Weighing The Week Ahead: Why Are Stocks Stuck In Neutral?

The economic calendar is normal, with an emphasis on inflation data. The week will begin with analysis of the annual Berkshire Hathaway meeting, the wisdom of Buffett and Munger, and a multi-hour CNBC program including Warren Buffett, Charlie Munger, and Bill Gates. While the questions will range widely, the punditry will soon turn to the mystery of the moment: Why are stocks stuck in neutral?

Last Week Recap

In my last edition of WTWA I asked whether the avalanche of economic data would send interest rates higher. That was part of the discussion, particularly around the FOMC announcement. At the end of the week, Elon Musk stole the headlines. Friday’s trading seemed to leave pundits bewildered. The reports on the economy were fine, but not super-strong. Inflation expectations and interest rates did not change.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. I especially like the version updated each week by Jill Mislinski. She includes a lot of valuable information in a single visual. The full post has even more charts and analysis, so check it out.

While the market was unchanged for the week, once again there was action along the way. The trading range was about 3.2%. I summarize actual and implied volatility each week in our Indicator Snapshot section below. As you can see, volatility has been moving lower.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

The Good

Rail traffic remains strong. Steven Hansen’s focus on “intuitive sectors” and year-over-year rolling averages filters out some noise and illustrates the recent growth spurt. Calculated Risk is even more enthusiastic, calling it the “best April ever” for intermodal.

Corporate earnings continue to exceed expectations. This is especially interesting because of the unusual pattern this quarter. Expectations were not reduced significantly before the reports. These are true surprises. FactSet calls it the highest beat rate since they began compiling data in 2008.

Investor sentiment is “less bullish” reports David Templeton (HORAN). He provides a nice summary of several sentiment indicators. Here is a chart of one you seldom see, the net exposure of active investment managers. It has declined from a high of 120 (leveraged long by 20%) to 52.6 (nearly neutral). Some managers are 100% short.

Employment shows continuing solid gains. The market reaction seemed to confirm a “Goldilocks” report – continuing strength, but not enough to stimulate an aggressive Fed reaction.

Layoffs have also been lower – 40% in April. (Challenger Gray and Christmas via GEI).

Jobless claims remain at record lows, with the streak of readings lower than 250K now at 24 – longest since 1973. (Bespoke).

Unemployment falls to 3.9% but wage growth remains weak (Dean Baker).

The Bad

Oil prices have moved higher. New Deal Democrat notes this move as part of his regular update of high-frequency indicators. Most of these remain neutral to positive. New Deal Democrat notes this moveWSJ Energy Journal.

Gasoline prices increased again – ten cents in the last two weeks. Some, but not all, of this is seasonality. Re-imposition of Iran sanctions would push this recent trend further. (GEI).

ISM manufacturing and services indexes both missed expectations, although the readings remain high. (Bespoke).

Pending home sales increased in 0.4% in March, but declined 3.0% y-o-y. (Calculated Risk).

The Ugly

Huge ER bills for little or no treatment? $5000 for an ice pack and a firm statement refusing further care? This is a problem that deserves attention. (Vox).

The Noteworthy

The Visual Capitalist always has informative and stimulating charts. For those in the US, this is an especially important source of perspective. Could you have listed the top ten languages? The top five?

The Calendar

The economic calendar is normal, with an emphasis on labor markets and inflation data. Earnings season continues, and Fed members will be on the speaking circuit. If the week is like those from recent months, a surprise event may well claim the spotlight.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

The week begins with a post-mortem on the BuffettFest, so expect a start with some good advice about value investing. This will not last long, since it provides little grist for the daily demands of financial media. The recent market mystery compares a market in neutral with a streak of (apparently) good news. I expect pundits and financial writers to be asking: Why are stocks stuck in neutral?