Mixed economic data bring unexpected market reaction

Late last week and earlier this week brought mixed economic data, which was met with a somewhat surprising market reaction. Last week, we saw some worse-than-expected PMI data; earlier this week, we had weak ISM manufacturing data and news of lower-than-expected job openings. The market reacted positively to this data, with bond yields lower and stocks higher. On Friday, we saw a greater-than-expected jobs number for May, showing the economy created 272k jobs, while expectations were for only 180k. The market’s initial reaction was negative to this news.

• The market’s reaction positively to negative economic data and negative to positive economic data tells us the market is more focused on interest rates than the economy
• Weak economic data would naturally lead to slower growth and slower earnings but would also be more conducive to the Fed lowering interest rates
• The market seems to be more focused on the latter than the former
• As it pertains to the health of the economy, the only thing that is clear is forecasts are hard
• It seems to us with continued massive fiscal deficits; the economy is maintaining a moderate pace of growth
• Any “official” recession projections are unlikely any time soon
• However, we do think this means a continuation of the higher for longer regime in interest rates
• This will ultimately weaken the economy, but it may just take a lot longer than expected, given the amount of deficit spending

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Stock market concentration not seen in 60 years.

This week, prominent strategist and author Michael Mauboussin released research that covered, amongst other things, the concentration of the US stock market. His research shows that the top 10 stocks represent 27% of the US stock market as of the end of 2023, the highest level since the late 1950s and early 1960s. The same goes for the top 5 and the single largest stock in the market. The other two peaks of concentration were in the late 1990s and 2007. Both preceded significant market downturns; Michael's assertion is that this isn't necessarily bearish but may be justified given the leaders’ performance.

• We have discussed the market concentration issue often in the past
• Usually, this is not a sign of a healthy market
• However, the bullish case is if the broader market starts to participate, you will see further market gains
• The contra take is with so few companies leading the charge; if trends were to reverse, we could see a downturn
• Our sense is that the more likely case is the market struggles to make significant gains in the foreseeable future as recent leaders struggle to grow at their current size
• This would be negative for the passive investing theme that has become so popular

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Roaring kitty Gamestop drama

While we usually refrain from commenting on such topics, we wanted to offer some context as to the latest twists in the Gamestop/Roaring Kitty drama. As a refresher, when everyone was stuck at home during the early days of COVID-19, many people turned to trading apps like Robinhood to entertain themselves and see if they could make a few bucks. Many people then went onto Reddit to share their wins and losses. One prominent Redditor was Roaring Kitty, who rallied a large community into buying into his bullish view of Gamestop (GME), the video game retailer. Like many retailers, Gamestop has been in secular decline, given its brick-and-mortar business model. Many professional investors (hedge funds) bet against the stock by shorting it. Having discovered this, the Redditors attempted short squeezes, buying the stock, forcing the hedge funds to cover their shorts (by repurchasing it), and further squeezing the price higher. The party ended in 2021, and besides testimony before Congress, we have heard little from Roaring Kitty. A few weeks ago, his Twitter profile became active, igniting a new round of speculation in GME.

• Since there is nothing new under the sun, we wanted to offer some perspective
• During the late 90's internet bubble, we didn't have Reddit, but we had Yahoo message boards
• Investors would hype up penny stocks (mostly worthless companies) with false promises of big gains
• While this went on for a while, it ended in tears for most of them
• The current situation, while different, is similar
• Gamestop is a secularly declining business, just today reporting declining revenues and losses while taking advantage of the newly hyped stock price to sell 75mm shares, diluting everyone involved
• Investors hoping to profit from the situation are speculating at best and gambling at worst
• We would urge all those following this situation to exercise extreme caution

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