Good morning. Today is the last day of winter. With the advent of spring comes a gift to American capitalism and the American dream: the end of brokers' de facto fixed commissions of 6 percent on home sales. The settlement of the lawsuit against the American Association of Realtors appears to have stopped this egregious bit of anti-competitive collusion, or at least made it more difficult. Send more reasons to be cheerful: robert.armstrong@ft.com.
Prices will matter again before long
The market doesn't seem to care much about interest rates at the moment. This is interesting, because not that long ago — three or four months ago — all anyone wanted to talk about, except for technology stocks, was the future path of Fed policy. What's somewhat worrying about this is that when everyone wanted to talk about interest rates, the interest rate story was unequivocally positive. With inflation falling rapidly, interest rates were certain to fall much lower. Now that inflation is more stubborn and interest rates less likely to fall, the market has moved to a different story, one about strong economic growth. This makes this market seem like one that sees the good in everything.
Going back to early January, the futures market placed an 85 percent chance of six or more quarter-point rate cuts by the end of the year, according to the Chicago Mercantile Exchange's FedWatch tool. Now the market is indicating a 70 percent chance of three or fewer. This is a great alternative. The stock market responded to the shock by smoothly rising by seven percent over the same period, reaching all-time highs.
One attractive feature of the story that high growth rates are a good thing is that it is true right now. The belief that there is a simple correlation between falling interest rates and rising stock prices (or vice versa) is a mistake that this newsletter is not tired of correcting. When growth is good and profits are strong, as is the case in the United States now, it is possible for stocks to rise completely on the back of stable or even high interest rates. In fact, this is the ideal type of market because it supports stocks but not access to returns, as Aswath Damodaran pointed out in his interview with Unhedged last week:
A market with a Treasury bond interest rate of 4 percent is healthier than a market with a Treasury bond interest rate of 1.5 percent. People don't feel like doing stupid things. . . So the fact that the interest rate on Treasuries is at 4 percent is a good sign for the markets and the economy. All this talk about “When will the Fed cut rates?” Completely misses the point. This is where we should be.
In an article (and podcast discussion) on this general topic, my colleague Katie Martin put the bull case this way: “Stocks are rising not because they are smoking the speculative fumes of imminent and potentially aggressive interest rate cuts, but because they are worth it.” “Ho-hee.” Fair enough. GDP estimates from the Federal Reserve Bank of Atlanta indicate the US economy expanded 2 percent in the first quarter, and there are few sounds of distress coming from businesses and households (a few, not none; See next item).
The trivial thing to say at this point is that strong growth will not last forever. Of course it won't happen, no one expects it, and stocks aren't priced accordingly. But when growth slows, the market's attention will immediately return to interest rates and the Fed. It is easy to assume that when growth slows, the stubborn problem of inflation will disappear and the Fed will be free to lower inflation rates. But it is not a safe assumption. If we've learned anything in the past three or four years, it's that no one understands inflation well enough to predict it well.
At any given moment there is a question looming over risk asset markets that can take almost any form, but it always means the same thing: “Could something terrible happen?” The most popular avatar for this ominous question right now is “Are tech stocks in a bubble?” There is a smarter alternative: “What is the probability that inflation will persist even as growth declines?”
More about low-income consumers
Last week I wrote about a rare rarity in a harmonious American economy: the low-income consumer. It's a difficult observation to make. The only clear signs of this come from rising delinquency rates among young borrowers, from the New York Fed's Household Debt Report, and from various anecdotes from companies serving low-income clients.
I'm not the only one listening. Alexandra White wrote in the Financial Times over the weekend about signs that consumers' ability to absorb price increases may be at an end. She cites a weak January retail sales report that showed a slowdown from January to February; Weakening survey measures of consumer confidence; and lukewarm comments from executives at Kraft Heinz, Pepsi, McDonald's, and Target, among other companies. In the Wall Street Journal, Jinju Lee focused on the dollar store chains — Dollar Tree and Dollar General — noting that the end of pandemic-era federal supplements to government food stamp programs continues to weigh on sales.
Although I think there is something going on here, and that it could be very important to investors, I want to be careful not to over-interpret the data or rely too much on the comments of executives, who have all sorts of reasons to interpret companies. Performing the way they do. For example, both major dollar store chains are in the midst of turnaround efforts, which inevitably results in some noise in financial results.
It is true, as White points out, that nominal retail sales growth has stabilized in the past few months, but the effects of inflation and pandemic disruptions make that difficult to read — especially in the specific context of lower-income consumers. Take, for example, inflation-adjusted personal consumption expenditures for goods and services:
Obviously there was a notable disqualification in January, but that's only one month. Aside from January, there is no clear trend over the past two years, other than noticeably strong spending on goods. In addition, wage growth continues to rise at a rate exceeding 4% in nominal terms, which does not indicate a huge hit to the average hourly worker.
The problems of less affluent families may not have a large enough impact to change the overall national numbers. I asked my former colleague Matt Klein of The Overshoot (subscribe!) about this; He is better at reading national data than I ever was. He noted that not only are retail sales volatile, but spending on goods (excluding energy) has been very high since the pandemic and may finally be starting to return to normal. If so, the fortunes of specific consumer goods companies may not represent how consumers perform. Even overall retail sales figures may not be particularly representative.
He also noted that within the Michigan Consumer Confidence Survey, it is noteworthy that the percentage of consumers who expect their nominal income to increase in the coming year is above average, and rising rapidly. The green line represents the percentage of Americans who believe there is a 75 percent chance their incomes will rise:
Klein agrees that the hardships of poor families could get lost in the aggregate data, but says his “suspicion is that this reflects that people are actually doing well.”
As is often the case, when we try to spot an inflection point in a large economy, we will have to find more data to find out what is actually happening at the low end. Readers, where should we look?
One good read
More based on trade.
