Markets In Holding Pattern
By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group
Markets seem to be in a holding pattern as there is still uncertainty surrounding interest rates, banking solvency, and the debt ceiling. When an airport encounters traffic back up or some other issue that prevents a plane from landing, that plane will be put into a holding pattern over the airport until the plane can safely land. That seems to be the current status of the market at this point. The 1990 sequel "Die Hard 2" continued the saga of John McClane but changed the scenery from a high-rise tower to an airport, Dulles Airport to be exact. McClane encounters ex-military extremists who want to free a corrupt foreign military leader. Per usual, McClane has to work alone to stop the evil plot before more innocent people die. While this movie isn't considered even close to the original classic, it's still an entertaining watch. Here are some interesting trivia about the film:
- While the original is more beloved, the sequel made $240 million at the box office ($100 million more than the original). The opening weekend for the sequel saw box office receipts of $21.7 million versus only $601,000 for the original.
- Audiences loved McClane's one-liners so much in the original that the director of the sequel, Renny Harlin, Bruce Willis was told he could ad-lib as much as he wanted.
- To get the right amount of snow at the airport scenes, filming was actually done at Stapleton International Airport in Denver, CO. Ironically, Denver saw an unseasonably snowless few weeks during shooting so a good amount of snow had to be created artificially.
- The animosity between John Amos' character and John McClane in the movie involved some actual tension between Amos and Willis on the set. I couldn't find anything to dish on what exactly that tension was, except for a quote by John Amos who said in an interview, "Let's just say that he will never humiliate me in public again. You got that Bruce?"
As markets are somewhat in a holding patter, here's what we've seen so far this week...
Wrong Place, Wrong Time. At one point in the film "Die Hard 2," John McClane is confronted by a hostage negotiator, who later turns out to be a nemesis. Major Grant, played by John Amos, tells McClane, "You're the wrong guy in the wrong place at the wrong time." To which, McClane responds, "Story of my life." I'll bet Fed Chairman Powell is feeling that way right about now. A recent survey conducted by Gallup shows that Powell has the lowest approval of a Fed Chairman in the last 20 years. Such low numbers probably have a lot to do with the recent Banking Crisis. PacWest (PACW) revealed this week that deposits last week dropped by 9.5%. This sent that company's stock lower and stoked fears of more banking issues. However, the company also said that it has at least $15 billion of immediately-available assets for liquidity. Conversely, another bank in the crosshairs, Western Alliance (WAL), revealed that deposits were up $600 million over the past 5 weeks.
Powell and the Fed has raised interest rates 10 consecutive meetings since the beginning of 2022. That pushed interest rates on fixed income securities higher than what banks were offering their depositors. It finally came to a head in March of this year with the start of the Banking Crisis and depositors moving money elsewhere to investments with more attractive yields. The Fed's Discount Window usage was up this week to $9.3 billion versus a drop to $5.3 billion the previous week. Lending through the newly created BTFP was also up this week. These are not good signs and hinder Powell's approval rating. Money Market assets, however, did show another week of lower additions. As of this writing, markets are pricing in an 82% probability of no rate hike in June.
Fight Or Flight? After McClane makes his first encounter with the bad guys in Die Hard 2, he reaches out to his friend from the 1st movie, Sgt. Al Powell. He sends Powell some fingerprints on one of the bad guys he's just killed and Powell asks him, "What's this about?" McClane answers, "Oh, just a feeling I have." Powell responds, "Ouch. When you get those feelings, insurance companies start to go bankrupt." McClane always has a choice to fight the bad guys or ignore their actions. He choses to fight and investors should, too. That means staying invested until it's time to not be invested. While there is some troubling data out there, other information is more encouraging. Inflation, as measured by the Consumer Price Index (CPI) and the Producer Price Index (PPI) both showed a 10th consecutive drop on a year-over-year basis. The key components of CPI (utilities, food, gas, & electricity) have shown such a decline over the past 12 months that it runs antithetical to historical recessions. And yet, like clockwork after a CPI / PPI print, a member of the Fed tells us there hasn't been enough progress on the inflation front. Fed Governor Michelle Bowman, in a speech given today at the European Central Bank Conference, said the following:
"In my view, the most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path, and I will continue to closely monitor the incoming data as I consider the appropriate stance of monetary policy going into our June meeting.”
So, we either have a Fed that is not looking at the numbers or inflation isn't really what they are fighting. It's no wonder the Chairman's approval ratings are in the tank.
Debt Ceiling Showdown Or Just A Show? In another scene from "Die Hard 2" the head of airport police, Carmine Lorenzo, gives McClane a sermon after he has just taken out a few bad guys in the luggage area. After chiding McClane that he doesn't care about the "Nakatomi thing," he says, "You are in my little pond now, and I am the big fish that runs it." Turns out Lorenzo didn't have a lot of power in the end - other than tearing up McClane's parking ticket he received early on in the movie. A lot is being made of the Debt Ceiling and the negotiations between the two parties over how to increase it. Much of the drama may have to do with the fact that the same survey that showed a lack of confidence in Fed Chairman Powell also suggested a lack of confidence in both political parties to do the right thing on the economy. You also have Treasury Secretary Yellen making all of the media circuits claiming, "we will face financial and economic catastrophe" if the debt ceiling isn't raised. For the record, the U.S. has either raised, extended, or revised the debt limit 78 separate times since 1960 - never failing to meet obligations. Related to the debt ceiling are "funding gaps" that occur when debt ceiling negotiations break down. There have been at least 14 funding gaps that have led to government shutdowns and the effect on the markets is marginal at best. As has been the case over the last few presidencies, the negotiations are more show than reality and they usually go down to the wire. Honestly, I would be more concerned about AI and its uses than I would be the debt ceiling. Meanwhile, the consumer continues to spend as last Friday's Consumer Credit reading for March was the strongest since December. It's early, but the Atlanta Fed's GDPNow estimate has improved over the last 6 weeks and shows Q2 GDP coming in at +2.7%. The improvement has been primarily due to higher projections for consumer spending. If the consumer remains resilient with lower inflation and stable interest rates, we can expect a growing, albeit not robust, economy.
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