Limits of endurance have not really been fully-tested ‘yet’; given breadth is not up-to-par with S&P around record highs, and that’s give back-filling room to persist; and of course along the way there could be a brief April ‘fooling’.However better breadth, something we’ve contended essential to hold up this market, has been developing, and there are money managers cognizant that the stocks they’ve tried to parlay to higher levels are quite stretched. Hence it may well be a feature of the 2nd Quarter that we start to see more small-caps in advancing mode, versus mostly moribund up to now for quite some time.
There is some argument that we don’t need any interest rate cuts; but there is a baked-in perception that we will get that. I think June is most likely. So if so it would help the market navigate a bit of a rocky April; then rally later as we move toward Summer. Then it gets confusing ahead of actual Elections.This is probably the least sticky broad market when looking at smaller-caps, while it’s the most sticky when it comes to the concentration in bigger-caps. It may also be a function of Semiconductor strength overall, and maybe fatigue from stock pickers (I get that) who have capitulated to investing in ETFs… as I have not. The ETF concentration tends to be in high average-daily-volume stocks, and multiples and prices are not inexpensive. Margin expansion very much needed by the leaders, and that’s where revenue growth/GDP matters.
Market X-ray: Finding small-caps that are robust is tougher than Easter-egg hunting; but may find fewer with cracked shells (well being cute; not shell corps. although many were brought public by being merged into just that).Part of the reincarnation of smaller-caps, especially those with compelling or interesting fungible growth ahead (especially in AI and Defense possibly) will be aided by both Federal Spending (which is commanded to be on a diet this go-round, but as usual probably won’t be), and by enthusiasm over Ai, which now is looking for ‘Application Software’ more so than enabling hardware.On the big-cap side, those stocks benefit from enhanced ‘capital spending’ of course; but they are almost all expensive; hence vulnerable to any hiccups.Enjoy your holiday weekend and we’ll see if those shorting the market at this fairly high level for the S&P are April Fools or temporarily seem prescient.
If the PCE comes-in lower (Friday morning 3/29) that would support more of the semi-dovish Fed types, and help offset the worries that higher prices such as I’ve noted for Food & Fuel (Oil rally particularly) will inhibit Fed cut action, at least in the nearer future. I’m tended to think it’s likely in June; not sooner. 
Meanwhile.. we don’t have a peak in breadth, which historically comes before general market tops; especially a so-called broadening-top. There have been approximate patterns like that; but nothing stuck so far.It is Election Year and you do have the prospects of a friendly Fed; almost an assured prospect ‘even if’ PCE isn’t softer; although it may be. PMI strength is a warning in the other direction; but GDP forecasts persist in strength; so of course risk assets love that. Small-caps would love lower rates as much.
Realistically, much of Earnings Growth has been in the so-call Mag-Seven or similar stocks (an AMD is not in Mag-Seven, but fellow traveler for instance). The majority of stocks (big and small) that are interest-rate sensitive, tend to do better in lower-rate environments; so that’s where normalizing the ‘curve’ by the Fed would help.If the Fed does nothing beyond June, it creates more economic woes, and for part of our society that ‘is’ in-recession, it worsens matters. However I doubt that’s the case. Depending on ‘unspoken’ back-chatter, the Fed might lean on easing more than most are expecting, or is even advisable. Politics perhaps.I anticipate job shuffles because of the Baltimore disaster will be addressed in a way that won’t be felt ‘much’ in National statistics (though there will be dislocations for awhile; believing the Corps of Engineers and others will get the maritime traffic ability restored. Of course the bridge (likely to be rebuilt like the one in Tampa Bay after it suffered a similar disaster) will take one or two years minimum to built-out, with temporary solutions ineffective (what will happen is toxic truckloads, that can’t go through the tunnel, will divert with the long-way-around approach… no alternative unless Maryland wants to risk the tunnel too). In any event the U.S. will cope; modest mid-Atlantic disruptions. I cross-fingers you’ll see the Port itself reopened by mid-Summer if not before.
Bottom-line: this report of course was written before the Holiday weekend; and that unusual PCE data release on Good Friday’s morning. As promised, I did a twitter update, where i said “Weekend update: today’s PCE number was a bit higher in ‘core’ but otherwise inline and shouldn’t inhibit the Fed’s intended policy easing agenda. It does affirm my view all year of inflatino not coming down generally; just rising at a slower pace.”Further comment will likely be unnecessary, as I’ve already allowed for some sort of interim stumble in April’s first half, but not disrupting the primary trend. The April Fool’s event could be a fake-out shake-out that recovers thereafter or conceivably the inverse again depending on the PCE number’s impact.More By This Author:Market Briefing for Thursday, March 28
Market Briefing for Wednesday, March 27, 2024
Market Briefing for Tuesday, March 26, 2024
