SPX Record Highs: Every Time Is Different

The S&P 500 indeed set a new record closing high and all-time intraday high on Monday. It's different this time because it's different every time, otherwise we'd have a more colloquial phrasing of "same time", which we obviously do not.  

The index nearly hit 2,950 before pulling back a bit into the closing bell and ahead of a key earnings report from Alphabet Inc. (GOOGL).  The Internet search and display ad mega-cap company easily beat on the bottom line, but revenue in its ad business segment slowed more than expected.  Shares of GOOGL are down nearly 8% ahead of the market’s open on Tuesday.  The impact from GOOGL is likely going to weigh on the tech-heavy Nasdaq (NDX) Tuesday, but that won’t likely detract from the major averages producing 4 straight months of gains. We’ll get to that in a moment.

The markets have been responding, all year long, to the better than expected economic data, capped with last week’s release of a 3.2% Q1 GDP result.  With growth better than expected, it has also come with a lack of inflation as recognized in the latest release of Personal Consumption and Expenditures data (PCE).  The PCE is the measure of economic inflation most widely used by the FOMC in their policy rate decision-making exercises.

Consumer spending surged in March, adding to the sense the economy is on strong footing, while core inflation weakened, government figures show. Spending jumped 0.9% in March after a 0.1% gain in February. This was the largest monthly gain in almost ten years. Again, this is MoM, which should be anticipated after a harsh winter that found consumer spending in “snap back” mode. Year over year, consumer spending is up 2.9%, and is the prime factor driving GDP.

The closely followed core PCE inflation was flat in March, knocking the yearly rate down to 1.6% from 1.7%. This is the lowest rate since September 2017.  Personal incomes, meanwhile, increased 0.1% in March and remained on a moderate growth path.

Income was subdued. The scant 0.1% gain in March follows a 0.2% gain in February and a 0.1% fall in January. Most of the weakness in personal income was in categories like interest and farm income. Private wages & salaries now comprise 42.7% of total personal income, a cycle high, rising about 4.2% over the last year.  Year over year, personal income is up 3.8 percent. Disposable income was flat in March.

As a result of the boost in spending and low income, the savings rate fell to 6.5% in March, which is the smallest since November. The savings rate has averaged 6.9% since February 2013.

You might recall from Morgan Stanley’s analysts notes back in mid-April that the firm was of the opinion that rising wages coupled with a higher savings rate would curtail economic activity in 2019. This would also likely perpetuate an earnings recession. Finom Group (for whom I am employed) tackled these varied calls from Adam Virgadamo in the report titled S&P 500 Q1 Earnings Are Disappointing Bond Investors. (subscription needed)

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