The US economy is showing signs of cooling as economic cracks are being exposed in the market. Companies with dicey balance sheets have underperformed in June, and equal-weighted stock benchmarks have lagged behind. Softening economic growth and bullish investor convictions are raising concerns among market participants. Data on personal spending and underwhelming results from companies like Micron Technology and Nike are calling into question the sustainability of the soft-landing euphoria. The S&P 500 has seen significant gains in the first half of the year, but risk premiums for global corporate bonds have reached their narrowest point in three years, indicating rising concerns about credit quality and interest rates impacting companies with weaker balance sheets. ETF investors are favoring investment-grade fixed income over high-yield obligations, further highlighting these concerns. Weaker-than-expected data prints have sent Citigroup's US Economic Surprise Index to its lowest level since August 2022, indicating that elevated interest rates are pressuring demand. [ad1307ad]
Despite the concerns surrounding the US economy, there is a divide between economists and the general public regarding the perception of the economy. An article from Forbes highlights this discrepancy, with the author, a contrarian dividend investor, arguing that the data shows the economy is performing well despite negative media coverage. The author mentions adding Central Securities Corporation (CET), a closed-end fund, to their portfolio in March, which has yielded a 7% return. The article compares the media's negativity to the sentiment during the Great Depression, suggesting that the decline in optimism reflects the media's focus on potential problems. The author advises contrarian dividend investors to ignore apocalyptic warnings and respond when things go too far. They suggest that it is still a great time to buy stocks and stock-focused closed-end funds (CEFs). The author recommends the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX) as a tech-focused CEF with a 6.9% dividend yield. QQQX generates income by selling call options on its portfolio and is currently trading at a discount. The article highlights the discrepancy between economists' positive views on the economy and the negative perception portrayed by the media. [3f8fc5fa]
However, a recent article from Seeking Alpha presents a contrasting view on the US stock market. The author warns of a potential market correction, possibly evolving into a major bear market, due to diverging breadth participation, contracting liquidity signals, and too much debt overhanging the economy. The article discusses the performance of the Invesco QQQ Trust ETF, which has experienced a sharp 40% price jump since October. The author suggests that this rally in Big Tech stocks is based on hopes for future AI efficiency gains rather than dramatic business growth or lower interest rates. The author also highlights the overvaluation of the US stock market and the high level of US debt. To mitigate the potential risks, the author recommends holding high cash levels, diversifying into bonds and precious metals, and hedging against equity longs. [e3d88ab9]
JP Morgan has also issued a warning note on US stocks, aligning with the concerns raised by the previous article. The bank warns that US stocks are frothy and may see a potential reversal. The market is positioned long, Vix is at lows potentially underpricing risks, valuations look stretched, economic growth is slowing, and credit spreads are extremely tight. JP Morgan argues that both the stock market and the US economy are running out of time for a 'goldilocks' outcome. This warning from JP Morgan aligns with the views of other perma bears like Harry Dent and Albert Edwards. [337803b6]
Goldman Sachs has now joined the chorus of warnings, issuing an alert to investors about a potential market correction. The firm's strategists point to declining real income growth, a slowdown in GDP growth, and weakening consumer sentiment as headwinds. They also highlight the overbought condition of stocks, rising concentration in equities, and the election cycle as negative factors. Goldman Sachs believes that a correction and period of higher volatility and lower returns is now more likely. However, they do not anticipate a long-term bear market, citing a slightly expanding economy and the potential for rate cuts as positives. [52c22ff0]