Walmart is happy with its Internet customers

Stocks traded higher yesterday after debt ceiling sentiment shifted from negative to… slightly less negative. Housing Starts rose while leading indicator Building Permits fell, a mixed but possibly negative message.

Say what you will. While the rate debate rages on, stock and bond investors are quietly positioning for where they expect markets to be later this year and beyond… but not too far beyond. While I have been searching and searching, I can’t seem to find any definitive quantitative indicator that a recession will be in the offing later this year. However, the chatter amongst industry experts has definitely picked up – for what that’s worth. I can point to a nice assembly of economic forecasts from a rather sizable number of large institutions (compliments of my friends at Bloomberg), and they place a 65% chance of a recession in the next 12 months. To put that in context, that probability has remained around there since December of last year. However, that probability was just 30% a year ago.

What do the boys and girls over at the Fed think? Well, we won’t know exactly until they release their next official report next month. Some have been so bold as to say that a “mild” recession may occur later this year, but for the most part FOMC members are smart to avoid making public predictions. The Atlanta Fed has this unique tool called GDPNow. It uses AI to project the next quarterly GDP release and it is generated daily. Now, I use similar home-baked models, and they are pretty accurate for the most part, but they have some flaws. Foremost, they are only accurate in predicting time in the near future. Kind of like seeing a low hanging chandelier in time to duck before receiving a bonk on the head. Investors, even the most nervous ones, have a 6-to-9-month window. It would be nice to find out where the economy would be during that window, but alas, this model does not handle that. Now, there are similar models that look further out, but the problem with those is that they cannot predict wildcard events. Inputs to these models are primarily economic indicators. While some of them may, as a secondary effect, factor in a bank lending tightening, they are likely too derived to have a material impact on the model’s predictions. I bring that up because it is that very lending tightening that has many folks, some FOMC members included, nervous.

Ok, so what is that GDPNow forecast actually good for, then. Well, we can look at the historical path of the predictions and see if there are any trends. You know, are they getting better or worse with time? In that case, I will tell you the model has been on the climb. That means the model is slowly raising its estimates. This should have you wondering. Are the Fed members’ models, due out next month, showing similar signs of improvement? If so, that would certainly support the “higher rates for longer” scenario, which is at odds with Fed Funds futures which have rate cutting in Q4. So, what gives?

Bond markets seem to continue to expect a recession with the inverted yield curve. Further, short-term interest rates have been slowly climbing, indicating that the Fed will keep restrictions tighter for longer. I am ignoring a debt default scenario for now, because… well, anything goes in DC these days. That aside, if the US does slip into a recession, we can certainly count on the hawks retreating to their nests and the doves will take wing. Nobody wants to be blamed for causing a recession. That leaves investors in a tricky scenario. Find stocks that can do well in a recession and that may get a boost if interest rates are lower. Regardless of whether a recession occurs, the Fed is expecting rates to be somewhat lower by the end of 2024. If the US does manage to sidestep that low-hanging chandelier, the equity investors mission gets modified. What stocks can hold their own in a recession and will benefit from lower interest rates… BUT will take off like rockets if there is not a recession after all. It’s your pick. Do your homework and stay focused.

WHAT’S SHAKIN THIS MORNIN’ ☀

Walmart Inc (WMT) shares are higher by +1.88% in the premarket after the company announced that it beat EPS and Revenue estimates by +12.14% and +1.54% respectively. The company also raised its full year EPS and earnings growth estimates. Dividend yield: 1.52%. Potential average analyst target upside: +10.0%.

CISCO Systems Inc (CSCO) shares are lower by -3.86% in the premarket. Though the company beat on EPS and Sales, it announced that orders declined by -23% in the past quarter. The CEO blamed the decline on a stronger prior quarter in which a boom in shipments meant that clients were “absorbing” the new purchases. The decline is consistent with what we have been hearing from others who sell into the enterprise IT space, regardless of “absorption”.  Dividend yield: 3.27%. Potential average analyst target upside: +20.3%.

YESTERDAY’S MARKETS

Stocks rallied broadly yesterday as hopes for a debt ceiling deal rose. The S&P500 climbed by +1.19%, the Dow Jones Industrial Average rose by +1.24%, the Nasdaq Composite Index traded higher by +1.28%, and the Russell 2000 Index jumped by +2.21%. Bonds declined and 10-year Treasury note yields added +3 basis points to 3.56%. Cryptos advanced by +2.89% and Bitcoin climbed by +1.41%.

NEXT UP

• Initial Jobless Claims (May 13) is expected to come in at 251k, lower than last week’s 264k claims.
• Existing Home Sales (April) is expected to have declined by -3.2% after falling by -2.4% in the prior month.
• Leading Economic Index (April) may have slipped by -0.6% after declining by -1.2% in March.
• Fed speakers: Jefferson, Barr, and Logan.
• After the closing bell earnings: Ross Stores and Applied Materials.