Keep Your Bear Spray Handy
Anyone that has hiked in a national park, such as Yellowstone, knows that you have to bring bear spray with you. You may never see a bear and have no reason to utilize the bear spray, but it is a must-have in your arsenal. Similarly, portfolio diversification is important to balance out inevitable bear market sightings and to diversify risk. We do not need to look over our shoulders very far to see this. The Magnificent 7 technology stocks fell in the first quarter by about 16% while the equal weighted S&P 500 fell by less than 1%. Bear spray can keep the bear at bay for a while, but eventually markets will respond to interest rates and earnings. So far, earnings are holding up, but interest rates are moving in the wrong direction.
Look For Bear Signs
Stocks fell sharply yesterday after a disappointing Treasury bond auction accelerated a selloff in the debt market. Only 18 stocks were in the green yesterday out of the S&P 500. The 10-year U.S. Treasury yield hit 4.6% and the 30-year rate moved above 5%. It was the highest yield in the 10-year since February and the highest in the 30-year bond since October 2023. The S&P500 has gained 5% in May so far and is down about 0.6% year to date. Better-than-feared first quarter earnings have played a role in the equity market bounce since the early April reciprocal tariff announcement. The growth rate for Q1 S&P 500 earnings currently stands at +13.6% vs the +7.1% expected going into the quarter. Markets gave back some of their recent gains yesterday but are still only about 5% from their all-time highs. Not quite bear market territory.
This week we got a glimpse of consumer spending, the housing market, and the impact of tariffs from several companies. Home Depot# and Lowes#, both home improvement retailers, reported results for the first quarter that were better than feared. Sales comparisons were negative in Q1, but picked up in March and April, and momentum continued into May. Home Depot and Lowe’s both reaffirmed annual guidance, which offset worries over tariffs. Home Depot has worked to mitigate tariff impacts and expects to generally maintain current pricing levels. However, both companies cautioned that homeowners continue to face rate headwinds and are deferring larger projects.
Luxury homebuilder Toll Brothers# reported better than expected earnings, choosing to focus on profits over its sales pace. Home sales revenue increased 2% year over year in the recent quarter and home deliveries increased 10%. However, net signed contract value was down 11% and contracted homes were down 13%. Toll is holding the line on pricing to keep profit margins in better shape and reaffirmed its full year guidance.
Mortgage rates jumped to their highest level since February last week, with investors concerned about rising inflation and the impact of increasing deficits and debt. The average 30-year fixed-rate interest rate increased to 6.9%, about where it was one year ago. Applications for a mortgage to buy a home, which had been rising for several weeks, dropped 5% last week but were still 13% higher than the same week one year ago. Homebuyers are seeing more listings on the market than they did even a few months ago, but affordability remains an issue for many, except for at the high end.
On the retailing side, Amazon# CEO Andy Jassy said at the company’s annual shareholder meeting yesterday that the company has not seen any signs of consumers tightening their wallets in the face of higher tariffs or any meaningful increase in selling prices. At least not yet. Target’s# Q1 comparable sales fell 3.8% from the prior year, which was worse than expected, due to softer discretionary spending and declining consumer confidence. Target said it now expects a low-single-digit decline in sales this fiscal year. Consumers are not hibernating, but slowing down a bit.
I’m Just a (Big Beautiful) Bill
President Trump’s “Big, Beautiful Bill” narrowly passed the House this morning by a vote of 215 to 214. The bill extends previous tax cuts, which are due to expire at the end of this year, raises the limit on the deduction for state and local taxes to $40,000, temporarily exempts tips and overtime pay from taxes, and cuts some safety net programs. The bill will now head to the Senate where terms will most likely change, so the final structure remains to be seen. Stock market futures are indicated down this morning, while the10-year yield is only ticking up slightly in reaction.
Hikers are told to avoid using bear bells, as bears will not hear the bells until you are too close. It has been said that bells are not rung at market bottoms or tops either. This serves as a reminder that market turning points are difficult to predict and encourages a more disciplined, long-term approach to investing. On a can of bear spray: “Keep spraying until the bear changes direction.”
Naomi Campbell turns 55, Novak Djokovic turns 38, and songwriter Bernie Taupin turns 75.
Christopher Crooks, CFA®, CFP® 610-260-2219