We have seldom been in a time where there has been so much confusion and uncertainty about the US economy. We came into 2024 with the Conference Board leafing indicators having suggested a recession on the cards and then saw that annual economic growth had been around 3%. More recently the two surveys for the labor market numbers have completely different numbers with the Establishment survey hitting the headlines with strong jobs growth and the Household one showing a loss of 408,000 jobs.
Meanwhile there is another sign of things being rather bubblicious.
The Magnificent 7’s share of the S&P 500 just hit another all-time high of 32%. This is 12 percentage points higher than at the beginning of 2023.
The weight of these 7 stocks in the index has almost DOUBLED in just over 4 years. This comes as the 3 largest stocks, Apple, Microsoft, and Nvidia, are all officially worth over $3 trillion.
Meanwhile, the technology sector just hit another all-time high relative to the S&P 500. Tech is becoming even more dominant. ( The Kobeissi Letter )
So the US stock market is booming as long as you are invested in the magnificent 7 and indeed these days the top 3. Or as De La Soul put it.
ThreeThat’s the magic numberYes, it isIt’s the magic numberSomewhere in this hip-hop soul communityWas born three: Mase, Dove, and meAnd that’s the magic number
Talk is even beginning about which of the three will be the first to pass US $4 trillion in market capitalisation. For those wondering the Twitter vote went in favour of Nvidia. But there are begged questions in how for example a company the size of Apple with analysts crawling all over it can do this like it did this week?
• Shares jumped 7.2% •
Closed at record-high $207.15 •
Added $215 billion in market cap ( @MorningBrew )
That is more like a penny stock than a market leader. That will be larger than the daily move in many national markets. That is before we get to this element of what is going on.
Apple to ‘Pay’ OpenAI for ChatGPT Through Distribution, Not Cash
The iPhone maker isn’t paying OpenAI to use the chatbot. ( Bloomberg)
This is one of those awkward things because every warning looks silly as the markets rise until they stop at which point things may reverse so fast most cannot get out.
There is another side to this which is troubling and again it is rather different to the consensus view. There are genuine economic changes here as we will be seeing what central bankers love which are Wealth Effects. Some will have sold their shares and made decent and perhaps large profits which we can add to the economic activity generated by the companies themselves. So it was not a surprise to see Isabel Schnabel of the ECB rather ruing the European Union’s performance in this area on February 16th.
At the turn of the millennium, Europe was operating at the global technological frontier, but today many euro area firms are laggards. Compared with many of their global peers, they invest less in both physical capital and research and development, and they are less productive.
The problem as so often is that we have a central banker chasing what has happened rather than looking ahead. Also it would appear that the ECB cannot stop itself as its working paper at the start of May had a sensible warning.
Furthermore, widespread AI adoption may harbour the potential for increased herding behaviour and market correlation.
But then concluded that the solution was more ECB! Completely ignoring its role in the European under performance.
Should concerns arise that cannot be tackled by the current regulatory framework, targeted initiatives may need to be considered.
In a nutshell we have an explanation for European Union under performance but returning to my theme of the day one of the reasons why the US economy has done better. It is just that what has in the past been labelled as “irrational exuberance” looks to be in play with the consequent risks.
The Federal Reserve
We can look at things via the words of Chair Jerome Powell at this week’s press conference and this stands out after the above.
We are maintaining our restrictive stance of monetary policy in order to keep demand in line with supply and reduce inflationary pressures.
What it tells us I think is that one of the growth parts of the US economy is affected very little by higher interest-rates. Apple does borrow as I recall it being able to borrow at negative bond yields at one point. Is it still benefiting from the cheap debt provided by the central bankers? That would be really rather awkward. Also its cash reserves ( US $67 billion as of March) will be earning interest.
Next up we see a sort of having one’s cake an eating it.
Although GDP growth moderated from 3.4 percent in the fourth quarter of last year to 1.3 percent in the first quarter, private domestic final purchases, which excludes inventory
investment, government spending, and net exports and usually sends a clearer signal on underlying demand, grew at 2.8 percent in the first quarter, nearly as strong as the second half of 2023.
The headline figures were just fine when they showed at answer we liked but now they do not we prefer our own numbers! It shows rather a contempt for listeners when they have just so spectacularly got things wrong via this sort of analysis.
Plus there is rather a swerve on the inflation front.
Inflation has eased substantially from a peak of 7 percent to 2.7 percent but is still too high.
That sort of analysis omits that the 2.7% is on top of the 7%. You could say we see the same about what we would call the labour market.
But you’re right to point to the last report where there was your job losses and ( he means in the) household survey, job gains big job gains in the establishment survey. So, I mean, we’re left with ambiguous results, and we have to
deal with that uncertainty around data. Nonetheless, the overall picture is one of a strong and gradually cooling, gradually rebalancing labor market.
He has been forced to address the obvious consistency in the two surveys but ends up stating the picture is strong and thus ignoring it. This states a position rather than saying in my opinion which is very different as again he is picking the numbers to suit his narrative.
Treasury Secretary Yellen
Speaking of narratives we are supposed to believe.
“If the debt is stabilized relative to the size of the economy, we’re in a reasonable place,” Treasury Secretary Janet Yellen told CNBC in a live interview. “The way I look at it is that we should be looking at the real interest cost of the debt.”
It is interesting to see CNBC joining in the public framing of the numbers i.e omitting the holdings of the Federal Reserve. How many central banks would they do that for?
The public share of the national debt as a share of GDP is running at about 97% but is expected to soon top 100% at current spending rates.
Comment
I thought that today I would look at some of the challenges for the US economy. However it is also true that the growth push of last year or circa 3% leaves it in a stronger position that Europe, the UK or Japan. Yet spinning around again how many of the gains of “3 is the magic number” reach Joe or Joanne Six pack?