Around Memorial Day, reflection seems natural. We first want to thank those who’ve fallen in service to the U.S., as well as their families. We also want to show appreciation for all who’ve served the country. What we do wouldn’t be possible without people who defend American values. Thank you.
Politicians and headlines will show reverence to the armed forces, but they’re also dwelling on the “debt ceiling crisis deadline.” So, we wanted to parse through the noise to discuss what’s happening and evaluate how the market could be further affected (by fear or something that’s actually a threat).
It might be two weeks before the debt ceiling situation is resolved. Given the Treasury cash situation, that time will likely induce more fear:
For now, we wait. Whether the solution comes at the eleventh hour, thirteenth hour, or even later, we think stocks will continue to move sideways until there’s some outcome that enables forward progress.
The headlines will continue to be dramatic – here’s a recent sampling:
One analyst said a U.S. default could knock down markets by 45%. Perhaps, but the biggest modern market drop related to the debt ceiling we can recall was 18% in 2011.
All this fear has investors shunning the “safety” of Treasurys in favor of high-end bonds from top corporations. This is because of hysteria created by politicians who continue to suggest a U.S. debt default is around the corner.
But we’ve seen this movie before. If it plays out like prior editions, eventually a deal will be made that allows both sides “to say they win.”
Still, investors will go where they feel safest. Apparently, right now that’s the corporate bond market rather than the Treasury market:
Will politicians save the day?
Don’t forget, this is politics. Debt ceiling drama unfolded multiple times (“boy who cried wolf?”) in the last 12 years or so. If there’s a dip, it will likely be short term. Thus far, the market is not allowing fear to drive stocks down unnecessarily, like the 18% drop in 2011.
The underlying data doesn’t currently indicate a fear-driven plummet. There are valid concerns though. The S&P Global U.S. Manufacturing Purchasing Managers’ Index (PMI) came in significantly weaker than expected, ending at 48.5, which is contractionary territory:
But the U.S. Services PMI came in stronger than expected at 55.1, putting it further into expansionary territory:
The Federal Reserve may not like that.
Additionally, there’s been a significant upside surprise on new home sales. Expectations were that new home sales would shrink 2.9% month-over-month due to rising mortgage rates. But they grew by 4.1%:
Still, prices are down:
We think this happened because home builders are also lenders. They can alleviate the problem of high mortgage rates by offering concessions on deals.
As of this writing, the average 30-year mortgage rate is 7.4%. On a $500,000 mortgage, that’s a monthly payment of roughly $3,756. But home builders that lend can offer free upgrades and lower mortgage rates. Builders can offer a mortgage for the same house at 6.4%, which is about $3,126 a month.
This also helps explain why existing home sales fell 3.4% month-over-month. Lower home prices and lagging existing sales will eventually trickle into inflation data, as we've spoken about previously.
A final economic data point worth noting is oil prices. As of this writing, oil is trading at $74.40 per barrel. That’s near the magic $80-per-barrel desired by Saudi Arabia to fund its social agenda. Unsurprisingly, the Saudis just hinted at a production cut, which should make prices creep higher as the summer driving season approaches and gas inventories dwindle:
Most interestingly, Saudi Arabia’s Energy Minister Prince Abdulaziz recently said:
You can't be more straightforward than that.
The debt ceiling and economic data show conflict in some areas and increasing fear. Is the resulting anxiety valid?
“Big Money” Battles
Let’s peel back the layers a bit for a better understanding (spoiler alert: data isn’t yet justifying big fears). We’ll first turn to MAPsignals’ trusty Big Money Index (BMI), which is an index of “big money” investor sells versus buys. From a macro level, there’s been both consistent buying and selling over the past few weeks especially, keeping the BMI mostly range bound.
Currently, there’s a formidable battle between “big money” buyers and sellers. The BMI rose in March and April but has turned slightly downward since, although flattening some recently:
Notice how the BMI is trading tightly. It’s ready to spring…we just don’t know which way yet (the news doesn’t either).
Unusual buying and selling with stocks and exchange-traded funds (ETFs) indicates a slight winner between “big money” buyers and sellers could be emerging. On the right side of the below charts, you can see how buying (green) is increasing slightly, while selling (red) is beginning to dip:
Since the middle of this month, “big money” has been buying stocks more than selling them, especially in smaller companies (i.e., investors are still growth-minded):
If everything is turning to garbage, as the media might have you believe, why are so many “big money” investors buying stocks that look to pay off down the line? We would argue that it’s due to business fundamentals and forward looking nature of the market.
What sectors are being bought the most? Growth areas like technology, discretionary, and industrials:
This doesn’t reflect a fearful market currently. Purely defensive plays are not prevailing. We’re witnessing a war of attrition.
But let’s stay focused on data. There are promising things happening:
- The BMI’s fall is slow, indicating consolidation and perhaps some pump priming.
- There’s noticeably more buying than selling.
- Small- and mid-cap stocks are being gobbled up.
- Earnings are working.
- Market leadership is in growth-oriented sectors.
Media logic says the market should be worse off. But as of now, data leans towards strength. We'll see how much the politicians can screw it up in the short term. Even if they do, it should only be a slight bump in the road.
We think the best course forward over time is to ignore the noise and stick to the plan. Avoid trying to pick tops or bottoms, instead conduct regular rebalancing and dividend reinvestment.
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