Investing Update: Rate Cut Or No Rate Cut?
What I'm buying, selling & watching
Stocks trended lower all week long until the final few hours of trading on Friday. The Dow finished Friday with its best day of the year up 1.5%. That lessened the losses for the week, but the Dow, S&P 500 and Nasdaq all finished up for the month of May.
The S&P 500 finished May up over 5%. That’s the best May since 2009 when it was up 5.3%. That the best May in 15 years!
I had mentioned to not count out May and fall into the “Sell In May & Go Away” mantra in my Investing Update: Buy The Dip? on April 20th where I said the following.
Don’t Sell In May & Go Away
Sell In May and go away is a popular adage that we will hear as we enter May. We do every year. It more or less says the stock market is weaker in the summer. Investors prefer to go away on summer vacations and enjoy their cottages. But historically this summer stretch has actually been one of the better four month stretches of the year. One you don’t want to miss out on.
Market Recap
Is The Market Losing Steam?
This week saw some rather important data come to light. There were some technicals under the surface that started to raise some warnings signs. Midweek saw the Dow in the midst of a 8 days losing streak. It was on its worst losing streak in two years. The S&P 500 was down 2.28% when Friday opened.
We saw 20% of large cap stocks hit a 3-month low this week. That’s the most since October 27th.
I liked Kevin Gordon’s chart where he pointed out the following.
As the S&P 500 has trekked higher this year (top panel), there has been a deterioration in the % of members trading above their 50-day moving average (bottom panel) ... series of lower lows and lower highs so far in 2024
Only 47% of S&P 500 stocks are trading above their 100-day moving average. That’s the lowest level since November.
Less than 64% of S&P 500 stocks are trading above their 200-day moving average.
As we get closer to the election I do expect some choppiness to return. To date we’ve still had extremely smooth sailing for the stock market. Through five months it has been one of the smoothest years in recent memory with little volatility.
Recession Worries Fading Away
The worries over a looming and an all but certain recession seem to be fading away. The indicators that we watch to determine a recession have actually gained strength lately.
It should come as no surprise that the number of new articles mentioning recession have tumbled to the lowest level of the past few years. To the point where there is hardly any talk of it now.
Air Travel Boom
We just saw a record 2.95 million people travel on Friday May 24th for Memorial Day weekend. 2024 airport travel is actually almost 7% higher in 2024 than it was last year in 2023 and pre-pandemic levels in 2019.
The pre-pandemic travel peak was also broken. Remember the talk that nobody was ever going to fly again back in 2020?
Mike Allen from Axios had some deeper numbers on the recent travel boom.
In the past two weeks we’ve actually had 5 of the 10 busiest travel days since they began tracking the number of people screened in 2001.
9 of the top 10 travel days have occurred in the past 12 months!
Keep in mind we haven’t even hit the peak summer travel season yet. But we’re still hearing talk about a weakening consumer?
I will have more detail on the “weakening consumer” on Wednesday.
Long S&P 500 When Oil Is Under $90
This was my favorite chart and research that I came across this week, so I have to share it courtesy of Warren Pies.
The simple stock market rule that has worked for the past few years is that when the price of oil (brent) is below $90 you want to be long the S&P 500. When the price of oil is above $90 you want to reduce your exposure to the S&P 500.
This chart backtests it to 2021 and you can see the downside reduction via the maximum drawdowns from those levels.
It’s since 2021, so three years isn’t a long time frame and it’s a short backtested period, but the market has changed the past few years. Especially since 2022. It wasn’t that long ago that when oil was up, the stock market struggled. When oil was down the market did well. I looked back and this was wrote down in my investing notes from a few years ago. Some good work here by Warren Pies identifying this and showing the data.
Rate Cut Or No Rate Cut?
Are we going to get a rate cut in the coming months or not? That seems to be one of the biggest questions on Wall Street. It very well could lead the next direction of this bull market.
If we look at the calls by most Wall Street firms, we see that most are looking for the first rate cut to happen in September. JP Morgan, Citigroup and MUFG still think a cut happens in July.
After the April PCE inflation data, the CME FedWatch Tool showed 50.5% odds that the first interest rate cut happens by the September 18th meeting.
If a rate cut does happen, I think the one area you have to watch is small caps. They just seem like a coiled spring to me.
Mega-cap tech stocks have been outperforming small caps by the widest margin now dating back as far as the peak of the dot com bubble.
They’ve drastically underperformed the S&P 500 the last two years. While the S&P 500 has been up 28.6% in two years, the IWM (iShares Russell 2000 ETF) is only up 11.6%.
A major reason is small caps exposure to interest rates. Over 40% of small cap debt is short-term or floating rate debt.
A lot of that debt is coming due over the next five years. $620 billion of debt will need to be refinanced by 2029. That 75% of it! A large amount comes due already in 2026.
One thing is easily head and shoulders above everything else for the direction of small cap performance and that’s what interest rates do. If rates do get cut, these will be one of the direct beneficiaries and I expect that coiled spring to burst.
Upcoming Earnings & Data
The Coffee Table ☕
Robert Farrington who writes The College Investor had a good post called 18 Best Investing Blogs Of 2024. I’ve read a number of posts like this, but this is a very accurate group that he has here. I’ve read work by everyone on his list. They all approach things from different angles and are worth checking out.
The Stock Market Isn’t Rigged And Consumers Are Just Fine was a great blog post by Ryan Detrick. His approach to this topic was spot on and he had a number of excellent charts in this. Well worth reading.
I found this to be an informative post for people with young drivers. The safest used cars for teen drivers. This is one of the most asked questions when parents have kids that start driving.
This month I was able to get a bottle of the popular but hard to get Blood Oath Pact 10. This is released once a year and Pact 10 is the 2024 edition. John Rempe seeks out famous and forgotten rare bourbons and bottled them in combinations for his limited-release Blood Oath Pacts. He has sworn to never reveal where he finds his bourbon. The finishes is caramel, spice, and cinnamon but then a blackberry jam taste comes through. This was different but quite good. I can see why Blood Oath has the following and fan club that it does.
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