VDC - The Good News Keeps Coming

2023-06-28 09:32:32 ET

Summary

• Consumers have a more optimistic outlook for the stock market for the first time in 17 months.
• New homes sales surprise to the upside despite higher interest rates.
• Durable goods orders rose and business investment continues to grow modestly.
• Risk asset prices are rising in anticipation of a soft landing for the economy.

With investor sentiment improving in recent days, some took advantage of the short-lived pullback in the major market averages to put money to work in stocks yesterday. We had solid gains across the board. My only concern is that it was led by the technology sector, which tells me we may have some more bloodletting to do in names with excessive valuations before we realize a more durable advance. Still, it's nice to see green again, and I think there is a lot more to come as this bull market broadens. Consumers are starting to agree.

The Conference Board’s consumer confidence survey for June was notable from the standpoint that a majority of consumers see stock prices higher six months from now for the first time since the beginning of last year. This 17-month stretch of pessimism has only been bested by 18 months during the Great Financial Crisis with the next two longest periods being just nine months each, dating back to 1987. According to Bespoke Investment Group, the good news is that the S&P 500 rallied an average of 22% after each of those three periods of pessimism ended, which is yet another historical precedent strengthening my resolve that we will see new highs for the S&P 500 in the year ahead.

The better-than-expected read on consumer confidence is consistent with the continued resilience of the U.S. economy, despite tighter financial conditions. New orders for durable goods rose 1.7% last month, but the increase falls to 0.6% when we strip out aircraft. Still, that is a lot better than the decline expected by the consensus and marks a third consecutive monthly increase. Most importantly, core orders or capital goods excluding defense and aircraft, which constitutes business investment, rose modestly in May for a second month in a row. The increase was just 2% on a year-over-year basis, but in the chart below it looks a lot like a soft landing to me. Now we just need to see a modest upturn in the months ahead, as business confidence in the economic outlook improves.

New homes sales also showed a sharp bounce back in May with a 12.2% year-over-year increase to an annualized 763,000. Again, it was ahead of expectations. That has a lot to do with the limited inventory of existing homes on the market. At the same time that home construction is ramping up, the median sales price has fallen 7.6% from a year earlier. We also saw a decline in existing home prices on year-over-year basis in the April figure for the first time since 2012. According to the S&P CoreLogic Case-Shiller index, prices nationwide fell 0.2%. The 20-city index fell 1.7%. This is the best of both worlds with rising demand and falling prices.

The knee-jerk reaction is to assume that the Fed will need to keep raising interest rates and tightening financial conditions in light of these economic upturns. That is a false assumption. The rate of inflation should continue to fall closer to the Fed’s target of 2%, as the rate of economic expansion stabilizes below trend. This is a soft landing, and that is what stock and bond performance, which looks forward, has been telling us.

Sector performance so far this year is resoundingly bullish for those who are listening to the market. You don’t typically see semiconductor ( SMH ) and consumer discretionary ( VCR ) names leading the charge with the safe haven of consumer staples ( VDC ) lagging well behind. If the consensus on Wall Street was as bullish as the market internals, I might be getting a little concerned, but we are far from that today.

Let us hope that sentiment on Wall Street remains depressed, as the good economic news keeps coming, and risk asset prices recover on a gradual basis with a rotation from excessive valuations to the rest of the marketplace that has yet to catch up.

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