Stocks, Bonds, Commodities All Rising

Stocks opened higher this morning as some of the debt ceiling risk fades. Currently, the Dow is up 200 points and the S&P 500 is up .8%. The Nasdaq is up 1%. Commodities are broadly higher (oil +3%, copper +2%, gold +1%). The bond market is also trading modestly higher. We rarely see all three asset classes trading in tandem.

Retail stocks are having a tough time this month. The SPDR S&P Retail ETF (XRT) is down about 7.5% vs. a small gain for the S&P 500 Index. Bellwether Home Depot (HD) reported disappointing quarterly results with sales down 4.2% from the year-ago quarter. The CEO noted a softening of consumer demand. Same-store sales for The Gap, Nordstrom and Macy’s were also negative. Following a post-Covid shutdown binge on appliances, furniture, and apparel consumers have shifted spending away from goods in favor of services. But there’s more to the story. Data show that beginning in March consumers have been somewhat cautious about discretionary spending. Costco’s CEO cited inflation fatigue and said the company has chosen to delay an increase in the annual membership fee.

Manufacturing activity is slumping around the world. Business activity surveys in China, the Eurozone and US are softening. Research firm ISM published May data showing that US factory activity has been shrinking for seven straight months. There is one clear positive, however: softer demand is causing inflation to fall. The “prices paid” component of ISM’s manufacturing survey plunged last month as firms began to push back on suppliers.

But while portions of retail and manufacturing seem to be experiencing recession-like conditions, the job market remains strong. Payroll processor ADP says the US economy generated another 278,000 private sector jobs last month. The report noted strength in leisure and hospitality, but also a pickup in construction hiring. And the weekly volume of new filings for unemployment insurance benefits has yet to spike. What’s more, this week Mastercard’s CEO said the consumer is “just remarkably resilient.”

So the situation isn’t all good or all bad, but is definitely fluid. In our view, slowing growth and falling inflation are the natural results of 1) the Federal Reserve’s monetary policy, and 2) gradual normalization of the economy after a very wacky Covid era.