Brookfield defaults on another office building … what Luke Lango says the Coppock Curve is telling us today … new data make the Fed’s decision tougher … today’s most crowded trades

Wall Street gains during a time of Main Street pain can feel unjustified, even unfair, but remember, the stock market and the economy operate on different timeframes.

As we near the end of this rate-hike cycle, Wall Street is looking ahead to conditions six-to-12 months out. Based on recent market bullishness, Wall Street believes this will be a lower-rate environment that’s likely to treat stocks better.

But as you’re aware, there remain plenty of reasons to be cautious about the market today.

So, are bullish investors jumping the gun prematurely, or are we really near to the end of this bear market?

Our hypergrowth expert Luke Lango, editor of Innovation Investor, just highlighted a rare stock market indicator suggesting this recent market strength is here to stay.

From Luke:

Last week, yet again, the stock market triggered a rare and powerful technical buy signal.  And it suggests, with 95% historical accuracy, that stocks are in the midst of a major breakout.

This bullish indicator is called the “Coppock Curve.”

It was developed by renowned market strategist Edwin Coppock in the 1960s to signal long-term stock market trends and, specifically, to identify when bear markets are turning into new bull markets. 

Luke walks through the details of the indicator, which we’ll bypass for space (but you can read the entire article for free here). Let’s jump straight to what the Coppock Curve is telling us today.

Back to Luke:

The same buy signal [that we’re seeing today] was triggered as stocks were coming out of the COVID-19 crash, the 2008 financial crisis, and the dot-com crash. 

The Coppock Curve buy signal was essentially the “all-clear” sign in each of those major bear markets that the worst was over and better times were ahead. 

This bullish indicator was also triggered and gave the “all-clear” at the end of the 1987, 1980-82, 1973-74, and 1968-70 bear markets. 

It’s Luke’s next piece of data that I find most encouraging.

Since 1970, the Coppock Curve buy signal was triggered 19 times. In 18 of those instances, stocks rallied over the subsequent three-, six-, and 12-month periods.

Average 12-month returns clocked in at roughly 16%.

For weeks, Luke has been featuring various indicators and historical data references that are supportive of a budding bull market. We’ll continue to keep you updated as he introduces more of them.

Meanwhile, there’s been a new default in the commercial real estate sector

Regular Digest readers know we’re tracking developments in commercial real estate. This is because the same interest rate issues that recently took down a handful of regional banks threaten to similarly affect the commercial real estate sector.

Roughly $1.5 trillion in commercial real estate debt is set to mature in the next three years. Most of this debt was financed when interest rates were near zero. As the debt rolls over, commercial real estate companies will be refinancing in a market environment characterized by higher interest rates, lower property values, and less liquidity.

Well, we just heard of a new, major default this week.

From Bloomberg:

Brookfield Corp. funds have defaulted on a $161.4 million mortgage for a dozen office buildings, mostly around Washington, DC, as rising vacancies hit property values…

Brookfield, a major office owner, previously defaulted on debt tied to two Los Angeles buildings, the Gas Company Tower and the 777 Tower. 

When you dig into the numbers, you see just how much the post-Covid work-from-home trend is kneecapping office demand.

In the Washington, DC metro area where Brookfield just defaulted, roughly 43% of workers were in their offices during the week of April 5 compared to pre-pandemic levels.

As you might guess, this impacts demand… which impacts revenues… which impacts valuations. In the DC metro area, office property values have crashed 36% through March from one year ago. 

As we’ve noted before in the Digest, make sure you’re aware of, and comfortable with, your exposure to commercial real estate in your portfolio.

Two recent pieces of data complicate the Fed’s interest rate decision

According to a new study from the Bureau of Labor Statistics (BLS), U.S. workers are now seeing their wages climb faster than inflation.

In its report released on Tuesday, the BLS found that median weekly earnings of full-time wage and salary workers rose 6.1% in Q1 compared with the same period last year. During that time, inflation came in at 5.8%.

That’s good news, right? The value of your dollar is outpacing inflation.

Well, it’s good news for workers. Not such good news for Fed members who are looking for consistent data to make their job easier.

Here’s Bloomberg to explain:

The data signify that Americans may be finally starting to stretch their dollars further, as wage gains have generally lagged inflation over the past two years.

Price pressures have been cooling somewhat, but companies are still raising pay to attract and retain a scarce supply of workers. 

While that may bode well for consumer spending, it’s potentially worrisome for the Fed as they try to curb demand across the economy to tame price pressures.

That may incline policymakers to lean toward another hike at their May meeting.

I should add that, yesterday, St. Louis Fed President James Bullard said he wants rates to climb to 5.5% to 5.75% based on his view that recession risk is highly overdone.

This dovetails into our second piece of complicating data for the Fed. For the first time in five months, manufacturing activity in New York increased.

While estimates were for a contraction of -18, the Empire State Index came in at an expansionary reading of 10.8. That’s the highest level since July 2022.

For a Fed that’s trying to cool the economy, this unexpected pivot to manufacturing expansion isn’t great news.

Looking ahead to what the Fed will actually do in May, as I write Wednesday, the CME Group’s FedWatch Tool is putting 80% odds on another quarter-point hike, taking the target rate to 5.00% – 5.25%.

While another hike is troubling for an economy that’s already showing the effects of high rates, Luke just pointed out an interesting contradiction

Yes, the Fed Funds rate is high and appears to be headed higher.

But market rates – which usually correlate with the Fed Funds rate – are now contradicting the Fed, and Luke says that calls into question the whole point of additional hikes.

Here he is to explain more from his recent Daily Notes in Innovation Investor:

The efficacy of Fed rate hikes is dropping. 

Rate hikes work best when rates are going up and investors expect more rate hikes in the future. But when rates are going up and investors expect rate cuts in the future, then all interest rates based on the Fed Funds rate – which is most of them, like mortgage rates – aren’t impacted by rate hikes that much.

That is exactly where we are today.

The Fed Funds curve is completely inverted. The Fed may be saying it is going to keep hiking rates, but the market is not buying it. The more the Fed says it will hike, the more the market prices in more rate cuts in the future.

This is an odd dynamic, but ultimately, it means the efficacy of rate hikes in fighting inflation is dropping.

The Fed is still hiking rates, but mortgage rates, Treasury yields, financing costs, etc., are dropping.

There is very little reason for the Fed to keep hiking rates if the efficacy of those cuts in fighting inflation is becoming negligible.

It’s an interesting perspective for sure. We’ll know more two weeks from today when the Fed wraps up its May FOMC meeting.

Finally, for a fun piece of trivia, what are the most “crowded” trades out there today?

If you’re investing the same as the crowd, it’s often hard to generate outsized returns. It’s when you bet against consensus – and get it right – that you make the biggest gains.

So, where is the crowd investing today?

According to Bank of America, here’s the breakdown, as reported by Bloomberg:

In April, the “most crowded” trades deemed by global managers were long big tech stocks (30%), short US banks (18%), long China equities (13%), short REITs (12%), long European equities (11%) and long US dollar (5%) …

All you contrarian investors take note!

We’ll keep you updated on these stories here in the Digest.

Have a good evening,

Jeff Remsburg