Bitcoin (BTC= – $63,770.00) touched a record high this week based on a view that global interest rates will soon fall. In many ways, bitcoin is a good illustration of the speculative nature of today’s stock market. According to LSEG data, net flows into the ten largest spot bitcoin funds reached a stunning $2.2 billion in the week ended March 1. The cryptocurrency has soared nearly 160% since October and jumped 44% in February alone. February’s action followed the Securities and Exchange Commission’s approval of 11 spot bitcoin ETFs in late January. Most crypto analysts believe these ETFs should give the current rally a boost. The underlying assumption is that institutional investors are more likely to commit long-term money to exchange-traded crypto products than they would commit to Bitcoin directly. This may prove to be an important viewpoint. ETFs represent a relatively new form of leverage, and the importance of this is that new forms of leverage have been major factors behind every financial market bubble.
Bitcoin is representative of today’s financial markets for several reasons. It has the backing of a new generation of investors and there are no underlying fundamentals. Bitcoin has no assets, earnings, or revenues to analyze, yet it is soaring based upon the belief that it will go higher. Likewise, momentum, liquidity, and leverage drive an equity bubble, not fundamentals.
Housing, Income, and Employment
Fundamentals may not be driving the current market, but it was a week full of economic data. The pending home sales index fell to 74.3 in January from 78.1 in December and remains well below the long-term average of 100. Census Bureau data showed the median price for a new single-family home fell 2.6% YOY in January; and though this may appear to be a negative, it was an improvement over the 13.9% decline reported in December. This data reveals the impact rising mortgage rates have had on the homebuilding industry.
However, the National Association of Realtors (NAR) survey indicated that the median price of an existing single-family home rose nearly 5% in January and the FHFA purchase-only house index showed an even better price gain of 6.6% YOY in December. See page 3. The stability in existing home prices may be due less to increasing demand and more to a low level of inventory, however, homebuilding stocks have been one of the best performing sectors of 2024. One reason for this was the breakout in the SPDR S&P Homebuilders ETF (XHB – $103.44) in late 2023 and the attention this technical chart received on several social media platforms. Price momentum, charts, and social media are important drivers of the new age of investing.
Personal income increased a healthy 4.8% YOY in January and disposable income increased 4.5% YOY. However, real personal disposable income only grew 2.1% YOY, which was the slowest pace in twelve months. Personal consumption expenditures grew 4.5% YOY, which was impressive given the pace of personal income, yet it was the weakest pace in nearly three years. January’s consumption slowdown was predictable since spending had been exceeding income at the end of 2023. But in general, personal income trends appear to be slowing. See page 4.
The slowdown in consumption resulted in a modest increase in the savings rate, which inched up from 3.7% to 3.8% in January. Last month we pointed out an interesting trend in government workers’ wages. It continued in January. Government wages grew at an 8% YOY pace whereas most other sectors experienced wage growth of 4% to 6%. This disparity in wages between government and private workers is historical! See page 5.
January’s relatively low consumption pace was also due to an increase in personal taxes, which is typical of the first quarter. Also weakening household consumption is the massive jump in personal interest payments which has been a direct result of rising interest rates. An additional negative for households is the fact that government transfer payments are no longer supporting income. For all these reasons, Friday’s payroll data will be noteworthy. The household survey had a sharp decline in job growth in January and we will be looking to see if this was a one-off event or the beginning of a trend. This could be important since the household survey captures many lower-income workers that are not included in state payroll data. For this reason, it is often a leading indicator of employment trends. See page 6.
The ISM manufacturing index fell from 49.1 to 47.8 in February with six of its ten components falling, or remaining, below the 50 breakeven level. The ISM nonmanufacturing index rose from 55.8 to 57.2, with four of its nine components registering below 50. It was also notable that both surveys show employment contracting in February, with the manufacturing index at 45.9 and the nonmanufacturing index at 48.0. This could be an omen for future jobs data and therefore personal income. See page 7.
The best piece of economic news in the past week was the PCE deflator for January which eased from 2.6% YOY to 2.4% YOY. Core PCE edged down from 2.9% to 2.8%. The stock market celebrated this report since it supports the view that inflation is slowly decelerating and if so, interest rates may soon decline. With this in mind, February data for the CPI and PPI will be released next week and both could be market moving events. See page 8.
Fundamentals and Technicals
The S&P 500 trailing four-quarter operating multiple is now 23.5 times and well above all long- and short-term averages. The 12-month forward PE multiple is 21.4 times and when added to inflation of 3.1% sums to 24.5. This is well above the top of the normal range of 23.8 and it helps to explain why equities are hoping to see inflation fall to 2%. By all measures, the equity market is at valuations seen only during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. See page 9.
Conversely, technical indicators improved this week. The S&P 500 and Dow Jones Industrial Average have continued to make a series of new highs while the Nasdaq Composite index finally rose above its November 2021 high of 16,057.44 on March 1st. The Russell 2000 also definitively broke above the 2000 resistance level for the first time in two years. As we have been stating in recent weeks, this move bodes well for the overall equity market. However, the Russell 2000 remains 16% below its all-time high of 2442.74 made on November 8, 2021. See page 11. But in line with the Russell index, the NYSE cumulative advance/decline line made a record high on March 1. Most technicians are stating that the market is overbought, but our 25-day up/down volume oscillator is at 1.18 and neutral this week. This indicator is based on volume, not price, and as such, it reveals the conviction behind price moves. Our oscillator has not come close to recording an overbought reading since the 22 of 25 consecutive trading days of overbought readings that ended January 5. This means volume in advancing stocks has not been impressive and the indicator is yet to confirm the string of new highs seen in the S&P 500 index and Dow Jones Industrial Average in January, February, or March 1st. To confirm the current advance, this indicator needs to reach and remain in overbought territory for a minimum of five consecutive trading sessions. In sum, we remain cautious.
Gail Dudack
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