Reality Versus Fantasy

What cuts across demographics... The top problem facing America... Reality versus fantasy... Uncle Sam's latest jobs report... The 'Fed pause' trade continues... Looking at gold, bitcoin, and oil... Inflation data and Fed meeting on tap...

They didn't call us, but we can agree...

A national poll conducted last week asked more than 2,000 Americans – with the sample group weighted to match U.S. Census data about gender, age, race, and education – to name the most important problem facing the U.S.

"Inflation" was the most frequent answer.

Here we are... approaching four years on from the decisions that triggered 40-year-high inflation – the trillions of stimulus dollars pumped into the economy in response to the pandemic while interest rates were near zero. Now, concern about ever-rising prices is one thing all demographics share.

Not only that, 56% of people interviewed by this CBS News/YouGov poll from December 6 to 8 said government spending is the biggest cause of inflation... and three-quarters said they felt their income is not keeping up with the rise in prices... despite what any "official" statistics might say.

As CBS put it...

Even amid stronger jobs reports and economists' talk of "soft landings," people say they still pay more attention to their own experiences than to macroeconomic measures – and an overwhelming number say their incomes aren't keeping pace.

That's the reality that people feel. Then there's fantasy land...

Uncle Sam's latest jobs report...

I (Corey McLaughlin) wrote last week that we would be watching the release of last Friday's jobs report with interest. After all, the unemployment rate had been gradually ticking higher over the past few months...

Remember, Wall Street has been increasingly betting that the labor market and economy is going to worsen so much more in the months ahead that the Federal Reserve will cut interest rates in early 2024.

Well, on Friday, the Labor Department's reported unemployment rate for November actually fell, from 3.9% in October to 3.7%. "Nonfarm payrolls" increased by 199,000 last month and average hourly earnings were reported to gain 0.4% for the month and 4% year over year.

At the same time, as we reported last week, the Fed's preferred inflation measures have kept easing, to an average of 0.2% monthly growth in each of the past five months. That's in line with the Fed's ballpark 2% annual goal and lower than reported wage growth.

Again, this doesn't mean prices at your local store are going down for all the items you're interested in, or that people are getting generous raises to beat inflation... But it's how the government measures these things, so it shapes how Wall Street reacts.

The 'Fed pause' and 'soft landing' reignited...

Add it up and Wall Street's knee-jerk reaction was to kick the idea of Fed rate cuts down the road from March 2024 out to May, according to federal-funds futures data. The "Fed pause" (of interest rates) trade continues, which has historically been good for stocks.

Bond yields climbed Friday after the jobs report and again today. The U.S. Dollar Index ("DXY") continued its recent trend higher from a late November low... The major U.S. stock indexes haven't taken off to the moon, but they haven't fallen significantly, either.

The idea of a "soft landing" is back on the table.

With more investors predicting a relatively stronger dollar for a longer period, the spot gold price has pulled back from its recent closing high above $2,000 per ounce last Monday. (On this point, Ten Stock Trader editor Greg Diamond shared a technical analysis of where gold's price may go from here with his paid subscribers... The possible outcomes might surprise you.)

Bitcoin, which is up more than 140% this year, even slid from its most recent high above $44,000 per token and is down roughly 7% in the past 24 hours.

By the way, if what I just said about bitcoin's returns this year grabbed your attention, Stansberry Alliance members and existing Crypto Capital subscribers won't want to miss editor Eric Wade's latest weekly update. Eric shared what has been going on with the world's most popular cryptocurrency and key price levels to watch. Check it out here.

But oil prices continue to fall, too...

The price of a barrel of West Texas Intermediate ("WTI") crude oil – the U.S. benchmark – is down about 25% from its most recent high in late September, to around $71 today. Brent crude, the international benchmark, is down about 20% to $76 per barrel in the same period.

I'm not going to lump a notable slide in oil prices in with strictly monetary policy's influence on dollar-denominated assets, though. It certainly plays a role – and lower oil (and gas) prices support the narrative of the pace of inflation cooling, as our colleague Whitney Tilson mentioned in his free daily newsletter on Friday. But also consider a few other influences...

Uncertainty around global oil supply and demand has enough investors thinking about potential global oil oversupply in the months and year ahead.

OPEC+ leaders are calling for more voluntary supply cuts from its member nations, though there's a healthy skepticism about whether they'll follow through.

Plus, recent reports out of China about deflation in the world's second-largest economy – and China talking up potential stimulus efforts once again – could be another headwind to oil demand.

The concern has spilled over to energy stocks...

As DailyWealth Trader editor Chris Igou wrote to his subscribers today, the Energy Select Sector SPDR Fund (XLE) has been trending lower since October and is trading below its 200-day moving average (200-DMA), a technical measure of a long-term trend...

Not only that, but Chris said what had been technical "support" levels, where buyers jump in to send prices higher, are now looking like "resistance," where sellers drive prices lower. As he wrote...

In the chart below, you can see XLE trading above its 200-DMA in August and September. Then it punched below it in October, breaking the support level...

Once XLE broke below its 200-DMA, the trend turned into a resistance level. And it has held for a month.

Even more, we're seeing the 200-DMA start to fall lower. That tells us the trend is down... and is acting as a barrier to higher prices.

Chris warned subscribers to avoid buying this popular oil fund for now and said energy stocks could still see "a sharper drop in the next month or two." Alliance members and DailyWealth Trader subscribers can read his full report here.

Maybe there's a floor for oil. Maybe...

The price of oil has gotten so low that the White House is finally buying barrels to refill the nation's depleted Strategic Petroleum Reserve...

The reserve was drained by 40% amid the policy response after Russia invaded Ukraine in the spring of 2022. A few months later, in October, President Joe Biden said the U.S. government would buy WTI crude when prices are at or below a range of $67 to $72 per barrel to replenish this stockpile.

Earlier this month, with oil prices higher than present levels, the U.S. Department of Energy said it planned to buy nearly 3 million barrels of oil at an average price of $79 per barrel or less. Now, Uncle Sam is (or should be) getting a better deal.

So, oil prices might have a built-in floor... But don't let that obscure what the oil market might be signaling about a global economic slowdown.

Heading into this week's Fed meeting...

U.S. central bankers will discuss policy decisions tomorrow and Wednesday for the final time this year.

The meeting follows a relatively "healthy" jobs report. So absent an unexpected major spike in consumer price index ("CPI") inflation data that will be published tomorrow, our bet is that the Fed will hold its benchmark lending rate steady between 5% and 5.25%.

I'll have updates on the CPI data in tomorrow's edition and the Fed meeting on Wednesday. The latest producer price index ("PPI") figures will also go live on Wednesday.

As always, the Fed's plans to be announced this week are likely already baked into the market. So the things to watch around its announcement will be about the future... which the Fed cannot predict, of course, yet enough people care about anyway.

Investors will be hanging on the words of Fed Chair Jerome Powell at his post-announcement press conference. And this meeting marks one of the bank's quarterly exercises, where it publishes projected GDP, inflation, and unemployment data.

When this happened last time in September, the market appeared to react strongly to the Fed's indication that it could hold rates "higher for longer." Stocks slid into October, while bond prices also fell and yields headed toward 5%.

A few months later, there's more of an expectation that the Fed is closer to cutting rates than raising them further. We could see volatility if the Fed's projections include notable surprises again.

New 52-week highs (as of 12/8/23): ABB (ABBNY), D.R. Horton (DHI), Enstar (ESGR), iShares MSCI Spain Fund (EWP), Expedia (EXPE), Huntington Ingalls Industries (HII), ICON (ICLR), Ingersoll Rand (IR), iShares U.S. Aerospace & Defense Fund (ITA), JPMorgan Chase (JPM), Lennar (LEN), London Stock Exchange Group (LNSTY), NVR (NVR), Palo Alto Networks (PANW), PulteGroup (PHM), Qualys (QLYS), Invesco S&P 500 Equal Weight Technology Fund (RSPT), SentinelOne (S), SPDR Portfolio S&P 500 Value Fund (SPYV), Stellantis (STLA), Trane Technologies (TT), and Vanguard S&P 500 Fund (VOO).

In today's mailbag, your thoughts about the "Magnificent Seven," which our colleague Dan Ferris wrote about in Friday's Digest... Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.

"Such concentration in such a small number of companies makes me smell a rat. Amazon clearly has monopoly power in the online sales business. Do the other companies have similar concentrations? Will these concentrations ultimately lead to Justice Department action to break up their concentrations? And then to more normal valuations?" – Subscriber Rod B.

All the best,

Corey McLaughlin
Baltimore, Maryland
December 11, 2023