Commentary

Stock bulls this week are hoping to add to recent gains while bears are waving red flags about market “froth” and a looming economic downturn. The S&P 500 and Nasdaq are now up more than +11% and the first half of the year isn't even over. There is some growing worry that stocks are getting “frothy” amid the recent resurgence of several so-called “meme stocks,” such as GameStop and AMC Entertainment. Bears have been arguing for a while now that stocks overall are “priced for perfection” and that some sectors may even be approaching bubble-like territory, especially tech stocks that some on Wall Street believe may have run too far on just AI-hype.

Bears also argue that “overly optimistic” investors are ignoring the growing number of companies issuing disappointing outlooks for the quarters ahead, as well as warnings from retailers and others that US consumers are starting to feel more pressure.

Remember, consumer spending drives about two-thirds of the US economy. Data has only recently shown signs that consumers may be pulling back, and inflation along with it, which are mostly viewed as positives as far as the potential for Fed rate cuts this year.

Bulls argue that one month of slower spending data is not enough to raise alarms about the overall economy. Bulls also are quick to remind investors that the "economy" is not the "stock market" and that Wall Street is more heavily influenced by Fed policy, i.e. its dual-mandate to regulate inflation and strive for max employment.

Meaning impending interest rate cuts may outweigh any concerns that the economy is backsliding, at least for now.  A lot of Wall Street insiders worry that once the Fed does make that first cut - regardless of how the economy is doing - bulls may have a tough time maintaining upward momentum.

Historically, over the past nine initial interest rate cuts, more than half of the Fed’s first interest rate cuts were followed by declines in the S&P 500 Index ranging from -22.6% to -55.5%.

The bigger declines mostly coincide with recessions, though stock valuations may be a factor as well.

In general, the higher the PE ratio, the bigger the losses tend to be during a market downturn. The S&P 500 is currently trading with a PE higher than five-year average of 19.1 and well above the 10-year average of 17.8.

Today, investors will be digesting earnings from Palo Alto Networks and Zoom. Remember, Nvidia reports on Wednesday and its results could be a market-moving event. It’s worth mentioning that Microsoft today is hosting an event that’s expected to unveil the company’s new AI tools, include AI-powered PCs.

There is no economic data on the calendar today.

For what its worth, the VIX is trading back sub-12.00 for the first time since late-2019.

Memorial Day Inflation... Travel, BBQ, and Booze All Cost More This Year: Inflation is sure to be a topic of discussion at Memorial Day barbecues nationwide later this month, with inflation now running at a hard-to-stomach 6% annualized rate over the last three years after coming in at 3.4% in April. Though inflation is far better than April 2023’s 4.9% and April 2022’s 8.3%, it’s far above the historical average of about 2%. Driving this year’s persistent inflation are some summer staples. Steaks are 7% more expensive than they were a year ago, sports tickets are 15% pricier, car insurance and car repairs are more than 10% costlier and vices are denting wallets more heavily, too, as beer is 10% more expensive and cigarettes are 7% more expensive, according to the federal government’s consumer price index. Plane tickets are 24% more expensive heading into summer 2024 than they were three years ago, gasoline is 28% more on average than it was in 2021, while cookout staples like meat (19%), alcohol (11%), and tobacco products (18%) are far more expensive than they were in recent years.  Source Forbes

Interesting Read on China's Housing Situation: There are enough unsold homes in China to house every family in California and New York combined. Beijing might finally tackle the problem with a huge outlay of cash, but investors should curb their enthusiasm. It might not be enough, or it could overshoot and reignite the housing bubble. Beijing rolled out measures Friday to support the sluggish housing market. The most eye-catching move is that it would let local governments buy apartments at “reasonable prices” to use as affordable housing in places with excessive inventory. China’s central bank also will set up a lending program of around $42 billion for state-owned enterprises to buy homes for the same purpose.  Source WSJ

Iran’s President Missing After Helicopter Experiences “Difficult Landing”: Rescue teams haven’t been able to locate a helicopter carrying Iranian President Ebrahim Raisi that made a “difficult landing” in northwestern Iran, the country’s interior minister said Sunday, without providing any information on his condition. Aboard the helicopter was also the foreign minister, Hossein Amir-Abdollahian, state TV said. Rescue teams were sent to the vicinity of the incident, which occurred in the mountainous Arasbaran forest in the country’s far northwest, near Iran’s border with Azerbaijan, according to the Red Crescent Society. Iran’s relations with the West have soured under Raisi, who was elected with the lowest turnout in years, after a raft of other contenders were excluded. His election marked the consolidation of anti-Western hard-liners in the Islamic Republic. Under Raisi, ties with China and Russia have grown much closer through Tehran’s “Look East” strategy, including the supply of weapons to Russia for its war in Ukraine. Raisi has also helped steer Iran toward a more confrontational stance with Israel. If Raisi were to have died or otherwise be incapacitated, “I don’t think this will have a major impact on Iran’s approach to the major issues,” including the nuclear issue and the war in Gaza, said Ali Vaez, Iran project director at conflict-resolution organization Crisis Group. It would, however, deprive Iran’s Supreme Leader of a trusted lieutenant.  Source WSJ

Consumer Interest in EVs Falls: A new report from automotive research firm J.D. Power noted fading EV interest from American consumers. For the first time since J.D. Power began its Electric Vehicle Consideration Study in 2021, EV buying sentiment has dropped. The latest edition of the study revealed that 24% of respondents say they are “very likely” to consider purchasing an EV, down from 26% a year ago. In addition, the percentage of shoppers who say they are “overall likely” to consider purchasing an EV decreased to 58% from 61% last year. According to the survey, the decline in enthusiasm for EVs can be traced to charging. Or a lack thereof. Among shoppers who say they are “somewhat unlikely” or “very unlikely” to consider an EV, J.D. Power said 52% cited a “lack of charging station availability” as a reason for rejection — the highest proportion in the study. And these concerns about charging availability have risen, up 3% from a year ago. Source YahooFinance

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