Equities had a nice rally last week. For the week, the S&P 500 rose a bit over 1.7%, which stopped a run of two straight weeks of losses. Information Services (up 4.19%) and Communication Services (3.06%) were the two best performing sectors within the S&P. The Nasdaq briefly touched a 52-week high on Friday before falling back slightly by the close. The index was up 3% on the week.
"Listen, here's the thing. If you can't spot the sucker in your first half hour at the table, then you are the sucker." - Mike McDermott, "Rounders"
I have been thinking about that quote quite a bit in recent (AAPL) as I continue to find few reasons to buy much in this market at current trading levels. It is quite amazing to see the Nasdaq now up more than 25% for the year. One could make an argument that the tech-heavy index was oversold to begin the year after losing a third of its value in 2022. And the rally has been quite narrow, driven by the largest names in the Nasdaq such as AAPL. Regardless, the index's gains have been notable.
Last week, we got more signs that the consumer is under growing duress after 24 straight months of losing buying power against inflation. Home Depot (HD) reported disappointing and negative same-store sales and ratcheted down forward guidance as well. Amazingly, the stock still managed to end the week in the green. Shareholders of Foot Locker (FL) were not so lucky. Their stock lost more than a quarter of its value last Friday after the retailer posted its first-quarter numbers. Foot Locker came in significantly short of consensus estimates and slashed forward guidance.
Call me crazy, but the last time I checked the consumer makes up about 70% of U.S. economic activity, so my concern around that sector seems warranted. We will get a bevy of first-quarter results from other retailers this week that include Kohl's (KSS) and Best Buy (BBY) , but I expect they will confirm what Home Depot and Foot Locker already have said. And that is, the consumer is pulling back.
The biggest reason I remain steadfastly cautious right now is Federal Reserve policy. Equities have risen this year despite the continued tightening of monetary policy in 2023. However, it is important to remember monetary policy always works with a lag. Even if the Fed pauses over the coming months, more collateral damage will start to surface.
I expect the commercial real estate sector to continue to come under increasing pressure as we head into the second half of 2023. Large amounts of debt there need to be rolled over the next couple years. Those rollovers will happen at significantly higher interest rates and lower collateral values, especially for office buildings in major cities.
Money supply is also falling at the fastest rate since the Great Depression, a topic getting too little attention in the financial press. Last week, Reuters reported Treasury Secretary Yellen as saying "a certain degree of consolidation in the regional and midsize banking sector could occur." That statement leaves me with the impression that more regional banks eventually will be sold off in pieces to larger brethren as bank failures continue in the regional banking system.
The combination of a weakening consumer and increasing challenges from monetary policy are key reasons why I see both the economy and equities deteriorating in the second half of the year. If that scenario doesn't play out by the end of 2023, I may need to look around the table again and confirm I still know the rules of the game.
