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WEEK AHEAD

May 20-24, 2024

Tactical Signal 9

Following another week of solid gains, our technical indicators reside comfortably at these support levels, allowing it to maintain a fully invested position (100%).

Equity averages reached new highs as the Dow Jones broke through 40,000 on the sentiment of cooling inflation and eagerness for the Fed to start cutting interest rates sooner rather than later. Last week's economic news, particularly April's Consumer Price Index (CPI) report of 0.30%, instilled confidence in investors as it hinted at a potential slowdown in inflation. This, in turn, has alleviated investor concerns about monetary tightening by the Fed. A possible "soft landing" – where the economy experiences continued growth without excessive inflation – is now back on the table, boosting investor confidence. Although in April, equities dipped by over 4%, the S&P 500 and Nasdaq composite have since regained and surpassed the earlier losses by gaining +5.43% and +6.65%, resulting in YTD gains of 11.80% and 11.47%, respectively.

 A brief look back at what helped the Dow 30 reach record levels has much to do with the underlying components and the reconstitution of the index, much like the S&P 500:  

·       In 2024, Amazon replaced Walgreens Boots
·       In 2020, Amgen, Honeywell, and Salesforce replaced Exxon Mobil, Pfizer and Raytheon
·       In 2015, Apple replaced AT&T

 Source: Kwanti Analytics

But on a YTD basis, the Dow still lags the S&P 500 on a head-to-head basis because the Dow has approximately 18% in Technology vs. 30% for the S&P 500 and 23% in Financials vs. 13% for the S&P 500.

With 168 days to the US Presidential election, campaign activities and rhetoric will deluge headlines. The market is expected to focus on a soft week of investor news as it awaits the forthcoming interest rate decision on June 11-12, when the FOMC holds its next meeting. Any hint of inflation from the economic landscape will come from the upcoming Durable Goods Orders and weekly jobless claims. The week ahead will focus on corporate earnings with a notable player, NVIDIA, reporting and the bellwether expectations surrounding AI. While the markets demonstrated resilience, this QTD, the blend of strong corporate earnings and tempered inflation concerns suggests a cautiously optimistic outlook. Investors should stay focused on the long-term as we navigate through this landscape.

"And I just wish everyone in Washington could understand what millions of Republicans and Democrats at the grassroots learned a long time ago: You can't drink yourself sober; you can't spend yourself rich; and you can't prime the pump without pumping the prime."

– President Ronald Reagan, Remarks at a Meeting With Republican Congressional Candidates, October 6, 1982

It's Not Egg-flation; It's Auto Insurance-flation…

Auto Insurance

In the early days of this past inflation spike, many people pointed to the rise in egg prices as the prime example of rampant inflation.  Sure, there were many other sources of inflation, none more impactful than the massive COVID stimulus and the supply chain kinks caused by the Ukraine-Russian war.  However, when you turned on the TV, the eggs got most of the attention and outrage. Consumer Price Index (CPI) Inflation jumped to over 9.1% in early mid-2022.  The most significant contributor to the massive jump in CPI in those early days was the spike in oil prices and the cost of core goods and food.

But after significant action by the FED, what is keeping inflation stubbornly above the FED's target of 2.5%? 

CPU INFLATIONJP Morgan's April Guide to Markets has a current chart on CPI contributors, which gives us the answer—and it's quite a surprise.

In fact, the chart shows that the root causes of CPI inflation, such as Energy, Core Goods, Food, and Dining, have dropped to zero and even negative for Energy.

Though it still costs a fortune to fill my gas tankmaybe it's a California thing.

A closer examination of this chart shows maybe a slight myth-busting around the current narrative that inflation is in housing or shelter—think higher mortgage rates. However, the largest source may not even have its seeds in the early stimulus and supply chain factors that we highlighted earlier. Surprise, what jumps out is the red section that attributes much of this final persistent inflation to Auto Insurance.

Yup, Auto Insurance! As a father of two children who drive, I know that auto insurance has always been a sore spot when you consider the monthly cost of insuring younger drivers in the family. Quite candidly, the monthly insurance and gas expense is equal to, if not higher than, the cost of the darn car.

What is going on here?  The answer is simple: particularly look to the left and right as you are driving, and it becomes readily apparent that many of the good driving habits of the past are now replaced with riskier driving habits that include driving faster and while texting.  Traffic deaths have been trending up since the pandemic, and the accidents have been more frequent and more severe.  The severity should be a cause for concern.  Add to these other forces, such as higher repair costs and labor shortages leading to higher wages, and you get much higher claims for insurers.  As an aside, one of the most expensive cars to repair and insure is a Tesla, and some rental car companies have taken note.  Lastly, crime and car thefts have been on the rise.  In the City of Los Angeles, recent "monthly reported stolen vehicles" hit the highest since 2010 and are trending higher, the worst being downtown Los Angeles.

While egg inflation has been essentially transitional, it's clear that auto insurance inflation may be more stubborn and will be with us for a while. However, this may be the rise before the fall, as autonomous driving may solve the inherent risks in driving and the current exacerbation caused by texting and multi-tasking while driving.  Let's be careful out there and remember that car insurance bill!

 

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

 

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