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Raising Expectations? Thumbnail

Raising Expectations?

Market Musings

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


Markets have moved higher this week with the inflation news and the higher probabilities of a rate cut in September.  While the volatility that is commonly associated with presidential elections still awaits, volatility has been rather tame so far in 2024.  This week's musings is inspired by one of my all-time favorite movies, 1987 cult classic, "Raising Arizona."  The film was a solid box office success, but has become a cult classic over the years.  Here's some trivia about the movie:

  • This film had an extremely low budget of $6 million and made more than 4x that at the box office.  This film was the collaborative work of the Coen Brothers (of "Big Lebowski," "Fargo," and "No Country For Old Men," fame).  In fact, Ethan Coen in 2000 stated that "Raising Arizona" was "the last movie we made that made any significant amount of money."
  • The start in this film are impressive, as the Coen Brothers found each of them before they became Hollywood stars.  Nicolas Cage had seen the most success, but the other actors were largely unknown.  Holly Hunter, John Goodman, William Forsythe, and Frances McDormand had mainly done bit parts or had supporting roles in TV and on the silver screen.
  • While Cage portrays a great H.I. McDunnough, Kevin Costner auditioned for the role three times and Cage was chosen over him.
  • This film is included among the American Film Institute's 2000 list of the Top 100 Funniest American Movies.
  • Fifteen babies portrayed the Arizona quintuplets in the film.  One of the babies was fired during production when he learned to walk.  The mother went so far as to put her baby's shoes on backwards to prevent him from walking.

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

Everybody Freeze, Everybody Down On The Ground.  In previous blog posts we have mentioned how you can't have growth in the economy without some inflation.  The problem recently has been that the Fed has tied future rate cuts to a seemingly arbitrary target inflation rate.  It's reminiscent of the scene in "Raising Arizona" when Gale (John Goodman) and Evelle (William Forsythe) attempt to rob a "Farmers & Merchants Bank."  The following classic dialogue takes place:

Gale: "All right, ya hayseeds, it's a stick-up. Everybody freeze. Everybody down on the ground."
Feisty Hayseed: "Well, which is it, young feller? You want I should freeze or get down on the ground? Mean to say, if'n I freeze, I can't rightly drop. And if'n I drop, I'm a-gonna be in motion. You see..."
Gale: "Shut up!"

Stocks are up about 1% on the news that inflation trended lower in May.  The Consumer Price Index was lower both on a month-over-month basis (0.0% vs +0.1% in April) and on a year-over-year basis (3.3% vs 3.4% in April).  On Thursday, similar news was released on the Producer Price Index.  Both on a month-over-month and year-over-year basis the inflation metric was lower.  In fact, May was the third month this year with a negative reading for inflation.  Some good news on the inflation front is evident when we break down the individual components of the CPI.  Many of the services categories - auto insurance, vehicle repair, physicians' services - were lower than the previous month or appear to have peaked.  A steep drop in airline airfare and gas significantly aided the improved CPI number for May.   After the CPI print on Wednesday and comments by the Fed, rate cut probabilities for September moved higher from 55% one week ago to 61%.  That pushed equities higher on the hopes it will afford the consumer some much needed breathing room.  However, after the FOMC meeting, the "Dot-plot" showed that of the Fed officials polled, 7 saw only 1 cut in 2024, while 8 saw 2 cuts.  That likely means there is some discord among Fed members.  What was also interesting about the "Dot-plot" from the latest FOMC meeting was that the mean projection was for 100 basis points of rate cuts in 2025.  That's a bit of a concern, because, again, you don't have inflation if you don't have economic growth, so if the Fed sees the need to cut 100 basis points next year, that means we're not having much inflation.

The One Place We Know We're Not At.  Many market prognosticators pound the table weekly about how we're on the cusp of another recession or bear market.  However, the data is not compelling enough to support that view.  They seem to be looking in the wrong place.  It reminds me of the scene where Nathan Arizona is being questioned by the FBI concerning the abduction of his child.  The following is a classic response:

FBI Agent #1:  "Ron, you're upsetting the victim."
Nathan Arizona: "Dammit, are you boys gonna chase down your leads or are you gonna sit around drinking coffee in the one house in the state where I know my boy ain't at?"
FBI Agent #2:  "Well, sir.  We don't have any leads as of yet."

The National Financial Conditions Index fell again last week to -0.53, which means that financial conditions are loose (i.e., strong).  We typically see a jump toward a positive reading when recession is imminent.  Of the 105 contributors to that index, only 6 are tighter than average, while 99 are looser than average.  Equally, the Financial Stress Index is at a reading of -0.80, which is well below zero.  Similar to the National Financial Conditions Index, we typically see a rise in the Financial Stress Index into positive territory just before we reach peak recession levels.  So far, the economic numbers are holding up.  The Atlanta Fed's GDPNow estimate is projecting 2nd quarter growth at +3.1%.  The Lewis-Mertens-Stock Weekly Economic Index we mentioned a couple of weeks ago continues to climb a it has a reading of 2.73, which is the highest reading in the last 21 months.  At this point, the consumer should be the primary concern as any downturn in spending could be the key to determining any weakness in economic growth.

Classic scene from "Raising Arizona"...
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