Capital markets perspective: Rinse & repeat

Capital markets perspective: Rinse & repeat


Last week’s events called to mind a pair of historical analogs that transported me back in time: one to the heady days of the Internet boom, and another all the way back to the 1980s.

Let’s start by first setting the dial on the wayback machine to the 1980s. If you lived through that period, a few memories probably come to mind: glam metal, the mullet, cruising the mall, neon leg warmers, that kind of thing. But if you were at all in tune with economic happenings of the day, you might also remember these: stubborn inflation, uncomfortably high interest rates, technological upheaval, a hollowing out of an entire layer of middle management, and economic angst, to name a few.

It turns out that almost all of these – even the mullet – are making a comeback. Some of them, like elevated interest rates and economic uncertainty, are obviously apparent. Others, like stubbornly high inflation rates that seem reluctant to fall even after (thankfully enough) backing down from once-in-a-generation highs, are equally well-known, so I’ll defer on those, too. 

But over the last several weeks, I’ve run into a few reminders of that angsty period that are just too eerie to pass up, including this one, from Bloomberg: Whether its ordinary cost-cutting or the advent of AI, middle managers are being let go at a much faster pace than they have they in recent years and now comprise almost a third of job cuts at American firms.1 If you lived through the 1980s, this was part of the experience when the “efficiency culture” was taking hold.

Next stop: Let’s reset the wayback machine to the late 1990s and revisit the Internet hype that defined the era. Those who read this Perspective regularly will by now understand how I feel about AI: Transformative? Yes. Positive and productivity-enhancing? Yes (well, probably...). But, just like the World Wide Web three decades ago, also over-hyped, at least for now.  Like all new technologies that aspire to remake the global economy, the coming wave that is AI will create wealth but also leave others in the dust. Sorting out who will win is tough business, best left to the competitive economy. 

In the meantime, I’ve been eyeing Reddit’s initial public offering (IPO), which came public on Wednesday at a price of $34 per share and was trading at more than $54 by the end of the day – the kind of one-day gain that feels uncomfortably familiar to those who remember dot-com IPO craze.

Accounts of the stock’s first-day gains were quick to point to executives’ claims that the company’s trove of “human experience, organized by topic” makes it an ideal training ground for large language models, the current iteration of AI that is transforming the world. How a company like Reddit would successfully monetize it remains to be seen, but for now, markets seem more than willing to give the company the benefit of doubt. 

I suppose the real message in these two nostalgic anecdotes is this: They provide a simple reminder that almost all economic phenomena are cycles – even if the specific details evolve (replace “PC” with “AI,” for example). The peaks may be higher and the valleys may be lower, but in the end, the cycle always swings back around, and the cycle always wins. 

... Which is a great segue to our final stop on this week’s tour: Wednesday’s Federal Reserve decision. The Fed decided to keep rates unchanged for a fifth consecutive meeting, and the post-decision commentary was closely aligned with market expectations. 

 Chairman Jerome Powell strongly hinted that the Fed might be in a position to cut rates three times this year – a view generally endorsed by the “dot plot” released inside the staff economic projections2 – which markets generally found to be dovish. But again, what was more interesting to me was the appearance of yet another cycle in the Fed decision and the market’s reaction to it (this one of a much shorter frequency, but still a cycle nonetheless). Here it is: 

Step 1: Fed holds rates steady 

Step 2: Market hears the same thing it’s been hearing since last summer, but now finds it dovish and therefore reassuring 

Step 3: Treasury yields fall 

Step 4: Stocks rally moderately 

Rinse, recycle, repeat. 

What to watch this week

Last week’s housing data was generally upbeat: builder sentiment ticked higher,3 a weather-related surge in housing starts provided hope that the inventory situation might improve soon,4 and existing home sales surprised to the upside.5 But the real issue remains affordability, with mortgage rates lingering in the mid-6% range and prices staying stubbornly high. We’ll get to see whether there has been any relief on the pricing front on Tuesday when we get two separate reads on home prices. If that translates to higher home turnover, it will eventually become evident in releases like new home sales (expected on Monday), and pending home sales, due Thursday. A recovery in housing would go a long way toward improving the economic mood.

The consumer will also be back in focus, with two separate looks into consumer attitudes – the Conference Board’s consumer confidence index on Tuesday and the University of Michigan’s consumer sentiment index on Thursday. Friday will also bring the income and outlays report, a detailed look at how much Americans are earning, spending and saving. The income and outlays report is particularly useful as a cross-check against other consumer-related data like retail sales, which has recently shown signs of weakening.

On the productive side of the economy, we’ll get the next few installments of regional Fed manufacturing data, including Dallas on Monday, Richmond on Tuesday and Kansas City on Thursday. So far, this month’s manufacturing data have been mixed: Last week’s flash Purchasing Manager’s Indices were moderately upbeat, with manufacturing activity continuing to expand even as inflationary pressures remained stubbornly entrenched.6 Meanwhile, it was the Philly Fed’s turn to surprise to the upside, while Empire tanked.7,8 Unless this week’s regional Feds show signs of aligning in one direction or the other, it will get harder and harder to determine whether manufacturing activity is a contributor, or a net drag, on economic growth.

Meanwhile, watch Friday’s retail and wholesale inventory data for any signs of a pickup in inventory-to-sales ratios, which compare how much each of these businesses are selling versus how much stuff is lingering on shelves. That type of data becomes critical as sales volumes across the economy start to slow – as both an indicator of the health of the overall economy and of profitability (and therefore earnings). Both of those could become crucial to the narrative in coming quarters.

Finally, Monday’s National Activity Index from the Chicago Fed (CFNAI) could be interesting as a cross-check on last week’s index of leading economic indicators from the Conference Board. That index – which has a spiritual sibling in the Chicago Fed’s CFNAI – no longer suggests recession is imminent but instead merely that “headwinds still exist,” particularly as rising consumer debt and elevated interest rates weigh on consumer spending.9 While the CFNAI and the Conference Board’s LEI view things a little differently, they have both been pointing in the same direction of late. 

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1 Middle Manager Layoffs Surge in U.S. With Firms Questioning Value, Bloomberg, March 2024


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Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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