Bob’s Journal for 6/6

Facts About the Nasdaq’s Climb to 17,000

The Nasdaq Composite Index exceeded 17,000 for the first time on May 28.

It has been a long climb for the index. After its inception in 1971, the Nasdaq didn’t break 1,000 until July 1995. It took another 1,095 trading days for it to break 2,000.

By then, the tech stock bubble was beginning. It took only 475 days to cross 3,000, 56 days to break 4,000 and another 71 days to break 5,000.

The popping of the tech stock bubble was traumatic for the index and those invested in it. After falling significantly below 5,000 during the bear market, it didn’t close above 5,000 again until 2015.

It wasn’t until April 2017 (6,256 days after breaking 5,000 the first time) that the Nasdaq breached 6,000, according to Bespoke Premium.

After that, the index soared through new 1,000 levels fairly regularly, though with a lot of volatility.

For example, it bounced above and below the 8,000 level 37 times before apparently putting that benchmark in the rearview mirror, according to Bespoke’s data.

The index was especially strong after the pandemic bear market. It broke 10,000 for the first time in June 2020 and eclipsed 17,000 less than four years later.

But the surge slowed down after the Fed began tightening monetary policy. The index exceeded 16,000 in November 2021 and didn’t close above 17,000 for 921 trading days. That’s the fourth-longest period between 1,000 thresholds for the Nasdaq.

The tech-heavy Nasdaq Composite Index has been good in general for investors, but timing does matter.

Buying as the tech stock bubble inflated and not selling early in the bear market was expensive since it took about 15 years for the index to regain the bear market losses.

Also, the 17,000 level was only a 6.3% gain from the 16,000 threshold. To look at it another way, since the November 2021 high, the index has returned only 2.3% annualized.

Looking Back at the First Quarter’s Earnings Season

Corporate earnings reports can tell us a lot about how a particular company or industry is doing. But looking at earnings reports in aggregate can tell a lot about the economy.

Many analysts have been on recession watch since the Fed began increasing interest rates rapidly in 2022, yet the recession hasn’t happened.

The latest earnings reports indicate the growth rate is lower than at the end of 2023, but the economy still is growing. More importantly, it appears economic growth is too strong to allow inflation to fall to the Fed’s 2% target in the near term.

I say that because the first quarter’s earnings reports indicate that household demand generally is strong. So, a lot of companies don’t have to cut prices to maintain sales volume.

There were some indications of weakening demand. But when we look at the reports overall, the weakness seems to be company or industry specific.

Consumers are moving their spending from companies that haven’t been willing to offer values. And they are shifting spending from some sectors (such as restaurants) to others (such as travel).

During the pandemic, household finances were strong enough that consumers could spend fairly freely. Now, they’re still increasing spending but are more selective about which businesses receive their dollars.

Walmart usually is a good indicator of broad-based trends. It reported consistent spending across all income groups.

Businesses did a lot to reduce the supply problems that emerged during the pandemic. As a result, there has been significantly lower inflation and even deflation in prices of a lot of goods.

But the easy work to restore the supply-and-demand balance has been done, as we can learn from the commentary that accompanies many earnings reports. It is not likely the inflation data will benefit much more from deflation in goods and commodities.

In addition, many businesses reported being optimistic enough about demand that they plan to increase capital spending. If they remain optimistic and follow through on those plans, demand might again overwhelm the supply of goods and commodities.

Companies continue to report shortages of quality employees, especially in jobs requiring special skills. The labor market imbalance will continue to keep a floor on compensation, and that will flow through to prices.

The result is that inflation in the services sector is likely to remain strong.

The wildcard is artificial intelligence (AI). Companies have invested a lot in AI and plan to invest more. This is supposed to provide a long-term payoff in efficiency, reducing costs and ultimately prices.

But in the short term, the investments are consuming a lot of capital with minimal results. It is great for companies that provide the basic infrastructure (such as computer chips and data centers) and electricity.

But there isn’t enough supply to go around, and that’s pushing up prices of all AI-related goods and services.

Plus, a number of analysts began to argue that AI’s benefits won’t be realized in the near term and for many companies might never be as significant as recent expectations.

Another question is the extent to which investments in AI are taking capital from other projects instead of using additional capital spending by companies.

The bottom line so far is that many companies aren’t seeing revenue from their AI investments and don’t expect to for some time.

A Clear Vision of How We May Avoid a Coming Tax Cliff

The tax cliff is the term many tax professionals give to the scheduled expiration after 2025 of the 2017 tax cuts. If Congress and the President don’t act before December 31, 2025, taxpayers will face a cliff of higher tax rates.

People around President Biden continue to describe the outlines of a compromise plan. They make clear that President Biden is not in favor of letting the full 2017 tax law expire.

Most recently, National Economic Council Director Lael Brainard said at a conference that legislation should prevent tax increases on taxpayers with incomes below $400,000.

Brainard didn’t specifically name provisions. But in March, Treasury Secretary Janet Yellen said the administration favored extending the 2017 individual income tax rates for those not in the top bracket, the doubling of the standard deduction and the increase in the child tax credit.

Brainard said the administration supports expiration of 2017 tax breaks that favor the “ultrawealthy,” as well as a number of corporate tax breaks.

Brainard also pointed to various tax provisions in President Biden’s 2025 budget proposal that would raise taxes on businesses, high-income individuals and international sources.

The administration’s goal is to have enough revenue increases to offset the extension of some of the 2017 tax cuts, plus reduce future budget deficits.

The estate and gift tax lifetime exemption and other estate tax issues haven’t been mentioned yet.

The Data

The Personal Consumption Expenditure (PCE) Price Index increased 0.3% in both April and March. Over 12 months, the PCE Price Index rose 2.7% through both April and March.

The Fed’s preferred measure of inflation, the core PCE Price Index, increased 0.2% in April, down from 0.3% in March. Over 12 months the core PCE Price Index (which is the PCE Price Index excluding food and energy prices) was up 2.8% through both April and March.

Personal income increased 0.3% in April after rising 0.5% in March. The compensation part of income increased 0.2% in April, down from 0.6% in March.

Personal consumption expenditures rose 0.2% in April, the second-lowest level in the last 12 months and a drop from the 0.7% increase in March. Spending on services increased while spending on goods declined.

Service sector activity declined in May, according to the ISM Services Index. The index fell to 49.4 at the end of May, down from 51.4 at the end of April. May’s number is the first time since December 2022 the index fell below 50, which indicates the sector contracted.

But the PMI Services Index increased to 54.8 in May, the highest level in 12 months, compared with 51.3 in April.

The ISM Manufacturing Index declined to 48.7 in May from 49.2 in April.

The PMI Manufacturing Index rose to 51.3 in May from 50 at the end of April and 50.9 in mid-May.

The PMI Composite Index for the economy was 54.5 in May, up from 51.3 in April.

Factory orders increased 0.7% in April, the same rate as in March.

But after excluding the volatile transportation sector, considered a good measure of demand, orders increased 0.7% in April after rising 0.4% in March.

Pending home sales in April were 7.7% lower than in March. Sales in March were 3.6% higher than in February.

Over 12 months, pending home sales fell 7.4% through April after rising 0.1% through March. The 12-month number has been positive in only two of the last 12 months.

Gross domestic product (GDP) grew 1.3% in the first quarter, according to the second estimate. That’s a decline from 1.6% in the first estimate and 3.4% in the final estimate for the fourth quarter of 2023.

The main cause of the decline from the first to the second estimate was lower consumer spending for both goods and services.

The private sector created 152,000 new jobs in May, according to the ADP Employment Report, compared to 188,000 in April. The number of jobs created in May is the lowest in four months.

The number of job openings in the U.S. declined in April by 296,000 to 8.059 million, according to the JOLTS (Job Openings and Labor Turnover Survey) report. This is the lowest level since early 2021.

The percentage of jobs that workers quit remained at 2.2%, where it has been for six months. But the number of quits increased a little in April.

New unemployment claims increased by 3,000 to 219,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.791 million from 1.787 million.

The Markets

The S&P 500 lost 0.27% for the week ended with Tuesday’s close. The Dow Jones Industrial Average dropped 0.28%. The Russell 2000 fell 1.55%. The All-Country World Index (excluding U.S. stocks) declined 0.72%. Emerging market equities tumbled 3.07%.

Long-term treasuries rose 3.23% for the week. Investment-grade bonds increased 1.60%. Treasury Inflation-Protected Securities (TIPS) added 1.28%. High-yield bonds gained 0.71%.

On the currency front, the U.S. dollar declined 0.31%.

Energy-based commodities fell 5.91%. Broader-based commodities lost 5.78%. Gold declined 1.32%.

Bob’s News & Updates

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