From US Stores to Factory Floors, Second Quarter Starts Out Slow Weaker-than-expected April results reported for key indicators

A string of reports this week illustrated a slow start for the US economy in the second quarter, adding to evidence that demand is cooling which will help set the stage for the Federal Reserve to cut interest rates.

New US home construction and manufacturing both came in softer than expected, according to data released Thursday. That followed reports that showed a steep dropoff in retail sales and the first step down in underlying inflation in six months, sending stocks soaring.

Fed officials speaking in separate events Thursday still said that rates should stay high for longer. But investors are betting that the data this week signal the economy is shifting into a lower gear, which could give policymakers the confidence they need to lower borrowing costs.

“The US economic data have consistently landed on the low side of expectations of late, suggesting the economy is losing momentum in the face of restrictive monetary policy,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “But the jury remains out on how quickly inflation will subside to provide some rate relief.” (…)

(Yardeni.com)

Pandemic excess savings being near depleted, the key indicators are employment and wages. Hourly earnings growth has been steadily slipping from 5.9% in January 2022 to 3.9% in April while headline inflation recently stalled around 3.4%, leaving little breathing room to consumers.

Meanwhile, employment growth peaked at 5.2% YoY in February 2022. It was +2.0% in December 2023 and +1.8% in April. Job openings declined 3.7% MoM in March and Indeed Job Postings through May 10 suggest another 3.6% slowdown in private labor demand. The NFIB reported that “Overall, 56% of owners reported hiring or trying to hire in April, unchanged for the third consecutive month.”

Aggregate payrolls (employment x wages x hours) were still rising a healthy 5.6% YoY in April but zero monthly growth in April, if persistent, could quickly erode spending power unless inflation also slows down. Recall that the personal savings rate is at 3.2%, a near all-time low.

Bank deposits, in real terms, are now below trend:

SCE HOUSEHOLD SPENDING SURVEY

• The median reported year-over-year increase in monthly nominal household spending edged down to 4.6 percent in April from 5.0 percent in December. While the lowest reading in the series since April 2021, it remains well above pre-pandemic levels. The decline was broad-based across age and income groups.
• The share of households reporting at least one large purchase in the last four months decreased to 53.8 percent in April, the lowest such reading since April 2020.

The NY Fed survey reveals that households expect their spending to rise 3.1% over the next 12 months, unchanged from December and down from 3.4% in August 2023. The CPI was up 3.4% in April and PCE inflation was 2.7% in March.

The U. of Michigan’s latest survey show household expectations to future home price appreciation currently at the highest level since 2007:

US Puts Its 1 Million-Barrel Gasoline Reserve Up for Sale Move is timed to help lower prices for summer driving season

The Biden administration is putting its cache of 1 million barrels of gasoline on the market, after being ordered to liquidate the reserve by Congress.

The sale of the Northeast Gasoline Supply Reserve, equal to 42 million gallons, was announced Tuesday by the Energy Department, which said it was timed to help lower gasoline prices during the summer driving season. Gasoline futures hit a fresh session low of $2.4895 a gallon after the news.

The reserve was authorized in 2014, two years after Hurricane Sandy damaged refineries and left terminals underwater leading some gas stations in New York to go without fuel for as long as 30 days. But the cache, kept in commercial storage terminals in Maine and New Jersey, has never been used, according to a 2022 Government Accountability Office report. (…)

While the Biden administration said the move would lower prices at the pump, analysts have said 1 million barrels is unlikely to make a significant difference in the East Coast region which burned through more than 3 million barrels a day of gasoline last June.

Canada: Inflation cools to 2.7% in April, increasing odds of a summer interest rate cut

The Consumer Price Index rose 2.7 per cent on an annual basis in April, Statistics Canada reported on Tuesday, down from 2.9 per cent in March and matching analyst expectations.

Not only did the annual inflation rate hit a three-year low, but it’s fallen within the Bank of Canada’s target band of 1 per cent to 3 per cent for four consecutive months. Measures of core inflation, which strip out volatile movements in the CPI, are also slowing. (…)

The April inflation report showed several areas of weakening price pressures.

Grocery prices rose at an annual rate of 1.4 per cent in April, down from 1.9 per cent in March. (They had peaked at roughly 11 per cent during this inflation crisis.) Meat prices rose 1.8 per cent over the past year, while many products – such as fresh fruit, fish and milk – are experiencing price declines.

Clothing and footwear prices fell by 2.6 per cent in April, year over year, while those for household operations, furnishing and equipment dropped by 2.1 per cent.

Consumer prices rose 0.5 per cent in April from March, largely because gasoline rose by nearly 8 per cent in a single month.

Housing costs continue to be a concern for homeowners and tenants. Rents have jumped by 8.2 per cent over the past year. While this was a touch weaker than in March (8.5 per cent), the housing shortage won’t be easily fixed, all but ensuring that Canadians will face an affordability crunch in that area for years to come.

The central bank’s preferred measures of core inflation rose at an average annual rate of 2.75 per cent in April, down from 3.05 per cent in March. This was the first reading below 3 per cent since mid-2021.

The CPI, excluding food and energy, rose by 2.7 per cent in April, year-over-year, compared with 2.9 per cent in March. On a three-month annualized basis, this measure of core inflation is running below 2 per cent. (…)

Goldman Sachs:

Today’s report confirmed that underlying inflationary pressures in Canada are moderating, with preferred and traditional three-month core measures running well below 2%, and services inflation finally showing clearer signs of easing. The confirmation of the softer inflation trend since the start of 2024 increases our confidence that the BoC will initiate its easing cycle at the June meeting with a 25bp cut.

China will control property sector risk, says vice premier

China will control the intertwined risks in the property sector, local government debt and small local financial institutions, Vice Premier He Lifeng said on Tuesday.

China is seeking to restore confidence in its financial system, which is mired in a property crisis and mounting local government debt, as the economy faces a host of challenges.

The country will also seek to prevent systemic risks and crack down on illegal financial activities, state broadcaster CCTV quoted He as saying.

“At present, we must comprehensively and strictly control the intertwined risks in the real estate sector, local government debt and small and medium-sized local financial institutions, and crack down on illegal financial activities,” He was quoted as saying at a financial meeting.

China will promote high-quality economic and social development, stepping up financial support for key strategic sectors, He said.

China’s $10,000 EV Is Coming for Europe’s Carmakers BYD’s Seagull hatchback is set to start Europe sales next year, beating the competition on price

(…) The car offers premium features like a rotating touch screen and wireless phone charging and sells for less than $10,000 in China. Even after tariffs and modifications to meet European standards, BYD executives expect to sell the Seagull for less than €20,000 ($21,500) on the continent.

That would price the four-seater thousands below electric runabouts that Stellantis NV, Renault SA and others are counting on to help them bridge the energy transition. Its impending arrival is ratcheting up pressure on Europe’s automakers for dominance in the post-combustion engine era. An anti-subsidy investigation by Brussels is unlikely to extinguish the threat.

The Seagull has won plaudits for the build quality, design and technology BYD has packed in for the price. And it’s no one-off: The company plans to introduce a higher-end €25,000 EV before the city car, European Managing Director Michael Shu said at an industry event in London this month. BYD’s plans for two plants in the region will help it blunt the effects of any European Union tariffs meant to slow its path.

The model is already doing well abroad. In Mexico, where the car is dubbed the Dolphin Mini, drivers have been flocking to the 358,800-peso ($19,780) car since its introduction in February, despite patchy charging infrastructure that’s still in its infancy. (…)

BYD is in the vanguard of Chinese carmakers that are increasingly targeting exports after seizing control of their home market. Tesla CEO Elon Musk warned in January they’ll “pretty much demolish” most other carmakers if trade barriers aren’t erected.

While President Joe Biden has moved to almost quadruple US duties on Chinese EVs, essentially slamming the door on those imports, tariffs are more complicated for Europe. The region’s carmakers are more dependent on the Chinese market than their US counterparts, making them vulnerable to retaliatory measures from Beijing. Europe’s plan to phase out sales of combustion-engine cars also will require cheaper cars to boost mass-market adoption. (…)

“Tariffs should not be used to shield our lead manufacturers from meaningful competition,” said Julia Poliscanova, senior director for vehicles and e-mobility supply chains at lobby group Transport & Environment. “What matters on top of climate targets, which are critical, is actually to have local jobs and for decarbonization not to result in de-industrialization.” (…)

Incumbent European carmakers are considering unorthodox steps to counter the challenge, including new alliances. Renault is openly shopping around for partners to cut costs on a small-car platform, while Stellantis will start sales in September of cars made through its joint venture with China’s Zhejiang Leapmotor Technologies Ltd.

“We have no intention to let this price band open for our Chinese competitors,” Stellantis Chief Executive Officer Carlos Tavares said last week about the upcoming European Seagull, dismissing calls for tariffs. “We don’t think that protectionism will give us a long-term way out of this competition.” (…)

While the overall share of Chinese brands in Europe’s electric market was around 7% last year, Transport & Environment projects they could reach 11% this year and 20% in 2027.

Judging by the reviews, incumbent automakers in Europe and the US are right to take the Seagull seriously. Caresoft Global, a Michigan engineering firm that tears down vehicles to evaluate quality and manufacturing techniques, pored over the Seagull to assess money-saving details in its construction.

“Everyone in the industry should be talking about this car, seriously, because it’s quite a vehicle,” Caresoft President Terry Woychowski said in a video posted on InsideEVs. “It changes the definition of cheap and cheery, which basically said, ‘Oh, sell something that’s just really cheap.’ This doesn’t come across that way at all.” (…)

Tesla’s Sales in Europe Fall to a 15-Month Low Registrations drop 2.3% to less than 14,000 vehicles in April

Tesla’s result was an exception in an otherwise encouraging month for battery-electric vehicle sales, which rose 14% industrywide.

Tesla similarly reported a downturn in shipments from its Shanghai factory for the month, in contrast with strong growth for China’s broader plug-in car industry. Musk told investors on April 23 that the company expected to bounce back from several issues that affected production in the first quarter, including Red Sea shipping disruptions and the suspected arson of power lines near its German sport utility vehicle plant. (…)

Countries including Germany and Sweden have ceased or dialed back EV subsidies in recent months, which has put a damper on Europe’s sales growth. Manufacturers including Volkswagen AG and Mercedes-Benz Group AG have meanwhile been rethinking product plans, with VW preparing more plug-in hybrids and Mercedes keeping combustion cars in production well into the 2030s.

While most brands have struggled with the pullback of incentives in Germany — Europe’s biggest car market — Tesla underperformed peers last month. Overall EV registrations were broadly flat, whereas Tesla’s sales plunged 32%.

In the UK, Tesla registrations fell 25% in April and have slumped 14% in the first four months of the year.

Chinese Business Group Warns of Tariff Increases on Car Imports in Response to U.S., EU Moves The group cited insiders as saying that Beijing is considering temporary extra tariffs on imported cars with large-displacement engines

The Brussels-based China Chamber of Commerce to the EU said in a statement Tuesday that it had been informed by insiders that Beijing is considering temporary extra tariffs on imported cars equipped with large-displacement engines.

“This potential action carries implications for European and U.S. carmakers, particularly in light of recent developments such as Washington’s announcement of tariff hikes on Chinese electric vehicles and Brussels’ preparations for preliminary measures in a high-profile antisubsidy investigation into Chinese EVs,” the chamber said. (…)

“In the short term, we suggest raising the temporary tariff rate on imported sedans and sport-utility vehicles that have engines larger than 2.5 liters, so as to reduce imports and guide consumption expectations,” said Liu, who has participated in drafting China’s auto policies.

Based on WTO rules, China’s temporary tariff rate on imported vehicles could be raised to a maximum 25 percent, Liu added. The potential move is in line with China’s efforts to cut emissions and green its auto industry, Liu said.

China imported 250,000 cars with engines larger than 2.5 liters in 2023, accounting for 32 percent of its total car imports, the Global Times said, citing official data. (…)

Risky Bonds Join Everything Rally High-yield debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts.

The premium that investors demand to hold debt from sub-investment-grade companies instead of relatively safe Treasurys has shrunk to near pandemic-era lows, a sign of dwindling worries about an economic slowdown that would cause a big jump in defaults and bankruptcies.

Low-rated debt has been swept up in a broad market rally fueled by signs of cooling inflation and hopes for interest-rate cuts. Attracted by yields around 8%, investors have added a net $3.7 billion into junk-bond funds so far this year, according to Refinitiv Lipper—the first inflows in that period since 2020.

That demand has powered bond sales from companies including Jack Dorsey’s Block SQ -2.76%decrease; red down pointing triangle<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> and Carl Icahn’s Icahn Enterprises IEP -1.38%decrease; red down pointing triangle in recent weeks. Collectively, low-rated businesses issued $131 billion of speculative-grade debt this year through mid-May, according to PitchBook LCD, up from about $71 billion during the same period of 2023.

Investors and analysts closely watch junk bonds because companies with weaker credit ratings tend to be hit by economic problems first. Strong demand there—along with a recent surge in profits among S&P 500 companies—boosts hopes that the economy will cool enough for rates to come down, without sliding into a recession.

There are signs of stress lurking. The default rate has ticked up to 5.8% of junk bond issuers over the 12 months through March, its highest level in three years, according to a Moody’s Ratings analysis. That figure includes bankruptcies and out-of-court debt restructurings.

The rise reflects ongoing financial difficulties at some private-equity-owned companies that had struggled to refinance debt at today’s higher rates, said Julia Chursin, a senior analyst with Moody’s leveraged-finance and private-credit team. (…)

Still, technical factors could keep spreads on high-yield bonds relatively low. Over the past few years, more businesses climbed into investment-grade territory, or returned there, while fewer fell into junk. That cuts into the supply available for investors, analysts said.

“It’s more money chasing the same amount of paper outstanding, and that’s also been very supportive of the market valuations,” said Michael Anderson, head of U.S. credit strategy at Citigroup.

The LEI’s Hole Is Too Deep to Dig Out Of

The Leading Economic Index (LEI) decreased 0.6% in April, marking the largest monthly drop since October. The index is now only 1.3 percentage points above its pandemic-related trough hit exactly four years ago. The U.S. economy has evolved in many unexpected ways since then, and despite a generally strong macroeconomic backdrop, recession indicators are still flashing signs of weakness. While the upturn in the six-month annualized change in the LEI is historically consistent with an improving economy, it is emerging from a recession signal that did not come to fruition. (…)

The S&P 500 lost some steam last month, which flipped stock prices’ contribution to the LEI negative for the first time in six months. The softening in equity prices coincided with an upward drift in the 10-year Treasury yield, while short-term bond yields held mostly steady. Consequently, the yield curve unwound some of its deep inversion over the month, leading the interest rate spread to its smallest drag (-0.1pp) on the LEI since last November. Credit conditions remain accommodative, evident in the Leading Credit Index’s positive contribution.

Despite generally loose financial conditions, permit applications for residential construction weakened in April and orders of durable goods are barely positive. Until market participants have more clarity on the timing and magnitude of monetary policy easing, we suspect the LEI will continue to slip in the coming months.

Source: The Conference Board and Wells Fargo Economics

The normally expected recession never happened, presumably because the LEI is very goods-sensitive in a predominantly service economy. But goods consumption was very strong during and after the pandemic. Why the weak LEI?

Because most goods Americans consume are imported.

This chart shows that new manufacturing orders jumped 28% between January 2021 and mid-2022 and flattened thereafter but production never rose. This while imports of goods (black) increased 21% in volume.

The LEI is now flashing recovery. If this means that manufacturing is recovering (as suggested by PMIs), the economy may not be soft landing, may not be landing at all.

American manufacturers saw their capacity utilization decline from 80% at the end of 2022 to 76.8% while their real fixed investments in structures (black line below) skyrocketed 80%. Assume they are not stupid and merely taking advantage of large government subsidies, production will eventually emerge from those structures, boosting employment and GDP.

Note the recent gap above between manufacturing shipments (value) and production (volume): prices rose 25% since the pandemic and have not declined since even after the supply bottlenecks eased.

Is the USA really reindustrializing, helped by higher tariffs and other protectionist measures?

Announcing his new tariffs on steel, aluminum, semis, EVs and solar panels last week, President Biden wrote on X: “China is determined to dominate these industries. I’m determined to ensure America leads the world in them.”

This was tried on solar panels since 2009 (subsidies, remember Solyndra) and 2012 (tariffs). The U.S. now has 2.8% of the world market, China 76%.

During the past 10 years, the USD has broadly appreciated 30%, +20% against the renminbi.

Can the U.S. reindustrialize with a currency many say is 20-40% overvalued on a purchasing parity basis?

The U.S. Finally Has a Strategy to Compete With China. Will It Work? The strategy, which took seven years to come together, is a three-legged stool consisting of tariffs, security restrictions and tech subsidies.

The U.S. buys almost no electric vehicles, steel or semiconductors—all targets of the tariffs—from China. But, by adding to, rather than rescinding, tariffs imposed in 2018 by former President Donald Trump, it signals that the decoupling of the Chinese and U.S. economies is becoming irreversible.

More important, the tariffs are the final piece of an economic strategy for competing with China.

This strategy is a three-legged stool. The first consists of subsidies to build a viable technology manufacturing sector, from clean energy to semiconductors. The second is tariffs on Chinese imports that threaten those efforts. The third is restrictions on access to money, technology and know-how that could help China compete. A fourth leg, a unified economic front with allies, remains unrealized. (…)

This [the 2022 Chips Act] enabled the Commerce Department to announce some $29 billion in subsidies to the world’s leading chip makers in recent months.

They include TSMC, which now says it will build three fabs, up from one, in Arizona by 2030. If TSMC follows through, its customers such as Apple and Nvidia might one day both design and manufacture their chips in the U.S. instead of Asia.

The restrictions [on the sale of advanced chips and chip-making equipment to China] are a powerful incentive for tech companies to invest in the U.S. or its allies instead of China. The White House, for example, is engaged in a continuing investigation into the security risks of “connected cars,” which share driver data with the manufacturer. This may provide a pretext to block all Chinese EVs from the U.S. market, even if they are assembled in the U.S. or Mexico.

So the U.S. finally has a strategy for economic competition. Whether it succeeds remains to be seen.

For one thing, it’s late. China’s dominance in key markets has only grown since 2017. The world is now bracing for a “second China shock” of cheap manufactured exports overwhelming local producers.

For example, its share of global production of “legacy” chips used in cars, appliances and other basic applications has grown from 17% in 2015 to 31% in 2023. It is on track to hit 39% by 2027, according to research firm Rhodium Group.

Biden announced last week that tariffs on such chips would double to 50% from 25%, which in theory should divert production away from China. But those chips typically enter the U.S. embedded in other products, untouched by tariffs.

And China’s capacity expansion is largely immune to tariffs because it is driven by self-sufficiency, not profit, said Jimmy Goodrich, senior adviser for strategic technology analysis to the Rand Corporation.

The economic strategy has also been distracted by politics. Like Trump before him, Biden is obsessed with steel and its importance to rust-belt swing states. He raised tariffs on the metal even though the U.S. already has plenty of domestic and allied alternatives to China. He didn’t raise tariffs on drones, which increasingly have national security roles, for which the U.S. really does depend on China.

Finally, despite lots of talking, the U.S. and its allies have struggled to form a united front for competing with China. While Biden officials suspended Trump’s tariffs on European Union steel and aluminum, a deal to rescind them altogether failed in part because the EU wouldn’t coordinate with the U.S. against Chinese steel. Fearful of falling behind the U.S. and China on EVs, the EU is busy teeing up its own subsidies and tariffs.

Such divisions could widen further should Trump return to office and carry through with this threat to hit all imports, including from allies, with tariffs. China finally faces determined economic pushback from the West, but it can take comfort that it isn’t unified.

UAW Loses Unionization Vote at Mercedes Plant in Alabama The United Auto Workers’ loss hurts its push to organize at many foreign-owned factories in the South.

Fifty-six percent of workers who cast ballots voted against joining the UAW, according to the National Labor Relations Board, which oversaw the election. More than 90% of the factory’s roughly 5,000 eligible workers voted.

The loss marks the first significant setback for the UAW’s fiery president, Shawn Fain, who has rejuvenated the 89-year-old labor group through his passionate rhetoric and a more combative stance with Detroit’s automakers since taking over 14 months ago. (…)

Fain’s team had been on a roll heading into this week’s vote. A decisive victory at a 4,300-worker Volkswagen plant in Tennessee last month was a breakthrough for the UAW, marking the first time the Detroit-based union successfully organized a foreign automaker in the South.

That win followed record contracts the UAW secured from General Motors, Ford Motor and Chrysler-parent Stellantis late last year, after a dramatic, six-week strike. Fain said Friday that the union’s success in Detroit led to changes at Mercedes, including a recent wage bump.

The UAW was trying to show its recent success at VW wasn’t a one-off as it targets factories and facilities owned by about a dozen car companies, from BMW and Toyota Motor to Tesla. The UAW is spending $40 million on the organization drive over the next two years, which includes some factories in the Midwest and West as well as the southern states. (…)

“We have the company’s ear, for the first time in a long time,” Howell said. “If our management doesn’t get it right, we can vote the union in a year from now.” (…)

EARNINGS WATCH

466 companies in the S&P 500 Index have reported earnings for Q1 2024. Of these companies, 77.5% reported earnings above analyst expectations and 16.3% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 17% missed estimates.

In aggregate, companies are reporting earnings that are 8.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 7.0%.

Of these companies, 60.7% reported revenue above analyst expectations and 39.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 65% of companies beat the estimates and 35% missed estimates.

In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.5%.

The estimated earnings growth rate for the S&P 500 for 24Q1 is 7.6%. If the energy sector is excluded, the growth rate improves to 10.7%.

The estimated earnings growth rate for the S&P 500 for 24Q2 is 10.5%. If the energy sector is excluded, the growth rate declines to 10.1%.

The estimated revenue growth rate for the S&P 500 for 24Q1 is 3.8%. If the energy sector is excluded, the growth rate improves to 4.5%.

The broad beat rates and surprise factors are just impressive.

Optimism reigns:

Trailing EPS are now $226.30, up 2.8% YoY. Forward EPS are now $252.93, up 12.6% YoY.

The Rule of 20 Fair Value line (yellow) chart uses trailing EPS and core inflation which has dropped from 6.6% in October 2022 to 3.6% currently, providing a 3 point boost to P/E ratios.

We need to watch the coming economic numbers, however:

Bloomberg’s data confirm the negative surprises on growth, amid higher than expected inflation.

So, slowing growth but rising inflation. For now, that means rising margins:

Goldman Sachs:

This quarter, the average earnings surprise has been 11% while the average sales surprise has been 1%, pointing to margins as the key driver of better than expected earnings. Amid an environment of rising input costs in 2021 and 2022 companies began to take action to protect their margins and bolster profitability.

While many firms pointed to their pricing power in previous years, firms this quarter have emphasized actions they have taken to manage expenses and keep costs under control. We expect the profitability of firms will remain in focus as long as uncertainty remains over the timing and magnitude of policy easing. The market is currently paying a historically large premium for high vs. low margin stocks and the valuation of our margin factor currently ranks in the 90^th percentile going back to 1980.

Across S&P 500 firms, those within the Financials sector that have a higher level view of consumer have noted that they still see strength in consumer spending and consumer balance sheets.

Among consumer facing companies however, the tone is more cautious, with several companies noting that the consumer has become more discerning and have started to trade down to lower priced product offerings. Furthermore, companies themselves have begun to focus more on the affordability of their products and services.

Other pockets of consumer facing companies still noted signs of strong consumer demand however, such as cruise lines, airlines, and entertainment companies.

During the 1Q earnings season, 83% of Consumer Staples companies have posted positive earnings surprises, the highest share of earnings surprises among sectors and a reflection of a better than feared earnings season.

This helps:

SENTIMENT WATCH

Roaring Kitty Is the Poster Child for Meme-Obsessed Generation T Younger investors are much more willing to take risks than their elders.

(…) Regardless of lagging regulatory attempts to curb speculation, the fervor behind wild swings in recent years of cryptocurrencies and randomly selected micro stocks — which often have large short positions, making them vulnerable to squeezes — can’t be un-invented. The boom in US sports betting, along with spread betting and contracts-for-difference trading in the UK, are all symptomatic of the new world of finance. (…)

Insane volatility has had the reverse effect on Gen-Z and Millennials by encouraging them to take bigger risks, rather than fleeing from price swings like their parents. The younger gang favors more active trading in smaller sizes and across a wider set of products. Bitcoin’s price more than doubling since October is just the latest fuel driving younger investors. Back off boomers: Gen-T is doing things its own way. (…)

Younger investors are more open to investing using futures and in fractional shares, the research shows, and are 50% more active than their older counterparts, with nearly 60% making adjustments monthly. (…) One intriguing development is in “copy trading” — a style where followers mimic ‘leaders’ portfolios and track performance via a leaderboard. This is predominantly on the investment platform provider eToro Group Ltd. It’s attracted the interest of the UK’s Financial Conduct Authority.

(…) if your first “investment” was a fractional stake in newly resurgent bitcoin or a soaring Magnificent Seven stock, your mindset is bound to be influenced. And your ultra low-cost 24/7 online platform provider also offers derivatives, leverage and a raft of trading techniques that don’t involve classic value analysis — it truly is a different world than 93-year-old Warren Buffett’s.

There’s a flipside to this youthful experimentation. Instead of applying value filters like generations of chartered financial analysts, there’s a much higher propensity to stick with whatever’s hot on social media. (…)

Retail investing is a huge market with in excess of $20 trillion invested and over 100 million accounts globally. But it’s the online business where the biggest changes are happening, with more than 11 million US-based accounts trading online at least once a year. (…)

The top reason cited in Investment Trends research for opening an online account is the ability to speculate with small amounts of money. Numbers two and four are more familiar: managing pension savings, and finding higher returns than from cash savings. But reasons three and five are driven by Gen-T; the desire to learn new skills, and the availability of commission-free trading. (…)

The new age of investing was accelerated by the pandemic and social media, and will likely be further propelled by artificial intelligence. Adapt or die might prove to be a good maxim for long-only fund managers and older generations of investors alike.

BTW:

One of the Last Big Bears on Wall Street Turns Bullish on US Stocks Strategist hikes S&P 500 12-month target by 20% to 5,400

Morgan Stanley’s Michael Wilson now sees the S&P 500 rising 2% by June 2025, a major about turn from his view that the benchmark will tumble 15% by December.

The strategist — whose bearish 2023 outlook failed to materialize as markets kept rallying — finally gave in and boosted his target for the S&P 500 to 5,400 points from 4,500. That catapults his forecast from among the lowest on Wall Street to one that projects a fresh record for the index.

“In the US, we forecast robust EPS growth alongside modest multiple compression,” Wilson wrote in a note on Sunday with his Morgan Stanley colleagues, as they discussed the firm’s second-half views across various assets.

Generally, the bank expects a “sunny macro environment,” which will support risk assets in the second half of the year, although Wilson reiterated his view that broader outcomes for the economy are becoming hard to predict as data become more volatile. (…)

China Sells Record Sum of US Debt Amid Signs of Diversification Selling seen as diversification away from US dollar assets

China sold a record amount of Treasury and US agency bonds in the first quarter, highlighting the Asian nation’s move to diversify away from American assets as trade tensions persist.

Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter, according to calculations based on the latest data from the US Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period. (…)

With China selling dollar assets, its holdings of gold have risen in the nation’s official reserves. The share of the precious metal in the reserves climbed to 4.9% in April, the highest according to central bank data going back to 2015. (…)

Meanwhile: