Market Note – April 1, 2024

By Hightower Great Lakes on April 1, 2024

Inflation Aligns With Consensus

The personal consumption expenditure (PCE) report for February was released last Friday, meeting market expectations. Headline and core PCE both came in-line at 2.5% y/y and 2.8% y/y, respectively.

These numbers are substantially lower than the highs seen two years ago, specifically compared to core PCE hitting 5.57% y/y in February 2022. There has been great progress with inflation data consistently trending lower but more needs to be done to hit the Fed’s 2% goal.

That said, the most recent Atlanta Fed GDPNow model shows 2.8% real GDP growth for Q1 2024, up from 2.3% on March 29.[1] The strength of the U.S. economy and consumer is partly the reason inflation has remained elevated near 3%.

Fed Chair Powell spoke at the San Francisco Fed on Friday morning following the PCE release. He noted that the February data came in-line with the Fed’s expectations and continued to echo the same rhetoric: the Fed needs further data pointing toward inflation lowering to 2% before policy cuts can begin.

Powell remarked on the continued strength of the economy, saying, “the fact that the U.S. economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.”[2]

He mentioned that the Fed will maintain a steady hand in its fight against inflation and likes the progress it is seeing. It has been sure to not overreact to recent data (the positive reports at the end of last year nor the two higher prints to begin 2024).

Overreacting to good data too soon by cutting rates prematurely bears the risk of inflation returning or never reaching the 2% goal. At the same time, not reacting to good data and waiting too long could threaten to undermine a healthy economy by keeping rates too high unnecessarily.

With a strengthening economy, Powell stated the Fed does not need to be in a hurry to cut and can wait to become more confident that inflation is coming down to 2%. We believe that regardless of the Fed cutting rates zero, one, two or three times this year, the consumer, economy and earnings will hold up.

Fourth quarter GDP was revised upward last week to an annualized rate of 3.4% along with upward revisions to consumer and business spending. Job and wage gains are strong and housing activity is rebounding, as we discussed last week.

This is something we’ve called out for some time: the economy can handle the rate hikes given the tailwinds from years of economic stimulus put in place.

Chart 1: Core PCE Drops as GDP Growth Remains Strong[3]

A Busy Week for Corporate News

Corporate headlines did not fall short over the four-day trading week. On the M&A front, Home Depot (HD) announced Thursday its plans to acquire SRS Distributions for $18.25 billion. This ties into the rebound we are seeing in housing, which we discussed in last week’s Weekly Wisdom.

The acquisition is the largest in the company’s history and will be funded by cash on hand and debt. SRS supplies materials to professionals in areas such as landscaping, roofing and pool contracting.

The company has over 2,500 employees across 47 states and provides jobsite delivery services. Home Depot believes the acquisition will increase its total addressable market by $50 billion to approximately $1 trillion.[4]

Furthermore, the addition of SRS’s sales is expected to provide a 6-7% bump to Home Depot’s topline growth. To note, the stock is up 10% on the year and over 38% from its October lows.[5]

News surrounding Johnson & Johnson (JNJ) acquiring Shockwave Medical (SWAV), a medical device maker, was reported last Tuesday.[6] Shockwave has a market capitalization of $11 billion and specializes in treating cardiovascular disease through a device that sends shockwaves to the heart to break up calcium in the arteries.

JNJ stated last year that it was looking to acquire companies to add value to its cardiovascular product line. JNJ has increased its dividend for 62 consecutive years and recently spun off its consumer business to spend greater focus on higher growth opportunities. We believe JNJ has an extremely strong product line and will continue to look for growth through innovative technologies and acquisitions.

In other news, General Electric (GE) and 3M (MMM) are both completing planned spin-offs this week. On April 2, GE will be spinning off GE Vernova, which will trade on the NYSE under “GEV.”

GE Vernova, GE’s energy-focused division, will be splitting from GE Aerospace (which still trades under GE) as the company finishes its plans from 2021 for the separation into three companies. On the other hand, 3M completed its planned spin-off of its healthcare business, named Solventum Corporation (SOLV), on April 1.

The spin-off is expected to help both companies become more efficient and provide greater operational and cost focus. Solventum’s four operating segments will be Medical Surgical, Dental Solutions, Health Information Systems and Purification & Filtration. Neither the level of economic growth nor inflation can deter strong companies from getting stronger, as seen with General Electric and 3M. 

Consumer Sentiment Remains Strong

The University of Michigan’s consumer sentiment index showed the highest confidence in the last three years. This is tied directly to the strong labor market, higher wages and higher savings levels. The consumer is seemingly becoming more assured that inflation will not return back to the 2022 highs and has greater confidence in the U.S. economy.

The data, released last Thursday, came in at 79.4, above the consensus of 76.7, for the highest reading since July 2021. The one-year inflation expectation came in lower at 2.9% from 3.0% in February.

Also, the five-year inflation expectation ticked lower to 2.8% from 2.9% last month. As the consumer drives 70% of GDP, it is a good sign that they have conviction in the current state of the economy.

Chart 2: Consumer Confidence and Sentiment at Highest Levels Since Summer 2021[7]

Fixed Income

U.S. Treasuries traded flat throughout the short trading week as new Treasury issuance was well-absorbed and investors remained confident as sentiment results beat expectations.

U.S. 2-year yields rose 2 bps, and 10- and 30-year yields fell by 3 and 7 bps. High yield spreads remain tight, rising 1 bp on the week to +345 bps. Municipal yields rose 1-13 bps across the curve with the front end seeing the largest yield changes.

The Week Ahead

Earnings – Monday: PVH; Tuesday: PAYX, PLAY, CALM; Wednesday: BB, LEVI; Thursday: CAG, LW, RPM.

Economics – Monday: PMI and ISM Manufacturing; Tuesday: JOLTS and Durable Goods; Wednesday: ADP Employment Report, PMI Composite, ISM Services; Thursday: Jobless Claims; Friday: Nonfarm Payrolls.

Return for Selected Indices^[8]

Click here to read last week’s Market Note (3/26).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Atlanta Fed. As of April 1, 2024.

[2] Source: Bloomberg. As of March 29, 2024.

[3] Source: FactSet. As of March 29, 2024.

[4] Source: Investors.com. As of March 28, 2024.

[5] Source: FactSet. As of March 31, 2024.

[6] Source: Reuters. As of March 26, 2024.

[7] Source: FactSet. As of March 31, 2024.

[8] Source: Bloomberg. As of April 1, 2024.