Short Interest

June 1, 2024

War is an ugly thing, but not the ugliest of things: the decayed and degraded state of moral and patriotic feeling which thinks that nothing is worth a war, is much worse. A man who has nothing which he is willing to fight for, nothing which he cares more about than he does about his personal safety, is a miserable creature who has no chance of being free, unless made and kept so by the exertions of better men than himself.

John Stuart Mill

Goodmorning, and welcome to the Weekender for Saturday, June 1, 2024. This will be a particularly short issue. As we closed the month of May on Friday, equity markets, as measured by the S&P 500, were essentially flat, with a modestly lower bias. For May, the equities were higher by 4.8%, putting in a remarkable showing on a year-to-date basis of 10.6%.

S&P 500 Index Levels

(Source: Bloomberg)

At the beginning of the year, broader market indices seemed to keep pace with the Magnificent Seven, but that scenario was short-lived. The Magnificent Seven are higher, year-to-date by 24.9%. Stunning. We are concerned that gains in the S&P 500 are being disproportionately influenced by a small group of large companies, setting up a potential downdraft when fortunes turn. Market pundits predicted that if Nvidia’s first-quarter earnings were strong, equity markets, broadly, would gain strength and continue to rise through the rest of the year. Nvidia blew away analyst estimates, and their shares responded. Since the beginning of May, the S&P 500 has increased by 4.8%, while Nvidia jumped 26.8%.

Year-to-Date Returns for Magnificent Seven (Blue) and S&P 500 without Magnificent Seven

January 2, 2024 - May 31, 2024

(Source: Bloomberg)

On the economic front, several data releases confirmed a few crucial narratives about the US economy. Let’s revisit them in a staccato fashion. Inflation is mildly softening. The Federal Reserve’s primary inflation indicator is the Core Personal Consumption Expenditure or Core PCE, which showed prices rose in April by 2.7, compared to last year. It was dead on economist estimates, and despite being higher than their 2.0% target, it’s the seventh month in a row with a two-handle. The data on a month-over-month basis showed the slowest increase this year. When adjusted for inflation, consumer spending accounts for almost 70% of US economic output, which fell by -0.1% in April compared to last year, suggesting that the consumer is turning tepid.

Economic and earnings data, especially for retailers show a bit of schizophrenia. But digging in deeper reveals a powerful bifurcation in consumer behavior. Low—and middle-income earners are beginning to show meaningful stress, resulting in a pullback. In aggregate numbers, lower income belt-tightening has been offset by the profligate behavior of the wellheeled. James Knightly of ING notes that consumers with the top 20% of incomes spend as much as the bottom 60%, and things look pretty dicey at the bottom.

We expect retailers catering to lower-income consumers will have a challenging year ahead. Lower inflation will make a challenge compared to last year, especially with growth. While inventory levels have moderated among retailers with high product turnover, in aggregate, the wholesale to retail inventory levels remain much higher than they were pre-pandemic. Steep discounts will be necessary to clear this glut. Meanwhile, theft, or shrinkage, if we use the kinder and gentler term, continues to be a significant problem. Recent data suggest consumers continue to prioritize necessities over discretionary items, which tend to generate much lower margins.

Next week, we will dive deeply into equity and bond valuations.

Conclusion

That’s is for this very short Weekender. Have a wonderful week. If you have a moment, remember that June 6 is the anniversary of D-Day. Its been eighty years.

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