Going Against The Grain

The calls for recession seem to be growing louder, while the data still doesn't support an imminent decline in economic activity. Sometimes you have to look for the data in

unconventional locations In a rare occurence on the Market Musings, we're highlighting movies in back-to-back weeks starring the same actor. This week's inspiration for the musings is the 1984 movie "Splash". Here’s some trivia about the movie:

• The film did reasonably well at the box office in 1984 by earning more than $69 million in theaters. That put the film in the top 11 for box office receipts that year. The film actually was nominated for 1 Academy Award for Best Screenplay.

• This movie was made before the dawn of CGI, so Daryl Hannah actually wore a mermaid suit with a tail. In fact, she swam so fast with the suit in selected scenes that her safety team could not keep pace with her during filming.

• Famed director Ron Howard turned down directing opportunities on both "Mr. Mom" and "Footloose" in order to direct this film.

• John Candy, who portrays Hanks' brother Freddie in the film, showed up late to the set one day, which was unlike him. The story goes that he had been with Jack Nicholson all night, who continued to supply Candy with drinks. Candy finally told Nicholson in the early morning hours that he was due on set, to which Nicholson replied, "You're going to be alright, kid. Don't worry about it." Candy proceeded to film the famous scene of him getting hit in the head with a racquetball.

• Tom Hanks has stated that he was the 10th or 11th choice for the role of Allen Bauer. Other actors who were reportedly contacted before Hanks were Chevy Chase, Dudley Moore, Bill Murray, and John Travolta (a nod to last week's musings).

Here's what we've seen so far this week..

Carefully Examine Your Sources. Just about any single data point, analyzed by itself without any broader context or against other significant data points can lead one to

the wrong conclusion. As we pointed out last week, the rise in margin levels in investment accounts is being highlighted as a comparison to the Dot.com bust. We showed last week that context was important as market caps have risen substantially since 2000. In addition, unlike the Dot.com bust, earnings are actually delivering. So far, realized earnings for the S&P 500 Index are tracking 2x greater than final estimates at the end of June. Unlike the Dot.com bust, which had plenty of "P" (Price) movement and not enough "E" (Earnings), this market is being driven by both the P and the E.

Where is the "E" coming from, you ask? Well, consumers mainly. Redbook Sales showed a significant increase last week (+6.5%) versus the historical average (+4.4%). Consumer Credit was slightly lower than expected for June (+$7.37 bil vs +$7.4 bil), but was substantially higher than the previous month's number of +$5.1 bil. Lastly, the Visa Spending Momentum Index shows a considerable jump in July indicating a consumer willing to continue spending. An entertaining scene from "Splash" is when Allen checks in with his secretary who is absent-minded. She says, "Oh, your father called. He wants you to call him back." To which Allen responds, "Mrs. Stimler, our father passed away about five years ago." When you're analyzing data, don't forget to dig deep versus just taking that talking head's word for it.

What A Week Powell Is Having. The curious scientist in "Splash" who spends nearly the entire movie trying to prove Madison is a mermaid, finds himself getting injured at each attempt to unmask her. Finally, after breaking yet another limb in his final attempt he screams, "What a week I'm having!" I would guess Fed Chairman Powell is

thinking the same thing at the moment. First, Fed governor Kugler announces near the end of last week that she is stepping down from the FOMC about 5 months before her term was due to end. Then, this week, the President announced he is nominating Stephen Miran as her replacement, subject to Senate approval. Miran formerly served in the Treasury Department and has been a critic of the Fed's current pause on rates. This news comes as the Jobs Report disappointed last week and futures are anticipating three cuts at the next four FOMC meetings.

In addition, we are continuing to be told that inflation will be going higher due to tariffs. Tariff revenues continue to climb ($129.5 bil as of 08/06) while inflation has yet to be anything close to "runaway." Last month's CPI increased +0.3%, while the Cleveland Fed is estimating July CPI to come in at +0.1%-0.2%. In fact, on a year-over-year basis, the Cleveland Fed expects CPI to be flat next week. For some perspective, when inflation was "transitory" in 2021-2022, monthly increases in CPI were as high as +1.3%. Yet, in light of all the trade drama, J.P. Morgan estimates that consumers are realizing less pass-throughs than during the 2018-19 trad war. With the possibility of yet another dissenter on the FOMC board, it's safe to say Powell isn't having a good week.

How Many Times Do We Have To Say It?  After Madison gets captured as a mermaid, the powers that be decide to test her reaction to Allen. After spending a considerable

amount of time in a tank with her, Allen yells, "I am not a FISH! How many times do I have to tell you people that?!" The calls for a recession have increased yet again. But are they reasonable? For the last couple of years the media has been debating, "soft landing", "hard landing", or "no landing." Yet, when we look at economic growth of +2%, corporate earnings more than doubling expectations, and an equity market, which is typically forward-looking, continuing to climb higher, at what point do we hear "no landing" dominate the news cycle? Probably never, as the old cliche goes, "If it bleeds, it leads." I suppose if they scream recession long enough and loud enough they will eventually be right - just like a broken clock.

While 2nd quarter GDP came in at +3.0%, the Atlanta Fed is estimating 3rd quarter GDP

to land at +2.5%. When we look at the recent weekly numbers, as measured by the Lewis-Mertens-Stock Weekly Economic Index, the numbers have been trending higher since the end of May. Similar data can be seen in the Chicago Fed's National Financial Conditions Index and the St. Louis Fed's Financial Stress Index - which show no signs of indicating tightening financial conditions. Lastly, the Credit Spread Index has settled lower since the beginning of April to well below the historical average. For now, expect some seasonal volatility until the next FOMC meeting and further tailwinds at the back of equities.

Here's the lovable John Candy, apparently playing hungover...

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