Is it a bubble? Is it a bubble?\images\insights\article\bubble-trees-small.jpg June 28 2023 June 16 2023

Is it a bubble?

If it is, bubbles can last a long time.

Published June 16 2023

Spent much of this week in hot and humid Coral Gables. “The City Beautiful” is known for tree-lined boulevards, mansions, the world-famous Biltmore Hotel and the Venetian Pool. Just seven miles from booming Miami (Goldman Sachs says its residential market will see prices rise this year, contrary to corrections for many U.S. cities), the discussion was of Trump’s arraignment. “It’s going to rain this afternoon,” an advisor joked, “just in time to get Trump’s hair wet.” There’s a strong Cuban presence here. “Cubans LOVE Trump,” I was told while being served a shot of extremely strong, sugar-infused Cuban coffee—“hope you don’t have lab work tomorrow!” I have maintained that $9 trillion of stimulus trumps (sorry Mr. president) whatever is worrying you. For months I’ve heard the consumer’s $1 trillion+ in excess savings (over and above 2019’s level, a time, incidentally when we were doing just fine) would be spent by June. Well, here we are, and BCA Research estimates there’s still $1.3 trillion left. Plenty to satisfy pent-up demand and keep consumer spending resilient (more below). The Fed’s “hawkish skip” recognized as much as policymakers raised this year’s GDP and core PCE forecasts, slowed unemployment’s anticipated rise and signaled 2 more rate hikes. Might it have been seeking to buy time to see if immaculate disinflation takes hold (more below)? And to ensure banking stress continues to dissipate? Despite credit crunch concerns, bank lending has rebounded and is now rising at a 5% annual rate and an even faster pace at smaller banks. CRE is concerning for some banks, but even Powell acknowledged the damage to the broader economy appears limited.

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Could the stock market just be catching up to what typically happens during tightening, with rallies in year one and a 20% gain through year two? And what about the power of 52? Net new 52-week highs on the S&P 500 turned positive—durable bull markets feed off new highs. The week’s stretch of new 52-week index highs surpassed Strategas Research’s “FOMO threshold” (4,325). And on the 8-month anniversary of October’s low, the S&P marked its 1,950th new 52-week high since 1946—on average, forward returns after hitting this condition have been +4.3% six months later and +8.8% 12 months later. Still, Strategas reports ETF equity inflows remain cautious, with defensive strategies gaining the most, and 5% money market yields offer stiff competition. Bears keep reminding it’s a very concentrated market. Indeed, the top 10 stocks account for nearly a third of the S&P’s weight and have an average YTD gain of more than 60%. And May saw just 23% of S&P index constituents outperform, the narrowest market since ’86. But two weeks in, June has seen a big reversal, with YTD underperformers (Value) outperforming the index and YTD outperformers (Growth) underperforming. After a better-than-expected Q1 season, corporate sentiment has turned positive for the first time since Q4 ’21. In fact, companies are issuing their strongest guidance in two years, Bank of America says, with the ratio of analyst upgrades to downgrades at a 15-month high. Currently, Yardeni Group shares that analysts expect an 8.1% Q2 earnings decline, followed by y/y gains of 0.4% and 9.1% in the subsequent two quarters and 11.4% in 2024. A soft landing.

A 2/10-year Treasury yield curve entering a 12th straight month of inversion brings ’79 and mid-’06 to mid-’07 to mind—Strategas recalls these two inverted-curve periods saw big S&P rallies just shy of 30% each. But Y2K in many ways is the most interesting comparison. The relative forward P/Es of today’s AI leadership remain a far cry from what was seen at the zenith of that internet/dot-com era, with AI forward P/Es close to levels reached a year before that top and before the peaks of two earlier innovation waves, mainframes in 1969 and PCs in 1983. This is because many AI issues generate significantly more free cash flow than did their predecessors at their peak, and many AI beneficiaries are enormous companies across many industries. Still, Piper Sandler remembers Y2K very well. After the last Fed hike in May of that year, stocks did move significantly higher, with lots of talk of a soft landing … before cascading down, as the lagged impact of the Fed tightening cycle in ’99 finally hit company EPS (down 40%) even though GDP fell just 0.4% peak to trough. Nasdaq got crushed. Some say, “it’s different this time,” a commonality of all asset bubbles. I was there in 2000, when companies with no revenues were flying as the market counted eyeballs! Yes, stocks with no earnings led the Y2K surge. Stocks with negative earnings are today’s laggards. Profitable companies with top-performing returns on assets are the leaders. And unlike 2000, investors this time are reaching for quality….  


  • The consumer reigns supreme May retail sales came in much stronger than expected with gains in nine of 12 categories. June trends look robust, too, with the latest payment card transactions data showing a 12% jump in retail and food service spending the first week of the month and a 12% increase the prior week, raising the 4-week average to 11.4%. (I’ll have more on the strength of the consumer in a special piece next week.)
  • Immaculate disinflation? Headline CPI slowed further and while y/y core CPI fell a little less than expected, the composition was encouraging. Used cars contributed but falling auction prices argue for declines in coming months, shelter categories showed signs off rolling over and non-housing services posted their smallest annual increase in 15 months. Headline PPI was negative a third time in four months and core came in below consensus. Finally, import prices fell more than expected and y/y, were down the most in three years.
  • Shout-out to small caps Earnings revisions trends have turned positive for the Russell 2000, and valuations relative to the S&P also are at historically attractive levels. Small caps tend to outperform during periods of economic stress and during easing cycles, an environment consensus still expects going into next year. Also, IPO issuance, a driver of small caps, is rising.


  • We bought a lot of stuff during WFH The goods economy is in a considerably worse shape than the services economy, as outlays for goods have unwound from the Covid-era boom. Some stay-at-home sectors are seeing outright declines. This weakness is evident in the global manufacturing PMI and Conference Board leading indicators, as well as in May industrial production, which posted its first decline since last December even though manufacturing eked out a gain on rising auto output.
  • Immaculate disinflation? In an out-of-consensus take, TrendMacro wonders if the Fed’s rhetoric and projections are a hawkish smoke screen—an attempt to buy policymakers more time to see if disinflation takes root enough for the Fed to have no choice but pivot. Volcker fan Powell wants to avoid the stop and go ’70s, when the Fed repeatedly cut rates, only to hike them again. Markets viewed the Fed meeting as a sign of higher-for-longer, with futures pricing at least one more hike this year.
  • Beware the curses of the headline “The Death of Equities” was the cover story headline of an August 1979 edition of BusinessWeek. Three years later, stocks entered an historically strong bull market. Why bring this up? Following the S&P’s 20% rally off last October’s lows, the definition of a bull market, this was Barron’s cover story: “Don't Fear the Bull Market. Why Stocks Are Headed Higher.”

What else

Why all the excitement over AI? ChatGPT’s user base has topped 100 million since its launch in November 2022, the fastest consumer adoption ever seen when compared to relevant online platforms. It crossed 1 million users in only five days, compared to 2.5 and 10 months for Instagram and Facebook, respectively, to reach the same level. (I’ve begun work on an AI presentation. More to come.)

Revenge of the boomers The number of seniors (65 and older) rose to a record 58 million in May, one of the drivers of labor shortages as a record 46.9 million of this total have left the labor force (though notably, 11.1 million are still working!). Overall, the baby boomer cohort (ages 59-77) held $73 trillion in net worth at the end of 2022 and exhibits a willingness to spend. Another catalyst for consumption.

Office, schmoffice Much like the rest of the country, workers in Coral Gables don’t want to come to the office. Even clients of the advisors I met with here don’t feel a need to come! Their many international investors don’t pay attention to the markets or economy here. “They think the USA is great!”

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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Atlanta Fed Wage Growth Tracker: A measure of the nominal wage growth of individuals.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Growth stocks are typically more volatile than value stocks.

Investing in IPOs involves special risks such as limited liquidity and increased volatility.

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Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

Purchasing Managers’ Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors.

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Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.

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Stocks are subject to risks and fluctuate in value.

The Conference Board's Composite Index of Leading Economic Indicators is used to predict the direction of the economy's movements in the months to come.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

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