A Good Place Right Now

MARKETS

All We Want Is More Data

Same as it ever was… which is fine.

I don’t even think it’s a case where Minnesota Fed President Neel Kashkari likes the sight of his name in financial media headlines.
Take this, for example, from Bloomberg during the lunch hour on Tuesday: “Fed’s Kashkari Does Not Rule Out Rate Hikes If Needed.”
There’s a lot of heat but little light there. Effects were similar elsewhere.
MarketWatch went with “Fed’s Kashkari doesn’t rule out a rate hike.” Yahoo! Finance offered nuance: “Fed's Kashkari cites high risk inflation is ‘settling.’"
Of course there’s a lot more to what Kashkari said during his conversation with New York Times reporter Jeanna Smialek at the Milken Institute’s annual conference.
But it all boils down to “we’ll keep watching the incoming data.”
“It’s a little too soon to declare that we’re definitely stalled out,” he said about the Fed’s progress toward its inflation target.
“We’re in a good place right now, the labor market is still strong, we can take our time to get more data to see if disinflation is going to continue. If it does, great, if it doesn’t, then we need to take that on board.”
Kashkari also said the most likely scenario is “we sit here for an extended period of time” until central bankers are convinced inflation is trending toward 2 percent.
Investors, traders, and speculators seem to appreciate the status quo as of Thursday, Friday, and Monday and continued to bid up stocks early Tuesday, though momentum stalled and the major indexes closed flat-to-mixed.

Since 2020, the S&P 500 is up 70 percent, with 50 percent of the gain coming from earnings and 9 percent coming from dividends.

Of course, the Thursday-Friday-Monday rally holds its own peril. Let’s take account of it and what its intensity suggests about price action.
Carson Group’s Ryan Detrick shared “Reminder No. 861” on X on Tuesday “that higher volatility isn't what you want to see if you are bullish.”
Detrick notes that Monday marked the S&P 500’s first three-day gain of more than 3 percent all year. “For reference,” Detrick writes, “2022 saw this 26 times and stocks lost 20 percent.”
It happened three times in 2019, when stocks were up 30 percent.
Jeffrey Hirsch, the editor of the Stock Trader’s Almanac, gets even more granular:

Over the last 21 years, the first three days of May have historically traded higher, and the S&P 500 has been up 18 of the last 26 first trading days of May. Bouts of weakness often appear around or on the fourth, sixth/seventh, and twelfth trading days of the month while the last four or five trading days have generally enjoyed respectable gains on average, but the last day of May has weakened noticeably with only NASDAQ gaining ground.

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This kind of stuff is useful for short-term players looking to exploit inefficiencies, with big downside moves inviting for investors looking to go long on new positions.
The song here remains the same, though: Stick to your plan, if you have one, and if you don’t have a plan, get one.
(Participation, people, is the thing – participate and you will learn. Participate early and your money will work for you for a long time and help you build something decent.)
Will wholesale inventory data for March rock stocks today? Probably not. Will Federal Reserve Governor Lisa Cook roll markets? Maybe!
More telling ought to be what Toyota Motor $TM, Uber Technologies $UBER, Airbnb $ABNB, Anheuser-Busch InBev $BUD, and Shopify $SHOP say about their respective operating and financial results for the three months ended March 31.
First-quarter earnings are up 5 percent year over year, beating the 3.2 percent consensus forecast and the strongest growth in nearly two years, amid what’s shaping up to be a pretty good reporting season.
And even more telling than recent results will be the guidance they share for upcoming quarters and years amid a halfway decent fundamentals-driven long-term bull run.

DEEP DIVE

In Search of an Audience

It’s a new world for Disney, after all.

One of the first real jobs I held was driving the submarines at the old 20,000 Leagues Under the Sea attraction at the original Disneyland in the late 1980s.
I grew up in the shadow of the Matterhorn, up the 57 Freeway from Anaheim in Brea, California, northernmost Orange County, in between the beaches and the real mountains.
I’m old enough to remember the original “A through E” ticketing system for ride, show, and transportation attractions rather than a flat entrance fee.
The Walt Disney Company $DIS has always been there for this Gen Xer.
It’s the type of thing my friend Howard Lindzon once described as an “8 to 80” asset: a company with something for everybody from the age of eight all the way up to the age of 80 and a stock you can buy and hold forever.
That doesn’t mean it’s never disappointed me. Long lines frustrate everybody, and, like many young workers, I was shocked by a low rate of pay and the level of regimentation “backstage” at “the most magical place on Earth.”
On Tuesday, DIS served up a different level of disappointment with its fiscal second-quarter earnings announcement.
And it seems to undermine its iconic status in the minds of people all over the world, be they investors, traders, and speculators or just regular human beings looking for some joy.

The Walt Disney Company $DIS declined nearly 10 percent on May 7, 2024, after management reported disappointing first-quarter results.

It wasn’t so much the results – DIS beat the consensus forecast for earnings per share, $1.21 to $1.10, and was on point with revenue of $22.08 billion – as it was management’s guidance for its Experiences segment.
That’s the theme parks, and DIS said operating income there will be flat during its fiscal third quarter, which ends June 30. Analysts surveyed by FactSet were looking for 12 percent year-over-year growth for the segment.
CFO Hugh Johnston cited “some normalization of post-Covid demand” during management’s earnings conference call.
Whether it’s mere “normalization” or more indicative of a longer-term diminishing of Disney’s global profile is the major question.
There was good news on the streaming front, with Disney Plus generating its first-ever profit, excluding ESPN. Management said the segment, in whole, will be profitable by its fiscal fourth quarter and will be a “meaningful driver of growth” in the future.
Disney Plus added more than 6 million users during the quarter, and average revenue per user also grew at a healthy clip. Deterioration is evident, however, in DIS’s linear TV business and weaker cinema box office totals.
Tuesday’s decline is the worst for DIS since November 2022, when a bad earnings report triggered a 13 percent selloff and eventually cost CEO Bob Chapek his job, as The Wall Street Journal’s Dan Gallagher reports.
Is it too late to point out that management upped its guidance for full-year earnings per share growth to 25 percent from 20 percent…

FIXED INCOME

Now Here’s a Bear Market

Bonds have been hit really, really hard.

Bonds have been hit really, really hard.The bond market is getting hammered.
As Ben Carlson said in a May 5 post in his blog A Wealth of Common Sense, “The Bloomberg Aggregate Bond Index is currently experiencing its largest drawdown since its inception in 1976 in terms of both magnitude and length of time.”
This is a function of the Federal Reserve’s rapid ascent from 0 percent for its benchmark interest rate to above 5 percent.
As Carlson explains, “As interest rates rise, bond prices fall. When rates rise quickly, bond prices fall quickly.”

The Bloomberg Aggregate Bond Index is currently experiencing its largest drawdown since its inception in 1976 in terms of both magnitude and length of time.

At its worst the Bloomberg index was down more than 18 percent. Given inflation’s impact on interest payments a drawdown of similar magnitude for equities would be something on the order of 40 percent to 60 percent.
So, here’s why the bond selloff is not a bigger deal, according to Carlson: “Bonds have gotten killed because rates rose. Now that rates have risen, yields are higher. Investors like higher yields!
“The losses are the past. The yields are the future.”
Carlson also cites the fact that “there are much better alternatives regarding volatility reduction in fixed income,” noting as well that “there aren’t all that many investors who have a high allocation to the areas of the bond market with the biggest losses because better options have been available.”
Finally, stocks and bonds are different:

Bonds are governed more by math than stocks when it comes to expected returns.Buying stocks when they are down is generally a wonderful strategy but there are no guarantees they will come back. There’s more uncertainty involved during a stock bear market.

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Ultimately, of course, as Carlson concludes, “There are more emotions involved with the stock market, as well.”
He’s hopeful, however: “If anything, the bond bear market shows investors, on average, continue to get smarter with their decisions.”