Something Doesn't Add Up

Another down day for stocks... Rate-cut expectations are moving back – again... Something doesn't add up... A recipe for higher inflation... Today's winners... Gold is at all-time highs with possibly more to come...

We've seen this before...

Stocks are down... Bonds are down... Oil prices are up... And market expectations for rate cuts have been pushed back by another month – again.

That was the story today, with a second straight down day in the markets overall. (But not for energy stocks or gold, which we'll get to in a moment.)

It appears the scenario we described yesterday – that higher inflation will stick around for longer (again) – settled into more investors' minds and actions today.

Federal-funds futures traders are increasingly betting on the Federal Reserve holding its recommended bank-lending rate right where it has been through at least June. The bets on a June hold, according to CME Group's FedWatch Tool, have jumped by nearly 10% in the past few days. The next Fed meeting, in May, was already considered a long shot for a cut.

Meanwhile, Treasury yields have risen. The 10-year Treasury is yielding more than 4.3%, its highest number since November 2023, before the Fed publicly projected multiple rate cuts to come in 2024.

The S&P 500 Index shed about 0.6% today, while the small-cap Russell 2000 Index was off roughly 2%. Most of the major S&P 500 sectors were down – except energy (up 1.4%) and utilities (up 0.1%), which aren't nearly as sexy as chipmakers and AI stocks.

However, as we wrote yesterday, longer-term U.S. stock trends remain up...

One or two days of losses in the indexes doesn't change that, but more could.

Today marks the 10th time this year that the S&P 500 has been down in at least two consecutive trading days... Yet, the benchmark index has churned higher after each mini-drawdown and is up around 9.5% year to date.

So the S&P 500 continues to churn higher, above its long-term and short-term technical trend lines, and market breadth is holding up. The number of NYSE-listed stocks trading above their 200-day moving average is still above 60%, even amid today's selling.

However, it's hard to imagine that the pace of gains through the first quarter of 2024 keeps up. That would be around a 40% return for U.S. stocks by year-end, which seems unlikely. The average annual return for the S&P 500 is about 10%.

Our colleague Mike Barrett has more thoughts and data about this point. He's being more cautious than ever and said stock valuations have entered a "danger zone" in his Select Value Opportunities update published last week.

What could turn stocks lower? In a word, inflation...

Indicators that I (Corey McLaughlin) am watching suggest more economic growth in the U.S., continued relatively low unemployment, higher energy prices, and higher costs generally.

Yesterday, for instance, a key measure of U.S. manufacturing activity showed growth for the first time in 17 months, above Wall Street expectations and a positive signal about the industrial part of the U.S. economy.

Add it up, and it would be wise to consider a future with higher inflation than many investors currently expect. We'll repeat what we said yesterday: The Fed's preferred measure of inflation, the core personal consumption expenditures ("PCE") price index, is showing a pace of 5% growth through the first two months of 2024.

Yes, 5%.

Yet the central bank is going to cut bank-lending rates this year?

Something doesn't add up...

In mid-December, as stocks shot higher in a ripping year-end rally, we wrote about the "Fed's new signals" – rate cuts likely coming this year – and said...

Fed members also prepared the market for the idea of multiple rate cuts in 2024... assuming a future in which economic growth slows and the unemployment rate moves higher while inflation doesn't.

But the story is changing, at least as I see it.

In December, the Fed projected 1.4% GDP for 2024, a 4.1% unemployment rate, 2.4% inflation (based on core PCE), and a fed-funds rate of around 4.6%, or about 75 basis points lower than the effective fed-funds rate (currently 5.3%) since the central bank's rate-hike "pause" started last July.

Last month, when the Fed did its quarterly projection exercise again, its members arrived at an outlook of 2.1% GDP in 2024 (much higher than previously thought), a 4% unemployment rate (slightly lower and nearly identical to the 3.9% it is now), 2.6% inflation (slightly higher), yet still a 4.6% fed-funds rate...

Said another way, all the expectations about the supposed major inputs for Fed monetary policy – and its "stable prices and maximum employment" dual mandate – suggest rates should stay higher for longer, but the median Fed-member projection was still the "status quo" to cut rates by 75 basis points by the end of the year.

Fed members say they're cutting rates no matter what, and the market is believing it...

Yet, as we've said before, the potential for inflation to be higher for longer is greater than the likelihood of inflation reaching a 2% annual rate anytime soon. For example, the trade winds for oil are shifting to the upside, which is a significant development for the global inflation picture.

Meanwhile, the latest read on the jobs market showed continued 'resiliency'...

The widely followed monthly Job Openings and Labor Turnover Survey from Uncle Sam came out this morning and said...

The number of job openings changed little at 8.8 million on the last business day of February... Over the month, the number of hires and total separations were little changed at 5.8 million and 5.6 million, respectively. Within separations, quits (3.5 million) and layoffs and discharges (1.7 million) changed little.

Later this week, we'll have another renewed picture of the labor market. Friday's "nonfarm payrolls" report will bring with it a fresh unemployment rate. And tomorrow, payroll processor ADP will publish its private-sector national-employment report for March.

There's also a slew of speaking appearances coming from Fed members later this week, which are worth keeping an eye on.

Now, we're not the only ones looking at these factors. Wall Street traders are pushing back their expectations for rate cuts again, as we saw throughout 2022 and during multiple points already this year.

In the meantime, though, a continued "Fed pause" could be good for stocks...

That's as long as most investors believe that the end result will be rate cuts, as Fed Chair Jerome Powell has promised. That appears to be why stocks have churned higher even as market expectations for cuts keep moving further into the future.

But if prevailing expectations that the central bank's next move to cut rates shifts to the thought that it might raise them first (because of higher inflation), it would be a dramatic change – and probably cause volatility for more than a day or two.

We'll keep watch.

The day's winners: Energy stocks and gold...

At the very least, today's market action shows why having exposure to inflation hedges like energy stocks and gold is a wise move in a well-diversified portfolio.

Remember that "golden cross" we mentioned a few weeks ago from our colleague Sean Michael Cummings in DailyWealth? It's when an asset's 50-day moving average (50-DMA) moves above its 200-day moving average (200-DMA). It happened in energy stocks last month.

This action doesn't guarantee higher prices ahead, but it's usually a bullish signal because of what it's saying about short- and long-term trends. It's the opposite of the bearish "death cross" signal – when an asset's 50-DMA drops below its 200-DMA.

This golden cross has "held" since March 22, and the Energy Select Sector SPDR Fund (XLE) is up roughly 4% since then, including 1.4% higher today.

Gold keeps pushing higher, too. The ultimate, centuries-old inflation hedge was up another 1% today to a new all-time high above $2,270 per ounce.

Yes, we're talking new all-time highs in gold, with more upside potentially ahead...

As Stansberry Research senior analyst Brett Eversole wrote in DailyWealth today (and first to True Wealth Systems subscribers last month)...

Gold recently moved higher for nine straight days. That's darn rare. This kind of winning streak has happened just seven times over the past 50 years. Take a look...

A multiday spike like this is important... because rare setups like these point to continued gains.

Brett looked at every unique instance of gold rising for seven or more consecutive days. It happened 31 times, and he found gold tends to keep rising after these setups and outperforms its average returns over various time periods.

As Brett added, and as we mentioned a few weeks ago, most investors are still completely overlooking gold right now. (He shared more evidence of that in last week's edition of True Wealth Systems "Market Extremes.")

As he wrote today...

That's almost never the case when an asset reaches new all-time highs. And it tells me that the current rally isn't about to end... It's just heating up.

The masses will wake up to what's happening in the gold market. They always do. And we want to be positioned to profit before the next move higher.

If you need more reason to own gold in your portfolio, there it is...

New all-time highs are here, but Brett says "much higher prices are likely in the months ahead." And on down market days like today and yesterday (with maybe more ahead), holding assets that go up proves their worth.

New 52-week highs (as of 4/1/24): Agnico Eagle Mines (AEM), Amazon (AMZN), Ascot Resources (AOTVF), Atkore (ATKR), Alpha Architect 1-3 Month Box Fund (BOXX), Sprott Physical Gold and Silver Trust (CEF), Pacer U.S. Cash Cows 100 Fund (COWZ), Copart (CPRT), Dorchester Minerals (DMLP), Dow (DOW), Enterprise Products Partners (EPD), Equinox Gold (EQX), Diamondback Energy (FANG), First Trust Natural Gas Fund (FCG), Freeport-McMoRan (FCX), SPDR Gold Shares (GLD), Alphabet (GOOGL), Kinder Morgan (KMI), Micron Technology (MU), Nucor (NUE), Sprott Physical Gold Trust (PHYS), Pioneer Natural Resources (PXD), Target (TGT), ProShares Ultra Gold (UGL), United States Commodity Index Fund (USCI), Energy Select Sector SPDR Fund (XLE), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

In today's mailbag, more thoughts on the bridge collapse here in Baltimore, which we wrote about last week... and which I personally took a closer look at yesterday. Here's a picture (taken from an admittedly outdated smartphone) of the wreckage and the Dali cargo ship from nearby Fort McHenry...

Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Seems to me the cost of cleanup and rebuilding the Key Bridge should be borne by: 1) the entity that damaged it, and 2) insurance. The U.S. footing the bill is intolerable." – Subscriber Bill B.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 2, 2024