Fresh out of earnings season, there’s been some recent intraday volatility since a couple Fridays ago. The way stocks rallied into the close of those trading sessions is notable though, as is the subsequent up-then-flat trading since.
There’s an old adage among stock traders – “Amateurs open the market, professionals close the market.” So, we take the sharp, late session moves that began on May 31 as a sign of “big money” institutional investors beginning to re-risk:
Typically, this is a reliable sign of institutional accumulation. That would make sense considering money market data showed institutions were de-risking in May to accumulate cash:
If this is the beginning of a risk-on trend, then it's an initial indicator that a short-term rise in equities is warranted. That’s especially true when applying the other supportive catalysts we mentioned last week.
The economic backdrop continues to be positive with more softening inflation and mostly favorable jobs data (more jobs were added than expected in May as unemployment ticked up). This corresponds with the April Job Openings and Labor Turnover Survey (JOLTS) report, which was a sizeable downside miss (8 million openings versus an expectation of 8.3 million):
There’s been a sharp deceleration in job openings, but more jobs added than anticipated, indicating the labor market is still strong though not as “red hot” as in the past. In general, the Federal Reserve wants to see less labor “heat” before cutting interest rates.
At Cornerstone, we think this April JOLTS data will begin a trend of continued downside JOLTS misses into May and June because the largest drops in openings occurred in typically “sticky” health care, food service, and technology roles:
Furthermore, we're continuing to see supportive moves in interest rates, oil prices, and the CBOE Volatility Index (VIX, known as the market’s “fear gauge”):
As of this writing, the U.S. 10-year Treasury yield is down to about 4.3% from 4.6% just over a week ago. Similarly, WTI crude oil is down to $76 per barrel from $81 a few weeks ago and $86 in April. Lastly, the VIX continued to stay below 15, indicating easing volatility. All of this reflects a deflationary environment that’s supportive of the positive short-term equity picture.
Understanding the importance of these data points in between earnings season is helpful for our analysis of the viability of equity market strength through the rest of the year. Obviously, the course of inflation is key too. Taken together, this continued downward path is what would allow the Fed to feel confident in cutting rates at some point, which will create the strongest equities tailwind of all.
The personal consumption expenditures (PCE) report for April was also a breath of fresh air. The PCE index is a great leading indicator of consumer price index (CPI) and producer price index data. April’s PCE index was up 0.3% month over month, leaving it up 2.7% year over year and unchanged from March.
Additionally, the core PCE index was up just 0.2% month over month, below the consensus estimate of 0.3%, and leaving it up 2.8% year over year (chart below). Both these numbers are below long-term inflation averages of about 3%.
Some key factors are moving in the right direction. One is a 0.1% decrease in PCE for services from 4% in March. Another is rental income increased only 0.1% month over month versus a 1.5% increase in March.
These data points provide confidence that inflation will soften in the months ahead, which again supports Fed comfort for cutting rates.
Another helpful development is early signs of stress in the housing market. With mortgage rates stuck above 7%, home affordability is starting to negatively impact consumer spending.
Rate pressure keeps frustrating homebuyers. Also, Zillow reported homeowners are now committing an average of 35% of their incomes to house payments, compared with just 29% for renters:
This is a significant reversal from the norm and not something the Fed wants to see in the future. Generally, the government wants to encourage homeownership over renting. Only lower rates can normalize this trend.
This data helps explain why shelter now accounts for 42% of the CPI. However, in April the shelter index was up 0.4% month over month and 5.5% year over year. That’s a significant decrease from the peak of 8.2% in March 2023.
But more needs to happen. As mentioned last week, homebuilders continue to build, bringing some optimism that prices will begin to level off. Still, that hasn’t shown up in the data yet:
But it seems to be just a matter of time.
Keep A Cool Head and Embrace the Expected Summer Volatility
Lastly, let’s dive more into the intraday volatility in late May/early June via the lens of unusual buying and selling by “big money” investors. Our friends at MAPsignals lent a hand by examining selling that began last September before October’s market lows.
In the below table, the right column shows the ratio of buys relative to sells. Hypothetically, if six stocks were bought and four were sold, the ratio is 60%. Despite May’s weak end, the month still experienced 60% buys overall, on average:
How does this compare to history?
Going back to 1990, it’s interesting how last month’s performance falls in line with historical averages. We know markets fluctuate up and down. This table exemplifies that, with green figures being like market inhales and red figures being like exhales:
Short-term memory and fear had some people freaking out at the end of May. But historically, May sees 56% buys, and in 2024 it was an above-average 60%. So, there’s no need to let emotions take over objective analysis.
While April was a clear departure from the norm, that’s expected over a 34-year data set. Based on history, we should expect a mixed June, a July bump, and then sloppiness in August and September.
Whether that comes to fruition or not, it’s important not to cave to the emotional contagion of mass worry and fall into behavioral mistakes. Instead, keep a cool head and embrace the expected summer volatility that’s on schedule. After all, it’s what normally happens.
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