Checking In on Consumers and China

Jeffrey Buchbinder:

Hello everyone, and welcome to the latest LPL Market Signals podcast. Jeff Bookbinder here, your host for this week, with my friend and colleague, Jeffrey Roach. Thank you, Jeffrey, for joining. I am glad to hear that your home down there in the Carolinas wasn't damaged, but I know you lost power. So we're thinking of all those out there who were impacted by the storm. That was a nasty one.

Dr. Jeffrey J. Roach:

Yeah, it's tough for many. Many are still hurting today too, so it's going to be a several days cleanup, for sure, for many people.

Jeffrey Buchbinder:

We're thinking of those down in that path. So we've got a good show for you today. We've got more new highs to talk about. First of all, I'll say it's September 30, 2024 as we're recording this. More new highs on the S&P 500 last week. I believe the count is at 42 for the year. That's not quite the record. Still got to put up a few more dozen, I think, to break the record for a calendar year, but still certainly a pretty impressive total. So we'll recap. Last week. It was of course another up week for stocks. Then we're gonna talk about the consumer. So Jeff, being our Chief Economist, certainly spends a lot of time looking at the consumer, which remains in excellent shape. Next, we'll highlight the Weekly Market Commentary for the week, which you can find on lpl.com.

Dr. Jeffrey J. Roach:

It is about gold, which is done quite well. Speaking of record highs, gold's made a few of its own. Then, we'll finish up with a preview of the week ahead. And I'm glad Jeff, you're on, because it is jobs week. Certainly that is the biggest economic data point of the week. So interested in hearing your thoughts on that. So let's get into the market recap here first. Not a huge positive week, but we were up about 0.6%, up three out of the last four weeks. The NASDAQ did better. So you saw some strength in the growth stocks. Tech and consumer discretionary in particular were up pretty nicely last week. On the other hand, you had a Russell 2000 small cap index that lagged. You know, a lot of folks were talking about small caps getting a boost from the Fed rate cuts, and they did initially, but frankly, that has been one of the most widely cited trades out there.

Jeffrey Buchbinder:

So it's actually possible that the gains in small may have already come. We'll have to, of course, wait and see. Our view and LPL Research on small caps is neutral. On the sector side, in addition to the tech and CD gains, we had a very strong week for materials, and I think that is probably driven mostly by China, which Jeff, I know you're going to share some thoughts on here in just a moment. So you had the China tailwind with all the stimulus announcements blowing through. Didn't help energy. Seems like nothing can help energy these days. Sector continues to struggle. It's a sector that we have become more cautious on lately. I think probably other than that I'll just make the point that we have cyclicals in general doing a little better than defensives. That is a bullish signal for the future.

Jeffrey Buchbinder:

Again, partly because of China, but partly just reflecting a pretty healthy economic growth outlook. Turning to international markets. You know, China was a huge winner. Of course, we certainly know why. It's one of the biggest up weeks for that index ever. The Shanghai Composite was up about 16% for the week. Of course, that drove emerging markets higher. We had a strong week in EFA too. Developed international markets, up almost four. You had strength in Europe, strength in Japan. Although, Japan is selling off sharply today, or already did, on their new prime minister who some think might be a little more hawkish. So turning to the bond market here, Jeff, I'll bring you in bond market, and commodities, and currencies. I mean, China, the bond market didn't do much, but China really is evident here because you look at copper prices up over five for the week. Industrial metals as a complex, up six for the week. And the dollar down. That's certainly consistent with the Fed starting their interest rate-cutting cycle. Does this make sense to you? Does this tell us that the China stimulus is a bazooka?

Dr. Jeffrey J. Roach:

Right? So we've read a couple interesting articles. You're referencing one. A great author that I often read talks about the bazooka. And I think in many cases, you know, it's fair to say, you know, we'll show a graph of that in just a little bit but one of the things, I'll just get a little teaser before we get into China. You know, they're coming up to their, they call it the China National Day. It's actually a whole week. So they call it the Golden Week, as well as the National Day, where the Chinese folks will have off to celebrate. It'll be interesting because you get a kind of an interesting look, anecdotal look into tourism and just the activities that the consumer will have in the upcoming week, this first of October. So one of the reasons I think you're exactly right, Jeff, on the rally in some of these more risky assets is a little unusual to see such a rally in materials without corresponding rallies in some of the other sectors. But it's been pretty impressive, the amount of stimulus. We'll talk about that in just a second, but I think it is a "bazooka" to use the term of some of the latest media press. I'm describing what's going on.

Jeffrey Buchbinder:

Yeah. It's kind of trickled out. So initially, maybe it didn't look as bazooka-like, but now? Yeah. I think it's fair to say that it is. So, yeah. Interested in hearing more of your thoughts on China in a minute. Here's the S&P 500 chart. You know, you might think because we've had all these record highs and gains were up over 21% year to date, you might think we're overbought technically, but we're actually not. The 70 level on the RSI 14, the Relative Strength Index over 14 days, is the trigger, or the breakpoint, between overbought and not. And we are at 63.6, as of just a couple hours ago when I pulled this chart. So not quite overbought, but certainly close. We are getting to the high end of this rising channel. So, you know, maybe in another, if we do go up another a hundred points or so, that could be in play. Actually, you know, this is not our prediction by any stretch, but if you take the magnitude of the breakout and you just extend it, you actually can get over 6,100. I think maybe even a 6,200, per our technician, Adam Turnquist.

Jeffrey Buchbinder:

So this is a bullish set-up, but still you've got, again, the top-end of this rising channel as technical resistance that we have to watch. And then, I mean, on the other side of it, if we roll over, you've got the lower-end of this channel and the 200 day moving average in the 52 to 5,300 range. You know, odds maybe aren't high that we get there, but we certainly think the risk that we go there cannot be dismissed. So let's turn to China now, Jeff. And I mean, first this chart is amazing. I mean, a lot of, you know, a lot of the research shops that I read have been talking about the magnitude of this bounce. It is one of the, it's actually the biggest five-day rally I think ever in the Shanghai composite.

Jeffrey Buchbinder:

It's over 25% in five days, five trading days over there. I think it only took two weeks for this index to go from a 52 week low to a 52 week high, which is pretty amazing. And the 8% gain overnight was, you know, in one of the top 10 best days in the last, you know, 15 years. So there's a little bit of superlatives for you to set you up for this. And I mean, so clearly the market likes it. How much of a "bazooka" was this? Are they, you know, what are they actually doing? And how much impact will it have?

Dr. Jeffrey J. Roach:

Well, it really is amazing. It's coming and rolling out in stages. So, for example, when you think about it, you know, they did announce a number of widely, broadly sweeping stimulus measures. So everybody knows about the monetary component, at least most investors know that. So, you know, a cut in their lending facility, reverse repo, a number of different target rates. They cut, by the way, a 30 basis point cut for that one year lending. That's the biggest on record. So, serious stimulus on the monetary side, but it's really important, I think, this is where it gets to highlighting for our listeners and those that are looking at markets. It's not just monetary. It's fiscal. It's a stimulus for real estate market, capital markets in general, banking sector. So fiscal side, they're paving the way for new issuance on sovereign debt. On the real estate side, talking about outstanding mortgages, cutting rates for outstanding mortgages. On the capital market side, the central bank has talked about providing a lending facility for institutional investors to use that facility to buy equities. So capital markets impact banking sector, certainly things are wanting to roll out for banks.

Dr. Jeffrey J. Roach:

What makes it a little complicated is that some of this stimulus has been enacted already and some is still to be determined. And it's coming out in waves. One of the things I think, you know, is important for investors to think about is that the fact that it's been a broadly based effort, I think, they have a good chance of reaching their goal. The whole goal is to get to their target growth rate. So they have a pretty good chance of doing that. You know, if I had to put it on a bumper sticker, what are they doing and why so aggressive?

Dr. Jeffrey J. Roach:

Well, they want to increase risk appetite, you could say, and confidence in investors. You know, allowing the, so-called wealth effect basically to stimulate growth, just like we've seen in the U.S., right? Jeff, you've known this because I've talked about this a lot recently, but I just finished a book on "The Life and Times of Alan Greenspan." He's actually the first one that talked about the wealth effect in 1950s, but the title of the book is called "The Man Who Knew: The Life and Times of Alan Greenspan." In some ways, I wonder if that central bank on the other side of the world, is trying to do the same thing. Instill confidence, instill interest in taking on risk. And maybe that's going to be the real kicker for leading to and stimulating growth. But quite, quite unusual. A lot of firsts. Jeff, you referenced a lot of new highs, a lot of firsts, in terms of the performance and equity prices. This is clearly some firsts as it relates to the stimulus.

Jeffrey Buchbinder:

Yeah. What's interesting to me is, you know, the interest in getting folks to buy new homes. Right? There was, you know, we've heard this from Quincy Krosby on our team, how there were just empty apartment buildings and they needed to fill them, and then they would, you know, put people in cheap apartments nearby. And the people that own the empty apartments, kind of getting a raw deal on all of that. They want to get past all that, right? They want these properties set up as good investments. They want people to live in them. And, while they used to talk about just property being only a place for a person to live or a family to live, and not for speculation, some of these stimulus measures kind of go the other direction, right? It sounds like they're okay with some speculation now because they're making it easier for folks to buy a second home and, you know, aren't sort of, preventing speculation, I'll say.

Jeffrey Buchbinder:

It's meaningful.

Dr. Jeffrey J. Roach:

This is one of the things I just read just recently. In addition to the first and second home distinction, Jeff, as you referenced, you know, they're cutting the minimum down payments for the second home. So, you know, it's kind of making it a little easier. They're relaxing their restrictions on non-local buyers, right? So all these things that in some ways we would see in this country, in western countries, is less regulatory restriction. That's certainly going to be a help to stimulate. So a lot going on and a lot still to come as we're awaiting more and more details of how these stimulus measures will play out.

Jeffrey Buchbinder:

I've also got these other market indexes or market measures here to just show how powerful this move was. So look at the percentage of stocks in the Shanghai, or I'm sorry, in the MSEI China Index, that are above the 200 day moving average. It went from like 20 to near 80 really fast. So there's been a ton of breadth to this move. And then a similar analysis on the bottom panel here. The percentage of four-week highs versus four-week low. Percentage of four-week high is now 87%. Right? So when you have these big sharp moves, you bring a lot of stocks with you. That certainly suggests a lot of four-week highs, and you've pretty much wiped out all the four-week lows. So now the question, of course, is can this keep going? Well, the stimulus is big enough for it to keep going, maybe for a little while.

Jeffrey Buchbinder:

Folks can forget about the trade war and forget about the tariffs that are likely coming or potentially coming. Regardless of who wins the election, can forget about, you know, some of these nationalizations that we've seen in the past. Right? Corporate China's not run for the people. It's run for the Communist party. And so sometimes you get surprised and companies that you think have a certain amount of shareholder value don't. So we still have to keep those risks in mind but boy. For now, it looks like a great trade. And we've been saying this is a trade, great trade for a while actually. And we still believe it is, but we're being cautious with longer term money in terms of emerging markets. So thanks for those thoughts, Jeff, on China. Let's go to the U.S. consumer now. Probably not really related to China. And, I mean, the data's been pretty good. The, you know, the GDP trackers are looking like 3% again, and we know that consumer spending is a big piece of GDP. We also got good inflation data last week so why don't you walk us through just how good a shape the consumer is in. It looks like it's pretty good shape to me.

Dr. Jeffrey J. Roach:

Well, yeah. So in this chart, I wanted to show you, you know, what's relevant here I think is the fact that, you know, we had that conversation maybe a year ago saying, hey, consumers are having some of their pandemic savings starting to dry up, which was indeed the case. You know, you started to see that downward slope as you could see in end of 2023. But what was interesting and surprising in many ways is that some of these numbers, some of the income numbers specifically, that that take a little bit of time for them to be released just takes a little more time to take that information in and collect the information. But you think, well, wait a second. It's not quite as bad. Are the savings gone? Well, not so fast. So this is checkable deposits and currencies. So you think about households, most liquid assets, and that is a phenomenal chart up into the right, right?

Dr. Jeffrey J. Roach:

That's the key here. And that's clearly your middle and upper income households. So when we talk about the consumer. Clearly we have to make a little bit of a footnote saying that there's, this is in aggregate, if you click do kind of a double-click down into income quintiles, you'll get a little different story. But I think the key takeaway here is the savings, the amount of savings, is probably a little bit better than what we might think. And actually what we would've said, even from just say, you know, the previous business day since we saw some pretty nice upward revisions on Friday morning. Here we are, we're recording on Monday here, but consumers in pretty decent shape. That's the one key takeaway. And then it does connect into the next slide that I want to show. And that is the fact that, you know, part of the reason why the consumer's hanging in there is, you know, they managed through the hump.

Dr. Jeffrey J. Roach:

I'm showing inflation stats here from from pre-pandemic to actually the end of this year. So a little bit of forecast there. The gray shaded areas are forecast numbers. If you could get through the period of the hump, you're doing okay. Hence inflation's closing in on that 2%. By the way, if you put the latest inflation metric in more significant digits, you know, month on month, we had a 0.09% increase month on a month in August. That is something that markets can celebrate in core, which strips out food, energy 0.13%. So I think it's exactly right on time, on queue for the Fed to be serious and announce, look, we're past our most most nervous fears on inflation. We're ready to now focus on the job market. Hence this week will be a lot of fun because it will have a latest update on what's happening in the labor market, but that truly now is the time for the Fed to make that pivot. They did it right on time, and certainly investors have responded with saying, let's put some more risk on the table.

Jeffrey Buchbinder:

I think consumers can pat themselves on the back because that was a rough patch, needless to say. And we've gotten through it to the point where the Fed's not so worried about inflation, and they've been able to, consumers as a whole, have been able to rebuild their nest eggs, right? Their savings rate back up to I guess what's a pretty normal level, right, Jeff? Four to five percent?

Dr. Jeffrey J. Roach:

That's right. That's right. So we had savings as originally reported in the high twos, low threes, and that's concerning, right? That was kind of the whole story. Inflation's eating away. Consumers don't have enough to, you know, get back to that long-term average reality. Government revised those numbers, said, oh no, we're actually a little bit above five percent, at least end of the summer. I will say, just real briefly here, looking at that shaded area, I think it's not necessarily going to be smooth sailing. You know, I don't want the audience to have that as their key takeaway as it relates to inflation. And that is because with the choppiness on year on year measures, there is what we call base effects, meaning we're comparing as we go into November, December of this year, we're comparing to November, December of last year. And those base effects will actually put us a little bit of an uptake. So that's why you can see a little bit of a bump up in the headline PCE number, but again, we're trending overall, trending in the right direction.

Jeffrey Buchbinder:

The shaded area is estimates. It is not a recession prediction. Some of these charts, Jeff. Do you show have that recession shading? But no, that just means those are those are estimates. So yeah. We'll be a little bit stalled out, I guess in the year over year downtrend for maybe just what? Two, three months or something,

Dr. Jeffrey J. Roach:

I think for a couple months. Well, you think about it, and this is why it actually, not to get too wonky here on you, but November 2023 and October 2023, we had no change in month on month inflation. So that's what I mean by base effects. When last year's corresponding month on month numbers were so unusually low that even if you have a month on month uptick of say 0.1, 0.2. That's pretty healthy, right? Well, it's comparing a very unusual period from last year. That's what we mean by where base of effects can make things a little bit choppy. So it'll be interesting. I think it's probably fair to say if, you know, if you wanted to throw a forecast out there, oh yeah, we'll have some increased chatter say in, you know, November, December timeframe about the resurgence of inflation. That certainly will be a debate. But I don't think it's a realistic one.

Jeffrey Buchbinder:

Well, if you participate in that debate, look at three month annualized at the same time. So you have a complete picture, right? I mean, three month annualized inflation numbers are right around two, right? I think that tells you why the Fed is comfortable with inflation. It's not time to declare victory, but we're most of the way there. So we'll keep watching it, but yeah, don't get too nervous about those potential slight upticks. So, you know, normally the segue to gold would be it's an inflation hedge. So we're talking about inflation. Now we're gonna talk about gold. But that's actually probably the one thing it hasn't been lately because the market doesn't really need an inflation hedge so much at this point. So we would argue that the other catalysts for gold are more at work here. I'll just say this is the topic of the Weekly Market Commentary for this week, which you can find on lpl.com under the Research tab.

Jeffrey Buchbinder:

I wrote here in the subheading several catalysts underpin gold's advance. One of them is ETF buyers. So this is kind of more retail, but you see here, the total at least known holdings of ETFs tied to gold, in kind of the greenish line, are certainly, you know, up nicely from several years ago. But they actually pulled back from the peak in, I guess it was 2021. Now they're starting tick higher again. So this catalyst may not have been so strong in recent months, but it now is starting to get stronger. It hasn't matter that it hasn't been a strong catalyst in recent months because look what the price of gold's done. Gold is the black line. It's gone to all time highs, just like the stock market has. I think it's around 2,800 as we sit here today. So you know, it's run without much in the way of ETF buying.

Jeffrey Buchbinder:

So what has been driving ETF buying, or gold buying, because obviously you have to have some demand to push it higher. And so one of the answers to that question is central banks. We have this chart of central bank demand and the rest of demand, which gets you to this dotted line, which is all demand. And you see here from I mean really from the highs in gold prices, or I should say in gold ETF purchases from the power slide a couple years ago, the demand has been going up nicely from central banks. So why are they doing this? Well, Jeff, you and I talked about this this morning. They want to diversify away from U.S. dollars, and gold is certainly one of the ways they're doing that, right?

Dr. Jeffrey J. Roach:

Yeah, you're exactly right. And I think, you know, it's like interesting to just think about what central banks are doing. You know, the large buying. A lot of emerging markets certainly, you know, you see that from China. And it's not necessarily a bad thing to diversify, right? If you put on your portfolio allocation hat on, you realize, well, look, this is normal. You want to see a diversification. It's not necessarily a corresponding risk that, you know, the dollar is losing its global reserve currency status. I think, but it is interesting to see which central banks are doing these massive buyings.

Jeffrey Buchbinder:

Yeah, certainly. Russia is another one and there are more. So yeah, the world is kind of dividing into two super regions, I guess you could say. And so, you know, the ones on the China-Russia side are certainly trying to move away from dollars, partly related to potential sanction risk, but there are other factors as well. Now, gold has another catalyst here in terms of low rates, right? So actually the most direct correlation with rates seems to be real rates. So that's actually where the inflation comes in. But inflation adjusted interest rates are coming down, and that historically has supported gold prices. So certainly the Fed cutting rates is tied to that, and that's what we show on this chart. If you, we've talked about this with stocks and bonds. When the Fed starts a cutting cycle, you know, on average the S&P 500 is only up about five, six percent in the subsequent year.

Jeffrey Buchbinder:

Actually, it's not too different from gold, right? But gold peaks after six months, so this is a 10.8% average gain in the price of gold at the start, or in the first six months after the Fed starts hiking or starts cutting rates rather. So gold actually is a pretty good rate-cutting play. I mean, we already liked it because of the weak dollar. LPL Research has a positive view of precious metals. We already liked it because, you know, rates were coming down. Market rates were coming down. Now you have the Fed funds rate coming down, which is another tailwind for gold. So looks pretty good here. And you know, if the trajectory of inflation and of rates continues the way it's been going, we think gold has more upside. So check out our Weekly Market Commentary if you're interested in reading more about gold. Great job by Adam Turnquist, our Chief Technical Strategist on that. So Jeff, let's close out with the week ahead and it's jobs week. So, want to hear your thoughts, certainly on the jobs report coming up on Friday, and anything else that you think that our listeners should be paying attention to this week.

Dr. Jeffrey J. Roach:

Well, I do like your stars there. We got six stars. I'll highlight several of them.

Jeffrey Buchbinder:

I'm not a Dallas Cowboys fan. I want to make that perfectly clear before we keep going.

Dr. Jeffrey J. Roach:

Have to turn, maybe change the color or something. I don't know. We'll address that issue, but our listeners know you too well, I think, Mr. Kansas City man himself. So talk about construction spending. You know, in the past year and a half, a lot of the construction activity, both hiring and spending, was driven by multi-family projects. That is coming to an end. We've seen that the last two months. So I think markets will pay attention to that if that trend continues, that that differing trajectory between single family projects, multifamily projects, ISM can be market-moving in terms of the prices paid component. Just a reminder, ISM comes out with two different reports; services and goods. You got to wait till Thursday to get the ISM services. But I think Thursday morning, in addition to claims right there on October 3, Challenger job cuts will be a likely market focus.

Dr. Jeffrey J. Roach:

Because we all know from the past revisions on payrolls as well as the monthly reports, the rate of job growth or payroll growth has slowed materially. So no surprises there. But we haven't seen negative numbers, right? It's not as if there's a massive shedding of jobs. So we got to see, you know, might see little inside peak on what's happening from the Challenger job cuts. And the reason why that is so interesting for investors, because that report breaks out the reasons for the job cut. Is it because it's a downturn in demand, or is it because of cost cutting? Those are two very, very different reasons, right? You want to cut jobs by managing costs. That's a lot different than the other. So but it all paves the way for the biggest event of the week.

Dr. Jeffrey J. Roach:

And that is certainly the non-farm payroll report, which is 8:30 Eastern time on Friday. You know, maybe a little bit of a ho-hum report if we're in between, you know, that 100 range to 150 range. You know, if it's below a hundred, I think maybe, you know, you'll get a little bit of chatter. And if it's a real blowout, you know, that'll certainly be something where rate expectations might change. But anywhere between kind of that 1, 150 range, I don't think it's going to be as interesting as the unemployment rate will be because unemployment rate looks like it could be inching higher. Even though the Fed has said we expect a Fed funds rate, sorry, Fed summary of economic projection says the unemployment rate's gonna be about 4.4% by the end of the year. Well, other reports, particularly the report on consumer confidence suggests that there's a little bit more upside risk to the unemployment rate. So I think that's where you need to pay attention as you go into Friday morning. If that number might be a little bit higher and the risks are that there might be a little bit of an uptick in the unemployment rate.

Jeffrey Buchbinder:

So, Jeff, is it fair to say that the Fed'll probably do 25 basis points as long as we get something in the three digits, you know, a hundred plus?

Dr. Jeffrey J. Roach:

Well, that's...

Jeffrey Buchbinder:

Or do they need more data than that?

Dr. Jeffrey J. Roach:

No, that's a great key takeaway from, alright, so what does this all mean, right, for Fed policy? So Fed has two more meetings November, December, and they did the they went big and bold with the 50 basis point cut recently in their September meeting. November, December, probably going to be 25 basis points or one quarter of one percent unless there's, you know, massive surprises. But if this is in the 1, 150 range, it'll be a 25 basis point cut in terms of how markets expect the Fed will behave at their next policy setting meeting.

Jeffrey Buchbinder:

And all of the votes will have been cast in the presidential election before the Fed announces what they're doing. Right? Because I think the Fed announcements on Thursday, I believe, is that November 7?

Dr. Jeffrey J. Roach:

That's right. It's just after the major presidential election. Right. And so hopefully we can move past politics by that point in time.

Jeffrey Buchbinder:

Oh, I fear it's gonna take a couple more days beyond that to move past it, but we'll see. We can still hope that was my point in bringing that up, is that we don't have to worry about the Fed, you know, sending a signal that would influence the election anymore, right? That's done. That was the meeting that we just had. And their next one is after the election. They got two more. I think 25, 25 is the right place to be right now and, you know, we'll just wait and see how the data shakes out. So I guess I mean it's quarter end, right? So I guess people are going to start thinking about earning season even though we're not gonna actually get September quarter end reports for another week plus. But I think it's worth noting that expectations are about four and a half percent or so on the S&P 500 year over year earnings. You know, that doesn't sound great, but the expectations for Q4 in 2025 are still for double digits and they have held up extremely well. So just based on that alone, we would say we're likely to hear pretty good things from corporate America during earning season. Anything else, Jeff, that you want to call out that folks should be thinking about for this week?

Dr. Jeffrey J. Roach:

We're good. It's a busy one. It's jam packed with a lot of important information.

Jeffrey Buchbinder:

So busy, busy, busy. Absolutely. So yeah. Markets are holding up okay on here on Monday, despite, you know, such a strong run here lately. Hopefully it will continue to do so. So we'll go ahead and wrap there. Thanks everybody for listening to another addition of LPL Market Signals. Hope you have a wonderful week and take care. See you next time.