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Danger Zone? Thumbnail

Danger Zone?

Market Musings

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group


Markets are pulling back on some inflation worries and poorer economic metrics.  However, this is a bit of a conundrum, because if the economy were struggling, inflation would not be on the rise (and, vice-versa).  With the advent of Summer, it's fitting to use a hit movie(s) and theme song released during the vacation months as the inspiration for this week's musings.  The 1986 song, "Danger Zone" was specifically written for the movie "Top Gun," released in the same year and was featured again in the sequel, "Top Gun:  Maverick." Here's some trivia about the song:

  • The song reached #2 on the US Billboard charts (in no small thanks to the success of the film) and sold more than 1.3 million copies.
  • This song was written by Giorgio Moroder and Tom Whitlock, who also wrote "Take My Breath Away," which was featured in "Top Gun."  A year later, this duo wrote "Meet Me Half Way," which was in the arm wrestling movie, "Over The Top," featuring Sylvester Stallone.  "Take My Breath Away" ended up winning the Oscar for Best Original Song in 1986.
  • Loggins did write and perform the song "Playing With The Boys," which he wrote specifically for the volleyball scene in "Top Gun."  That song was not nearly as popular, as it peaked at #60 on the Billboard charts.
  • Loggins was not the original choice to sing "Danger Zone," as it was originally presented acts such as Toto, Bryan Adams, REO Speedwagon, Corey Hart, and Jefferson Starship.  Members of Starship and Bryan Adams liked the song, but were uneasy about the movie's pro-military theme, so they turned down the opportunity to perform the song.

"Headin' into twilight
Spreadin' out her wings tonight
She got you jumpin' off the deck
Shovin' into overdrive

Highway to the danger zone
I'll take you right into the danger zone"

Here's what we've seen so far this week...

Consumer Danger Zone?  The economic data, taken in pieces, can look a little shaky, but as a whole, presents a still strong economy.  At the heart of economic growth is the U.S. consumer.  But so far, the consumer is holding up well.  Earlier this week, the Redbook Sales numbers showed growth of +6.3% on a year-over-year basis.  If we compare that to 2022, a year in which we had two consecutive quarters of negative GDP growth, Redbook Sales declined throughout the year.  So far this year, those figures have steadily improved, indicating that the U.S. consumer is still spending.  Some initial data to start the month had some analysts expecting the consumer to slow down.  However, the Credit Card data from this past week shows that spending is up 0.5% versus the week prior at -2.4%.  Likely, the consumer was gearing up for Summer vacations and was holding back on some purchases in preparation for kids getting out of school and the approaching Memorial Day holiday.  According to survey data, vacations are back in vogue this year.  Data from the 1st quarter shows that more than 20% of respondents indicated they were planning a vacation to a foreign country within the next 6 months.  That's a record high, since the data first began to be tracked in 1967.  This would indicate a consumer, at least the middle-to-high-end consumer, still in the mode of spending.

Inflation Danger Zone?  Permabears typically want their cake and eat it, too.  They pound the table on inflation heating up, but at the same time, lecture about a slowing economy.  Well, in this case, you can't have both.  If the economy is slowing, so too will inflation.  If the economy is heating up, you will have some inflation.  This morning, the PCE Price Index for April showed that inflation was flat on both a month-over-month and a year-over-year basis.  After inching higher in February and March, April's inflation was 0.3%, as expected.  This has provided some confidence among investors that a rate cut will happen this year.  However, not all rate cuts are created equal.  The economy continues to show positive growth, albeit at a steady pace.  This creates a tough situation for the Fed.  At this point, they can afford to leave rates as they are until something changes - either economic growth slows considerably or inflation heats up.  The current odds of a rate cut by the Fed show the strongest possibility now of happening in November.  September has been considered the launch point for rate cuts, but the futures show only a 50:50 possibility of a rate cut in September, at best.  The Weekly Economic Index, created by Daniel Lewis, Karel Mertens, and James Stock, tracks the 10 different daily and weekly series covering consumer behavior, the labor market, and economic production.  The Index currently stands at 2.21, which is the highest level since the beginning of the year.  This does not indicate a economy that is slowing down considerably.  So for now, we're probably stuck in a period of wait-and-see as the Summer doldrums are upon us.

Here's the iconic video of the hit song from the Summer of 1986...
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Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

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