We are seeing the beginnings of de-risking as for the first time since the election as the S&P 500 has broken below its 50-day trendline, but is still just 3 percent shy of its all-time high, so let’s not get overly carried away here. Volatility, in the form of the CBOE’s volatility index (VIX), rose every day last week and has jumped 24 percent to be at its highest level since November. Meanwhile, those talking heads on mainstream financial media keep focusing on the same thing the herd does – which rarely results in successful investing.
Ten big stocks are exerting an unusually large influence on the S&P 500 in 2017, the latest sign that the herd instinct is alive and well on Wall Street. Those 10 large stocks have powered nearly 53% of the S&P 500’s 4.7% advance this year, according to Fundstrat Global Advisors’ data through the middle of last week. During an average year, the 10 stocks with the greatest impact typically account for only 45% of the market’s price moves, according to analysis of data from AQR Capital Management.
Looking at what has happened with core CPI and PPI rolling over as well as current GDP estimates for Q1, we think it is quite likely that non-financial corporate profits may have contracted in Q1 on a quarter-over-quarter basis while rising on a year-over-year basis thanks to the weakness in Q1 2016. Those CPI and PPI numbers tell us that corporate pricing power just isn’t there, a reality that does not support the narrative of “animal spirits” igniting post-election. Nor is the reality of declining productivity in the face of rising unit labor costs, which serve to squeeze margins.
As for that accelerating economy narrative, it is wholly inconsistent with the data coming out of bank earnings reports with commercial loan balances at J.P. Morgan Chase (JPM) and Wells Fargo (WFC) unchanged over Q1 while new auto loans fell 17 percent at JPM and 29 percent at Wells on a year-over-year basis. Citigroup’s (C) profit from consumer banking in North America dropped 25 percent thanks to credit losses on some credit cards while JPM and WFM consumer banking profits dropped 20 percent and 9 percent, respectively.
