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Five for Friday - April 5, 2024

Five for Friday - April 5, 2024

Manufacturing, Commodities, Momentum, Interest Rates, and Bubbles

1. Manufacturing

One of the key stories of the week was the upside surprise from the March ISM Manufacturing PMI data, which saw manufacturing activity expand for the first time in 16 months. Per the report, which is built via survey responses from supply management professionals, demand was positive, output surged, and surveyed firms notably increased production. All good things. Further, this jump came in spite of higher interest rates across the quarter, with our partners at Strategas concluding that merely the market’s anticipation of rate cuts sparked activity in previously weak sectors. The trickiness (and the reason soft landings are so hard to engineer) is that a pop in manufacturing activity actually makes the Fed less willing to follow through on the rate cuts being anticipated. A real chicken or egg scenario. In the end, green shoots from manufacturing and housing are positives, particularly after a few years of mini-recession. But for the market, too much good news can end up as a near-term negative, especially if it pushes interest rates uncomfortably higher.

2. Inflation

One other thing the Manufacturing PMI report noted was an uptick in prices (to their highest in 20 months) driven in large part by shaky raw materials costs. This emblemizes the recent trend of reaccelerating commodity prices – crude oil is up 20%+ off its December low (leading retail gasoline prices higher), copper is up 15% in just a few months, and the price of cocoa has tripled since October! Overall, the drivers of inflation have narrowed in the last year to mainly housing and labor costs, which have proven sticky and kept overall inflation stuck between 3% and 4% for nearly a year (the Fed targets 2%). But if food and energy prices were to reaccelerate – even a small amount – that pressure could push overall inflation to an uncomfortable level for both the Federal Reserve…and investors counting on lower interest rates in 2024.

3. Rally

This week brought the start of a new quarter, closing the books on a strong 1Q 2024 for stocks. In fact, the S&P 500 rose over 10% in 2 straight quarters for only the 8th time since 1940. This is worth celebrating, but with historically strong performance comes anxiety about what’s next. Are we on a precipice, ab

out to fall? Luckily, history has a calming message. In all 7 prior instances, the stock market was higher a year later and by an average of 12%. Returns might moderate from here, but in markets, momentum begets momentum. And as we’ve noted for months, the market’s strength and breadth are bullish signposts – not bearish ones.

4. Rates

An obvious comparison for today’s market is the late 1990s – a new technology (AI, internet) driving both investor enthusiasm and corporate investment, all against the backdrop of a Fed-engineered economic soft landing. Some might quibble about where we are in that comparison (are we in 1996 or 1999?), but it’s worth noting that interest rates were elevated for that entire stretch. From 1995 to 1999, the S&P returned 250% and the fed funds rate never dipped below 4.75% (it sits just above 5.00% today). Looser policy helps stimulate activity (explaining investors’ laser-focus on the Fed), but it’s worth the reminder that hyper-low interest rates are not a prerequisite for strong returns or for economic growth.

5. Bubbly

This week in 1720, the South Sea Company received permission to sell shares to the public. The company ultimately rose to fame not for its business dealings, but for the massive bubble in its stock price – the “first global financial bubble,” – that eventually popped as quickly as it inflated. As ever, the most timely lessons about investing are behavioral, with writer Jason Zweig concluding, “conformity is a powerful force that can counteract gravity for longer than skeptics often expect. Bubbles are neither rational nor irrational; they are profoundly human, and they will always be with us.”


This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.

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