If you own a business that is part of the traditional mainstream of any industry, you will probably be very skeptical of any innovative upstart that enters your world. Not all upstarts are disruptors, but some are, and a few are legendary. For example, in 1994, Amazon.com, Inc. (AMZN – $226.65) led by Jeff Bezos, began a new online marketplace for books and soon became a massive disruptor to traditional bookstores. Not only did Amazon deal a major blow to Barnes and Noble (founded in 1873), but over time it changed the entire retail industry. Change is not easy for anyone. I remember being upset when the Borders bookstore closed in my neighborhood in 2011. Borders was a special place where I could take my young son on a Saturday morning, and he could peruse Manga (Japanese comic books) while I sipped a cappuccino at the instore coffee bar. I was an early skeptic of Amazon. Nevertheless, I am now an Amazon Prime member. Technology has and continues to change many industries, and artificial intelligence will take this to another level. In the end, bookstores have faded away, just like Blockbuster, the video store chain ended when streaming became available. It is impossible to say right now, but technology may also be changing politics.
President Trump has always been a disruptor. But in his second term, Elon Musk, and his expertise in technology, artificial intelligence, and business, may become a true disruptor of the political scene as we know it. By combining modern technology and business acumen to find redundancies, fraud, and dark pools of money in the political system, we wonder if Washington DC will ever be the same. Transparency of government money flows has been absent for generations and Washington DC is bereft of modern software systems and people who know how to use them. So, Elon Musk, by posting his findings on the DOGE website, is educating the voting public of the inner workings of federal agencies. This may be why we are seeing so much head spinning and uproar in the federal government this week. However, if this disruption actually results in reducing the federal deficit and making the government more efficient, we cannot imagine how anyone could be opposed. Nonetheless, it will mean many career federal workers will lose jobs and we doubt that they will go quietly.
The stock market has clearly taken the worries about tariffs in stride. The S&P 500 index scored a record high this week, and most of the other popular indices, including the Russell 2000 index, are not far behind. See page 11. Our 25-day up/down volume oscillator is at 2.77 and closing in on an overbought reading. In this indicator an overbought reading that lasts a minimum of five consecutive trading days or more, confirms a new high. What this would signal is that volume is supporting higher prices. See page 12. Last week’s American Association of Individual Investors (AAII) survey indicated that bullishness fell 4.9% to 28.4% and bearishness rose 4.4% to 47.3%. Bullishness has declined 15% in the last three weeks and bearishness has increased 18%. These numbers are close to a bull/bear split of 20/50 which is rare and favorable. The 8-week bull/bear is minus 2.6% and neutral but closing in on a positive reading of minus 7.0%. See page 14. In short, the technical backdrop of this stock market continues to be favorable.
Conversely, valuation is not supportive of equities, but this is not new. Momentum, hope, and sentiment have been overruling valuation for two years. The SPX trailing 4-quarter operating multiple is 25.8 times, and well above all long- and short-term averages. See page 9. However, we have noticed that analysts have been raising their 2024 earnings estimates as fourth quarter earnings season ends but simultaneously lowering estimates for 2025 and 2026. Fears of economic slowdown and higher inflation as a result of tariffs appear to be the underlying cause of earnings forecasts falling, but we believe this is overdone. If we are correct, there will be positive earnings surprises on the horizon and that should support equities. See page 10.
Recent inflation data was unfriendly, but the consensus has already shifted to no Fed rate cuts for the near future, so this did not impact financial markets. Headline CPI rose from 2.9% YOY to 3.0% YOY and core CPI increased from 3.2% YOY to 3.3% YOY. Owners’ equivalent rent remains high, but it did inch down from 4.8% YOY to 4.6% YOY. The areas of concern in January’s report were transportation, which rose 1% over the month, and 3.2% YOY, and eggs, which are now in short supply due to the avian flu. The index for meat, poultry, fish, and eggs soared to 6.1% YOY in January, up from 4.2% YOY in December, but egg inflation should be temporary. For January, food at home rose 1.9% YOY (up 0.1%), but food away from home fell to 3.4% YOY (down 0.2%). See page 3.
Service sector inflation is slowly ratcheting lower, but it remains high at 4.2% YOY. Services less rent of shelter was 3.9% YOY, down from 4%. However, most core indices have been trending up, not down in recent months. One of the Fed’s favorite inflation benchmarks is all items less food, shelter, and energy, and it rose to 2.3% YOY, up from 2.1% YOY in December. See page 4.
The PPI indices had relatively small changes in January. The finished goods index was 2.9% YOY, up from 2.8% YOY, and core finished goods rose 2.2% YOY down from 2.6% YOY. PPI final demand was 3.5%, unchanged from December, but still at the highest pace since February 2023. The main issue regarding these benchmarks is that rising inflation indices also mean the real fed funds rate is falling, leaving the Fed no room to lower rates. Unless inflation data improves in coming months, the consensus view could shift from Fed rate cuts to Fed rate hikes in 2025. See page 5.
January retail sales were solid. Advance estimates for total retail and food services sales for January 2025 were $723.9 billion (seasonally adjusted), down 0.9% on a monthly basis, but up 4.2% YOY. Total sales excluding motor vehicles and parts were up 3.7% YOY and excluding autos and gasoline stations were up 3.9% YOY. Motor vehicle & parts dealers rose a solid 6.4% YOY and gasoline stations increased 2.0% YOY. General merchandise store sales increased 3.7% YOY (an acceleration) and nonstore retailers rose 4.7% YOY (a deceleration). See page 6.
Industrial production rose 0.5% in January following an upwardly revised 1% gain in December. The overall industrial index rose 2% YOY. Manufacturing output rose 1% YOY and mining production rose 3.4% YOY. Utilities output, which can be volatile and weather-dependent, rose nearly 7% YOY. Overall, total capacity utilization rose from 77.5% to 77.8% YOY – the highest since August 2024 – and is back in line which levels seen prior to the pandemic. See page 7. Retail sales and industrial production reflect a healthy level of consumption and an expanding economy; however, the housing market is showing some signs of weakness. After three consecutive months of improvement, the pending home sales index fell from 78.5 to 74.2 in December. The National Association of Home Builders confidence index for February also fell for the first time in seven months, dropping from 47 to 42, with the greatest weakness seen in the expected sales over the next 6 months, which declined from 59 to 46. High mortgage rates are one of the reasons President Trump is lobbying for lower interest rates; but this is out of his control. Meanwhile, the housing sector may be slowing.
Gail Dudack
PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.
