Hope you are all doing well. The S&P 500 eked out its seventh weekly gain in a row. It was only a 0.2% rise and marked a sharp departure from the big increases seen in the preceding weeks. The NASDAQ and Dow both recorded fractional weekly declines after a pullback on Friday. This is the final week of the Late Show. I have broken down this week’s update using quotes from its two hosts.
“If you want to make a small fortune, just start with a large fortune and invest in whatever I just bought.” – Colbert
Colbert apparently has been investing in bonds. The most recent bond market sell-off accelerated, as yields of U.S. Government bonds rose on Friday to their highest levels in just over 12 months. The 10-year Treasury yield finished the week at 4.59%. That is up from less than 4.00% as recently as late February. The 2-year yield was 4.08%. The 30-year yield was at 5.12%, the highest it has been since 2007. Bonds continue to be a terrible investment. Bond prices move opposite interest rates, so the hope for future rate cuts may make bonds seem attractive. Don’t get lured into bonds. Those who have worked with me for some time know that for the past ten years, I have consistently advised avoiding longer-duration bonds. If you had invested in the iShares bond market ETF, your cumulative return for the past ten years would have been only 18%. By comparison, the S&P 500 ETF has had a cumulative return of 274.75% over the same ten years. I think inflation will continue to tick higher in the coming months, which will be bad for bonds.
“Stocks are at an all-time high today. I don’t have any money in the stock market. I don’t have the stomach for the ups…” – Letterman
Stocks have been great. Can it continue? The negative headlines and rising prices have consumers feeling pessimistic. However, the market is rallying in spite of the negative sentiment because earnings season has been so strong. The strength has not just been on a revenue basis, but also in terms of profits. As of Friday, companies in the S&P 500 were on pace to record first-quarter revenue growth of 11.4%, the highest rate since the second quarter of 2022. Even more amazing profits for the 500 largest U.S. companies are on track for an earnings growth rate of 27.7%. That is the strongest since 2021’s fourth quarter, which was driven by people starting to spend again post Covid. At some point, the negative headlines and inflation concerns could cause stocks to cool. However, a case could be made that if the conflict ends in the Middle East, then sentiment will turn positive and cause an additional leg higher for stocks.
“Due to inflation, the Duane Reade store at the Port Authority Bus Depot has locked up all of its SPAM… Now, if you’re eating SPAM in the Port Authority, you’ve got bigger problems than inflation” – Colbert
The Senate has many problems to deal with, so getting bogged down on approving Kevin Warsh’s nomination as chair of the U.S. Federal Reserve was not something they wanted to do. Warsh was confirmed and replaces Jerome Powell, who led the Fed for eight years. Warsh’s first meeting as chair is set for June 16-17, and inflation will be the central topic. Consumer Price Index report showed that inflation rose at a 3.8% annual rate in April. It is the highest level since May 2023. Wholesale prices showed a 6.0% annual rate for the Producer Price Index. That is the highest since December 2022. Chairman Warsh could surprise markets positively by trading the Fed’s predictable, forward-guided policies for decisive, growth-focused adaptability. I am not saying Warsh will ignore the inflation data. However, the incoming Chairman is quite bullish on artificial intelligence. He has previously argued that technological gains will structurally lower the cost of goods and services. As the AI-driven productivity boom materializes, he feels it will allow the economy to continue growing without reigniting inflation. If that happens, it will give the Federal Reserve the wiggle room to sustainably lower borrowing costs, which is something the market is not pricing in at this point. While I share his bullishness on AI, I am not quite sure that corporate cost savings will trickle down to consumer prices.
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