🤯 Have you seen our AI stock pickers’ 2024 results? 84.62%! Grab November’s list now.Pick Stocks with AI

At some point, weak data is bad news: Roth MKM

Published 05/16/2024, 03:58 AM
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect
US500
-
GME
-
AMC
-

Despite a deceleration in core and super core consumer price index (CPI) inflation in April, inflation remains elevated at 0.3% and 0.4% month-over-month, respectively.

Simultaneously, retail sales, excluding autos, gasoline, and building materials, fell by 0.3%, signaling potential consumer fatigue amid dwindling excess savings and a softening labor market, a Roth MKM strategist said in a note on Wednesday.

Even so, “there is no concern in risk markets about the top-line growth implications of slower sales, only jubilation that the worst of the inflationary pressures are in the rearview mirror,” the strategist noted.

This exuberance is evident in the resurgence of speculative behaviors reminiscent of early 2021– with the meme stock darlings GameStop (NYSE:GME) and AMC witnessing substantial gains once again – while expectations for the Federal Reserve to securely “soft land” the business cycle “have risen to shockingly high levels.”

Roth MKM cautions that nominal retail sales are trending at a mere 3% year-over-year, negative in real terms. They point out that a slowing nominal (top-line) economy is vital for the Fed to control inflation, but it will lead to slower revenue growth and pressure on profits unless offset by efficiency gains. Also, there's no evidence of productivity acceleration from the AI frenzy yet.

“There is also little credence given to the negative efficiency ramifications of trade wars, industrial policy, re-shoring and rising political risk, all of which would be productivity headwinds,” the strategist added.

Moreover, they warn against assuming the extended effects of historical liquidity surges, noting that the dominant segments of risk assets are already trading at valuations reminiscent of the spring of 2000.

This environment, coupled with lagging inflationary pressures, complicates the Fed’s path forward. Roth highlights that "risk markets are almost forcing the FOMC into a 'reactive' reaction function," signaling that the Fed may be reluctant to ease monetary policy amid soaring risk asset prices and elevated inflation.

“This, of course, implies more risk to the business cycle than is widely appreciated. We would continue to stick with defensive strategies (rate sensitive and defensive equity positioning e.g., utilities and healthcare),” the strategist concluded.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.