Stock vs Bonds, Inflation Watch, Consumer Sentiment and Geopolitics


By the Curmudgeon with Victor Sperandeo

Stocks and Bond Market Returns Diverge:

The S&P 500 index increased 1.9% to 5,223 last week and is within 1% of its record all-time high.  On Friday, Fed “Goons” came out of the woodwork to temper the rally using moral suasion.  Fed Governor Michelle Bowman said she doesn't expect it will be appropriate for the Fed to cut interest rates in 2024, citing persistent inflation in the first several months of the year.

The S&P has returned ~10% this year. The QQQ ETF (proxy for the NASDAQ 100) has a 2024 year-to-date (YTD) return of 8.09% and a one-year return of 36.86%.  At the same time, bond prices have declined.  As of May 10, 2024, the iShares 20+ Year Treasury Bond ETF (TLT) had a 2024 YTD total return of -7.66% and a 1-year return of -10.11%. 

It is very unusual for U.S. stocks to be in a bull market for 19 months (since October 2022), while U.S. government bonds are in a prolonged bear market for almost four years. 

·        The 10-year U.S. T-note yield closed Friday at 4.504%, which is 8.75 times higher than its 0.515% close on August 4, 2020! 

·        The TLT ETF declined from $171.57 on August 4, 2020, to $90.12 on Friday, May 9, 2024, for a loss of 47.5%.

·        In sharp contrast, the S&P 500 closed at 3,306.51 August 4, 2020, vs 5,223 on Friday, May 9, 2024, which is a +58% return (not including dividends).

Inflation Watch:

The CPI report this coming Wednesday, which will follow Tuesday’s PPI report, will provide a good gauge of the direction of inflation in the U.S.

Economists estimate that consumer prices rose 0.4% month-on-month, flat versus March, and increased 3.4% year-on-year, easing from 3.5% in March. Core CPI, which strips out food and energy costs, is expected to have risen 0.3% month-on-month and 3.6% year-on-year, down from 3.8% in March.  The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, will be reported on May 31st.

Meanwhile, consumers’ inflation expectations have moved up, as per last week’s University of Michigan Consumer Sentiment report.  Over the next 12 months, consumers anticipate prices to be up 3.5%, versus 3.1% in last month’s survey. That’s above the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations inched up, from 3.0% last month to 3.1% this month. Although they have been within the narrow 2.9-3.1% range for 30 of the last 34 months, long-run inflation expectations remain elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.

"The Fed is unlikely to cut rates, absent the onset of recession, unless inflation is clearly headed sustainably to 2%," Conrad DeQuadros, senior economic advisor at Brean Capital. "Anchored inflation expectations are a key part of this assessment, and a 3.1% longer-term expectation is near the high end of the range that the Fed judges as being anchored."

Consumer Sentiment Plummets!

The University of Michigan reported that Consumer Sentiment retreated ~13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups. Consumers in western states exhibited a particularly steep drop. While consumers have been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment, and interest rates may all be moving in an unfavorable direction in the year ahead.

Victor:  I think the Michigan Consumer Sentiment report reflects the real economy; not the one created by U.S. government spending which now shows 4.2% GDP estimate for 2Q-2024, according to the Atlanta Fed GDP Now.


It’s interesting to note that Consumer Sentiment has been well below pre-Covid years (see chart below), while stocks have been in a secular bull market since then, while bonds are in a major bear market!

Source: University of Michigan


Victor’s Market Comments:

Victor thinks the Fed and the U.S. government don’t want a stronger U.S. stock market until after the FOMC June 11-12th meeting, at which time they will mute their “sticky inflation” narrative.  The election is the goal (to retain power) and the $7.3 trillion U.S. government spending budget the prize.

Starting in July, expect to see lower CPI reports from the BLS and lower employment numbers, setting the stage for two Fed Funds rate cuts.  Fed funds futures again are pricing in two possible 25bps rate cuts by year end, according to the CME FedWatch site.

Stocks and Gold are strong holds currently, while commodities and bonds will be buys (FOR A TRADE) next month after the FOMC meeting. ALL THE TALK ON “STICKY INFLATION” WILL THEN STOP.

The grains have started their rally already, as I suggested, and will continue to rally into August. Wheat, corn, and soybeans can do very well based on weather and will move up in hopes of a drought.                     

Let me also say that all must be reevaluated on September 30th. The election is an unknown with large risks.

Current Critical Issues:

Geopolitics are the real potential problem for the world. Here are two of them:

1. The veiled threats by French President Emmanuel Macron to send troops into Ukraine (perhaps French Legionnaires?) would be a disaster. Macron has, over the past few months, mulled the dispatch of Western ground troops into Ukraine, saying, recently, in an interview with The Economist, “I’m not ruling anything out, because we are facing someone who is not ruling anything out.”

Russia will target any French troops in Ukraine and has threatened nuclear missiles at France and any other NATO countries who send troops to fight there.

This is a Napoleon complex bet that could end the world.  Yet it’s not discussed in the Mainstream Media (MSM).  Why not?

2. Alarmingly, U.S. President Joe Biden said for the first time on Wednesday that he would halt some shipments of American weapons to Israel if Prime Minister Benjamin Netanyahu orders a major invasion into Rafah in southern Gaza.

“Civilians have been killed in Gaza as a consequence of those bombs and other ways in which they go after population centers,” Biden told CNN’s Erin Burnett in an exclusive interview on “Erin Burnett OutFront,” referring to 2,000-pound bombs that Biden paused shipments of last week.

The U.S. president’s announcement that he was prepared to condition American weaponry on Israel’s actions amounts to a turning point in the seven-month conflict between Israel and Hamas.  It could potentially fracture the 76-year U.S. alliance with Israel. That’s exemplified by this cartoon:

A cartoon of two men holding an object

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Image Credit: Matt Davies/Newsday

Israel will ignore Biden and proceed with a tactical invasion of Rafah in order to destroy Hamas.  Indeed, Israeli forces pushed deeper into Rafah on Sunday and battled Hamas in parts of the devastated north that the military said it had cleared months ago, but where Hamas militants have regrouped. 

Rafah is considered Hamas' last stronghold. It is also the last refuge in Gaza for more than a million civilians. Some 300,000 Palestinians have fled the city following evacuation orders from Israel, which says it must invade to dismantle Hamas and return scores of hostages taken in the Oct. 7 attack against Israel that sparked the war in Gaza.

The Israel Defense Force (IDF) announced that it has opened a new crossing to bring humanitarian aid into the famine-stricken Gaza.  The Israeli military announced in a Sunday press release the opening of the "Western Erez crossing" between Israel and northern Gaza in coordination with the U.S.

According to the IDF, the new crossing is located west of the Erez crossing, closer to the seashore. The crossing was constructed by the Israeli military "as part of the effort to increase routes for aid to Gaza, particularly to the North of the strip."

Victor’s Conclusions:

If Israel does not destroy Hamas, the October 7th attack will happen many times over by the enemies of the Jewish state (e.g. Iran and it’s Islamic Jihad proxies).

Once again, the U.S. is again telling another sovereign nation (Israel) what to do and is more than overstepping its authority.

This seems to be an obsessive-compulsive-reflexive-imperative mania to overestimate U.S. power and influence while underestimating its most important allies like Israel!

It is yet another example of what you see from the U.S. government today-- extortion, bribery and using the threat of force to CONTROL AND RULE THE WORLD.

End Quote:

“The only way to deal with an unfree world is to become so absolutely free that your very existence is an act of rebellion.” Albert Camus


Be well, success and good luck. Till next time……………….

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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