been lower over the last week, so the trade really hasn't begun to pay off its max payoff, if we're right, or the max loss you don't have to take on your portfolio if you were to take some protection. You know I'm always hesitant to tell people to liquidate. You know, understand you might have to be nibbled to get back in, but right now the risk is pretty high and for these reasons Because the entire thought process around Fed cutting rates dramatically to support the market and this was a big driving force to the bull side is gone, it's poof disappeared.

Speaker 1 5:02

The 10-year note making new highs all right at 4.93. I mean, you're not even 100% confirming one rate cut now by the end of this year. Part of the probabilities implied in the pricing of these instruments suggest there's some chance they don't cut rates at all. Now this would be on the theory that inflation is bottoming. And I'll tell you what. The most recent quarterly PCE data was very telling, similar with data we just got out of Germany very telling to a bottom in inflation. And I've talked about this in terms of a variety of factors, the least of which is not the base effect in energy.

Speaker 1 5:37

When you're talking about the PCE for the first quarter, end of March, 3.4, up from the fourth quarter of 1.8. Those are quarterly annualized numbers and that's a really good, smooth thing to look at, as does the Fed look at it From the perspective of that. If you exclude the pandemic, the 3.4 rate, excluding the pandemic, we went to 8% on this measure. By the way, it was the high and we were there for about nine months, roughly just under 8%. So you've come down a lot to 1.8. You were below the Fed's target in the fourth quarter and that was part of the reason everyone got so excited about the Fed potentially cutting rates. We knew it wasn't going to last and other measures didn't even get that low. Cpi is still holding above 3% and potentially getting back through 4% in the very near future. If you exclude the pandemic for PCE, rate of inflation annualized in the first quarter was 3.4. Without the pandemic included, it would be a 13-year high in inflation. There is no way the Fed's going to be cutting rates there when you have a 3.4 inflation rate which is consistent with CPI, by the way, which is actually a little higher against the 5.5 Fed funds rate. You're what the Fed wants to be sufficiently restrictive with a 200 basis point plus positive real Fed funds rate compared to inflation.

Speaker 1 6:53

Now, the problem here is that you had a massive divergence between the bond yield, using the 30 year or the 10 year, against the S&P. When you measure these things against one another, against the S&P, when you measure these things against one another, the bond outright, the S&P outright, and then the ratio between the two, bottom line is that September 2022, when the stock market made a new low bond market also made a new low. Both hit their lows, but since then the S&P is up 50.8% and the bond market has gone zero nowhere. It's right back at the high yields, so it's back to those lows in the bond market. In the meantime, the stock market's up 50%. So the bond market has not confirmed any of this and over time really going back to 1987, the relationship between the stock market and the stock bond ratio spread has become increasingly tight because it keeps taking an easier and easier Fed and lower and lower bond yields to keep the stock market from going down or to bring it back when it does go down, which is really more of the point.

Speaker 1 8:00

In that context, you could say that you could argue and I'm not saying this, however, I am arguing that you could argue this that that implies that the fair value in the S&P is 3,500. It's currently, right now, as of this moment, it is 50-60, 5-0-6-0. That's a pretty big decline 30%, something along those lines. So that's kind of number one. The fixed income, the Fed, that bubble has been popped. Ai chips okay. Since March of 2023, the XLK has led the way, all right. That is the information technology S&P sector ETF. All right, it peaked in early March, but during that time it ran up 88%, all right. So against the S&P's 50% rise, you have, the XLK. Infotech is up 88% and much more so than the NASDAQ too. In fact, the NASDAQ versus the S&P, that ratio spread has peaked and is breaking down. So that's really interesting to me.

Speaker 1 9:07

And I said before, I think this is a limited number of stocks. For this to be a bigger thing for the broader market, you need consumer products that have the AI already working in them. That is real AI, not just fake AI that they're putting out there now as AI, because everyone's all AI intensive. Let me tell you, half of that stuff's not AI. All right, it's really not. It's just the regular computer program is a little more advanced. When you talk about true AI, artificial intelligence that learns, when you talk about that, you need consumer products. You need to be making them, you need to know what they are, you need to be making them, they need to be profitable, they need to be sold. All of that hasn't happened. So that's steps away. So you had this blow up in the chip stocks, very narrow ranges, and yet the broader market look at the russell 2000 that's even made new highs. It's so far lagged, it's not even funny. Now it's about to break down too from even lower levels. That's troubling.

Speaker 1 10:04

The third argument the third, the third tenant, the third driving force in the stock market. You know bull move here, especially since the third quarter of last year is the consumer is healthy. I hear this argument all the time and what I find funny is it's often Bank of America or Discover or Capital One the banks that are reporting that the consumer is strong because consumer credit card borrowing is so strong. Now I would argue a number of points. Number one savings are below 2019 levels. Savings went from around $900 billion to $6 trillion, back to $800 billion. Gone poof, disappeared. No savings, number one. Number two earnings.

Speaker 1 10:46

You want to say that wages are growing at a 4% clip. Some measures say higher ADP is a little higher. Maybe you have some real growth there, but generally speaking, wages, at best relative to inflation, are flat. They have been actually negative for quite a while. They've risen to the point where they're flat, in other words, zero. Your check doesn't buy you anything more last week, even if you have more money in it, because the cost of everything is keeping pace. They're both keeping pace now, so at least you're not falling behind, which have been the case for a while, but you're not gaining anything. So you still have people that are borrowing on credit cards borrowing the most money ever at the highest cost in history. That's healthy. That's not healthy. Highest cost in history that's healthy. That's not healthy.

Speaker 1 11:32

Let's take the March retail sales, because I've been blowing away the retail sales numbers for about 14 months now, because they're not really growing even though the dollar value is going up. Because the dollar value of the stuff being bought is going up and the volume of stuff that that dollar is buying is less, especially in the discretionary sector. Every single one of them, except eating and drinking establishments and online sales Completely negative. Let's talk about the math. Very simple to figure this out the March retail sales just came out. Versus March of 2022.

Speaker 1 12:04

The year-over-year gain in dollar terms for the month was $27.4 billion. That's a big number. I've been tracking this for years. When you have anything above $20 billion, it's in the hot zone. Above $30 billion, in the white hot zone, you're below $10 billion, you're in the red zone, or you're in the orange zone, getting to negative, which would be red, but either way. $27.4 billion, you're in the orange zone, getting to negative, which would be red, but either way, 27.4 billion, you're in the hot zone. That's huge.

Speaker 1 12:32

The year-over-year rate from February of 2.1 jumped to 4% and the media went crazy. This is strong retail sales. The consumer is strong, healthy, the backbone of the economy. Bull crap man, no way. If you take the inflation rate of March of 3.5% year over year and $690 billion, you get an inflation adjustment of $24.2 billion. That growth was driven by price increase. 88.2% of the growth in retail sales in March was purely price inflation. That's not healthy, it's just not Case closed.

Speaker 1 13:14

Look at the year-over-year rates that are deeper by far, by 3.5%, theoretically, depending on each sector's inflation. It's not exact. It gives you a ballpark figure on these individuals, but furniture minus 6.1. Electronic appliances 0.6. Building materials, garden supplies 0.6. Sporting goods, books, music down 3.9. I mean, the monthly numbers are bad too. Vehicles went from a big increase to a big decrease.

Speaker 1 13:41

From that perspective, let's also then go to the PCE data that was released last week, because you can argue income, all right. Disposable income was up $104 billion in March. Spending was up $160 billion, so spent $56 billion more than they earned, which is a 50% negative gap. It reminds me look, the people in Washington are the leaders. People tend to follow what they do. In February, the government spent twice as much money as it took in here. Consumers in March spent 50% more money than they earned. I mean this is one of the reasons, you know, savings are declining, but that gap is tremendous.

Speaker 1 14:24

When we take another step and look at transfer payments, which is entitlements and handouts, it remains above $4 trillion, which is an enormous number. It was higher during the pandemic but it hasn't come down nearly as much as everything else has. They are still pushing money out there for all kinds of social programs and things. As you might suspect, it is real. Since November, the gain in personal income $275 billion. Of that, $162 billion, or 59% of the growth, came from government payouts. That's not healthy. When the government is funding 60% of the growth in income and people are spending 50% more than their income, how is that healthy? It's a crash course where there's a dead end out there and that's a problem.

Speaker 1 15:17

So we take the XLY, which is the consumer discretionary ETF, and you can really do some cool stuff with these things. I love to use ratios and comparisons and overlays because they are very telling and they work. Man, I mean this is just historically proven time and time and time again Early warning signs. When you take the discretionary items against the staples, in other words, the necessities, are people spending more money on discretionary items or the things they need Right now. The XLP, which represents the staples, is by far the leader. That is a negative tell. That ratio between the discretionary and the staples actually implies an S&P currently at 50, just under 5,100. At 50, just under 5,100. At 3,700, against the XOY, the discretionary against the market itself is even more telling.

Speaker 1 16:15

Let me tell you that this thing bottomed in 2008,. Excuse me, peaked in 2008, led to the crash. It was a precursor of the 2008-2009 crash. It actually peaked in 2007. It also bottomed first before the market did in 2009, and led through the entire period of QE through to 2014. It was a warning sign in 2018 to the downside. It was a warning sign in 2020 to the downside and it rallied first and led the way in 2021. In the last year and a half, it has completely failed to match anything that the S&P has done. The ratio is near the pandemic low and beyond that, it would be the lowest since 2013.

Speaker 1 16:58

Where is the consumer strong here? He isn't. He's not in the stats on consumption, he's not in the stats on income versus spending and he's not in the stats as it relates to the stock market's reflection of this. That ratio spread implies an S&P at 2,600. I'm not saying it's going there. I mean this could work both ways so you could have the consumer kind of come up off a low at some point, especially if the Fed were to react to some of this. But the market needs to come off first to get the react. I have said all along that the Fed probably doesn't pull the trigger until you have asset price disinflation, because that would almost assure them that they could reach their target of 2% If the stock market comes off a little bit enough to hurt demand. They want this. Powell has been very clear on this. When you take all of this into account, you know this leadership by the consumer. I mean that's number three. It's false. So what are some of the downsides here? I mean geometrically, for the S&P it's 4760. The 200-day moving average 4735. The D23 high 4790. So you can easily see a market below 4800.800. I think $4,600 is a given.

Speaker 1 18:07

Frankly, for me, and especially when you talk about the unintended consequences of higher interest rates, which is to drive the dollar higher, guess what? The highest, tightest, most reliable correlation is currencies and stocks. A higher currency means lower stocks. A lower currency means higher stocks. Look at Japan, look at Argentina, look at all the places where the currency is getting devalued. The stock market's at new highs Doesn't mean it's a better standard of living, because of course the currency's being devalued. But the bottom line is the dollar is higher, or stable at the very least, because the rate dips have expanded. It drives people into the dollar because it's a higher interest rate environment. Right, that creates demand for dollars. So the dollar is higher, which right now is a negative for stocks where the overlays on that one, which have been extremely tight maybe the tightest of any the X O Y and the dollar are the two best to look at, the X O Y being consumer discretionary In this case.

Speaker 1 18:59

What's the S&P against the dollar versus the S&P? It's telling us the S&P guess what? 4,600. This number keeps coming up. In that context, if you have a bigger picture decline, though, if you go all the way back to the 2008 low, you have a normal Fibonacci correction in the S&P of 38%. You're going to 3,000. So I think somewhere in the middle.

Speaker 1 19:22

I'm not saying the market's necessarily going to crash. Here I see liquidation. People don't want to own these stocks, like NVIDIA and stuff. They own them. There's no one left to buy them. The volume is dried up and the stock prices are very high, meaning if you go to sell and there's no one there to buy them, you can have a liquidation panic that drives the market down 25, 30% without really much changing. You realign, kind of, the fundamentals against the narratives we just told you that you know really aren't borne out to be true. Then you might have something to talk about.

Speaker 1 19:51

What do you do in the meantime? Well, I mean we, our quant portfolio work has been phenomenal right, the XLY, which the Infotech. We held that for a long time, all summer. It was great. We replaced it in the early fall with energy and uranium and that's been a great play, all right. The newest things that are hot within our quant work is the staples and the utilities. That's a tell right there. The most defensive sectors in the stock market are the ones that are hot right now on the quantitative work, all right.

Speaker 1 20:19

And the new negatives all of a sudden, when interest rates are higher the XLRE, which is the real estate ETF, and the homebuilders and, by the way, the recent home building numbers showed new homes for sale not yet built rising. The supply is rising, sold is falling, so new homes being sold that are not yet built. In other words, the homebuilders have to build them. There's your profits are down and the inventory is up, and the inventory is at a multi-year high. This is why the homebuilders, which has been one of the hottest area of the stock market, has all of a sudden come off. That has also been an upside leader that is now failing, so that's another negative.

Speaker 1 20:57

What are some of the newer ones? Well, there's one in particular that we've added recently, maybe three weeks ago, that has really been hot. That's copper and the base metals, the mining shares. The COPX, the DBB, is the base metal ETF. Some of the individual mining shares have really taken off. This is what we do all the time.

Speaker 1 21:16

Our portfolio playbook has all of this information in it. I invite you to email me at sales at weldononlinecom. One word WeldonOnlinecom sales at WeldonOnlinecom. I'll send you this week's portfolio playbook. I'll send you some samples, but it's really about right now. What we're trying to do is just alert people to the fact that these three narratives upon which the stock market rally since really October 22, and certainly since last year, has been built upon are falling apart, and the market now is reacting, literally today. But it's not too late to either take some protection, maybe a little bit of speculative on the short side. You know I'm always hesitant to. You know, tell long-term investors that they need to liquidate, but I would tell you this taking some protection right now would probably be the best move it could be.

Speaker 1 22:06

Follow us. See you in a while. Follow us on Twitter at money underscore podcast. Follow me on Twitter at Weldon Live. Follow me on YouTube at Gregory Weldon Gregory underscore Weldon. And I'm happy to be continuing the podcast. I have another one coming up shortly on gold and some of the really wild dynamics taking place in the gold market as it applies to Chinese buying. That's it for today. Thanks for listening.