Dow's best week since May and expectations of increased market volatility

Good Morning. The S&P 500 advanced 0.6% for the week, while the Nasdaq finished flat. The Dow rose 1.45% for its best weekly performance since May. Read more

Markets are enjoying extremely low volatility. However, the historical trend suggests this may change soon. Upcoming macro events like the French elections may also increase market volatility. Check the curated insights section for more details.

CNN's Fear & Greed Index stands at 41 (Fear) out of 100, a marginal improvement of 3 points from last week. Details here

The top five trending stocks on Reddit are NVDA, SPY, MU, AAPL, and AMD. The full list is here.

The S&P 500 has gone 377 days without a 2.05% sell-off. That’s the longest stretch for the benchmark since the great financial crisis. Read more

The Bloomberg Dollar Spot Index edged 0.1% higher in the past five days, marking the longest stretch of weekly advances since February. The gauge ended the day at the highest level on a closing basis since early November. Read more

Neel Kashkari, President of the Minneapolis Federal Reserve, indicated it is reasonable to expect that the Fed will not cut interest rates until at least December. This stance is based on ongoing concerns about inflation and ensuring economic stability before considering rate reductions. Read more

U.S. regulators have flagged deficiencies in the "living wills" of major banks, including Citigroup, JPMorgan Chase, Bank of America, and Goldman Sachs. Regulators found fault with how each bank planned to unwind its massive derivatives portfolios. Read more

The spreads between U.S. investment-grade corporate bond yields and U.S. Treasuries have surged to their highest over three months, a sign of risk aversion. Read more

$5.5 trillion expired during the quarterly event ominously known as “triple witching,” in which derivatives contracts tied to equities, index options, and futures mature. Nearly 18 billion shares changed hands on US exchanges Friday. That’s over 55% above the three-month average. Read more

Lennar Corporation reported a strong earnings report, surpassing analysts' expectations. The company beat expectations with revenues of US$8.8b, arriving 2.5% ahead of forecasts. Statutory earnings per share (EPS) were US$3.45, 6.3% ahead of estimates. Read more

Accenture reported revenues of $16.5 billion, a decrease of 1% in U.S. dollars and an increase of 1.4% in local currency, with consulting revenues of $8.5 billion and managed services revenues of $8.0 billion—generative AI new bookings of over $900 million for a total of $2 billion fiscal year-to-date. Read more

Implied equity market volatility remains supported by a constructive macro backdrop consisting of decelerating inflation, the prospect of less restrictive monetary policy, and resilient corporate earnings and economic growth. The broader market has historically generated above-average returns following periods of extremely low implied volatility. However, seasonal VIX trends and rising expectations for increased volatility suggest the current low-volatility window could soon be closed. Read more

With the rise of private equity, the number of publicly listed US companies has decreased significantly in the last thirty years, from ~7500 in 1996 to less than 4000 in 2023. In 2000, private equity firms managed about 4 percent of total U.S. corporate equity. By 2021, that number was closer to 20 percent. In other words, private equity has grown nearly five times faster than the U.S. economy. Read more

This article from Avraham Shama explains why the Fed should start lowering rates now. The broader point he makes is to reform the Federal Reserve so that it can serve the US better. The key reasons cited are –

1. The data used by the Fed to make rate decisions needs to be revised. The rental cost component accounts for 1/3^rd of the CPI and is based on homeowners' opinions rather than actual data.

2. The Fed does not consider other macro variables affecting prices to gauge inflation.

3. The Fed board members are selected from narrow finance and economics backgrounds and often vote the same on rate decisions. The Fed should widen its disciplinary scope to include specialists from other areas. Read the full article here.

NBFIs (Non-Bank Financial Institutions) have noted relentless growth as their assets outgrew those of banks, especially in the most recent decade. However, the growth of these NBFIs is heavily dependent on the banks. This week's blog from the Fed highlights the data around growth in term funding and credit facilities provided to the NBFIs by the banks. Much of the growth of NBFIs is backed by the banks. Read more

Apollo Chief Economist Torsten Slok published the 2024 mid-year outlook. The detailed outlook explains an unstable economic equilibrium where higher rates continue to reign in growth, but the Fed pivot in Dec 2023 triggers easing financial conditions. Below are some of the key points. If interested, please download the whole report as it has many good stats and analysis.

1. Credit card delinquencies for the youngest households have risen sharply and are approaching rates last seen during the Global Financial Crisis (GFC).

2. The same story can be seen in auto loan delinquency rates. People in their 30s and below need to catch up on their auto loans at a faster pace than during the pandemic. Indeed, auto delinquencies for that cohort are almost as bad as they were at the peak in 2008.

3. Low-income households do not have any savings left from stimulus checks, unemployment benefits, childcare tax credits, Paycheck Protection Program (PPP) loans, and whatever amounts they might have saved during the pandemic by not going to restaurants, staying at hotels, or going to sporting events and concerts.

4. The top 20% of incomes account for 39% of consumer spending. These households are still paying thousands of dollars for tickets to Taylor Swift concerts or the Super Bowl, flying on airplanes, and eating out. Why? Because they still have some excess savings left from the pandemic.

5. Securities-related wealth has increased by $15.7 trillion since the November FOMC meeting.

6. In 2024, corporate liquidations are declining while reorganizations are rising. This is because of a phenomenon known as equitization. Debt is being written down and exchanged for equity, and that is keeping firms alive. Why is that happening? There’s a lot of dry powder sitting on the sidelines—at least $1 trillion in private equity and another $400 billion in private credit.

7. Weekly Fed data shows small and large bank lending growth slowing rapidly.

8. A record-high share of the population is planning to go on vacation to a foreign country within the next six months.

9. Inflation will likely be above the Fed’s 2% target for the rest of 2024, and interest rates will likely remain high for a long time.

10. The current AI bubble is bigger than the 1990s tech bubble.