The 1995 film Mall Rats depicts two buddies who decide to hang out at the local mall after both being dumped by their respective girlfriends on the same day. (Interestingly, the movie happened to have been filmed at Eden Prairie Center, which at the time had a large number of vacant storefronts making it easy for the producers to set up fake stores; not the case today as the mall appears to be flourishing.) Very much a box office failure upon release, it later became a cult classic as many teenagers from that time could relate to hanging out at their local mall. Brick and mortar retailers were thought to be something of a bygone era when the Covid pandemic hit, however retail sales, both online and in-store, are thriving today thanks to the strength in consumer spending. And with consumer spending now making up over two-thirds of GDP, this strength continues to surprise most forecasters and has helped keep the economy out of a recession.
There seems to be a disconnect between “Main Street” and “Wall Street.” The general American public seem to have no problem continuing to spend money, largely ignoring Wall Street’s predictions of an impending recession and the threat of layoffs. Main street seems to now be giving less credence to many Wall Street predictions, which is probably fortunate since it is consumer spending helping buoy the economy and enable it to continue growing.
The initial reading of first quarter GDP showed growth of 1.1%, well under consensus estimates of 1.9% and the 2.6% growth seen the previous quarter. On the positive side, this indicates the economy continues to grow. But on the negative side, growth is slowing faster than anticipated and we are likely teetering on the brink of a recession. With the economy continuing to expand, the Fed is expected to raise short-term interest rates another quarter of a percent at this week’s meeting. Analysts are currently projecting the Fed will begin lowering rates in the fall but if the economy continues to perform well, inflation may not recede and they could be forced to hold rates high, if not continue to raise them.
Prior to making Mall Rats, writer and director Kevin Smith produced a movie titled Clerks. This film was shot at convenience and video stores where Smith worked in real life and had a total cost to produce of $25,575. Clerks also became a cult classic and is regarded as a landmark in independent filmmaking. The film went on to gross over 4.4 million dollars internationally, not to mention VHS (for those of you who remember what that is) sales beyond that, to give a hefty return on investment. It is this type of success many people try to achieve in the stock market, but it is extremely rare when such outsized gains occur. It is much more prudent to remain patient and disciplined with a long-term investment strategy instead of trying for fast, outsized gains.
April closed out with a bit of a roller coaster in the markets last week. The major indices were able to shake off declines early in the week to end the week slightly higher. This helped propel the S&P 500 to a small gain for the month while the Nasdaq was near unchanged. The month was marked by a fairly muted trading range without much movement in either direction. Markets were supported by positive themes from earnings season especially better-than-feared results from regional banks and large-cap tech stocks. Healthy household spending and a resilient labor market are also themes helping provide tailwinds to earnings and the markets. However, these positive aspects of the market also support the Federal Reserve’s higher-for-longer messaging.
Banking fears resurfaced last week and concern is growing about weakness in other regional banks due to the drop in value of their investment portfolios, fewer deposits and rising delinquencies with commercial real estate loans. There are calls for the Fed to stop raising interest rates since higher rates are negatively impacting the price of bonds held at banks, which reduces the amount of capital available to back deposits. But the Fed finds itself in a difficult position since inflation, while slowly receding, continues to be higher than desired for long-term price stability. With prices rising more than 4% year-over-year combined with GDP only growing at about 1% a year, we once again hear the “s” word – stagflation.
The major event of the week will be the Fed meeting and its policy statement release on Wednesday with the expectation of another quarter percent increase followed by a potential signal of a pause to its hiking campaign. There will also be a flood of earnings reports and it remains to be seen if they will continue to surprise to the upside. Friday will bring the monthly labor reports which are expected to show a slowing in job growth. A slowing labor market could help persuade the Fed to put future interest rate hikes on hold, assuming inflation continues to moderate and decrease.
As an observation, the S&P 500 is enjoying a decent year with the index already higher by 9% year-to-date. Digging into the index, the seven largest growth stocks, which comprise almost 25% of the benchmark, account for a little more than 100% of this gain; meaning the remaining stocks in the index have a combined return of nearly zero, even slightly negative. Generally, this is not healthy breadth in the market and when this has occurred in the past, it was an ominous sign. This leads us to remain cautious but also makes us think if there are further gains they are likely to come from some of the lesser thought-of names. Something we will be keeping an eye on going forward.
Between stress in the financial system, a Fed meeting, and key economic reports, the next couple of weeks are shaping up to be interesting but it is likely to calm down after that. This is the time of year when the weather starts to warm up and many people in this part of the country leave shopping malls to head outdoors. We would not take the advice to “sell in May and go away” literally, but the idea of a quieter summer in the markets may very play out this year.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
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