MI2 Partners

21 June 2024

“So much owed by so many to so few”

Winston Churchill said the above line in a speech delivered in 1940 to the House of Commons, noting in his survey of the war efforts that “The gratitude of every home in our Island… goes out to the British airmen who, undaunted by odds, unwearied in their constant challenge and mortal danger are turning the tide of the world war”. While we don’t want to focus this week on the “psalm of swords” (though we would note Denmark’s government may have broken the first rule of Fight Club in recommending its citizens stock up on water, food, medicine, and iodine tablets!), the British Bulldog’s words are particularly apt at the moment given so much of the economic landscape is dependent on “the vital few”.

The recent performance of Nvidia is an easy (and well-televised) example. As this article from Barron’s notes (the kiss of death?), as of the end of May, “the top three stocks in the S&P 500… made up 20% of the index for the first time” and 35% of the year-to-date performance of S&P 500 is courtesy of just one: Nvidia. As Torsten Sløk noted, “Such high concentration implies that if Nvidia continues to rise, then things are fine. But if it starts to decline, then the S&P 500 will be hit hard”. (Holders of XLK, take additional note.) The more optimistic version of “Live by the sword, die by the sword”?

The Pareto principle goes some way to explain retail sales as well. “US retail sales barely rose in May and prior months were revised lower, pointing to greater financial strain among consumers.” Beyond the glass half empty perspective, a commentator in this article noted that “the bulk of the action in terms of overall consumer spending occurs in the services component, not in retail sales” while the retail figures “largely reflect purchases of goods”. The bad news is that “Considering spending on services had been a major engine of consumption growth, such a decline [in the services component, i.e. spending at restaurants and bars] during the month that included the Memorial Day Holiday suggest consumers are feeling the effect of tightened budgets”.

Finally, to housing, which, by way of reminder, is the business cycle. While we have often pointed out the dumpster fire in commercial real estate, up till now, the residential market has, for the most part, sailed serenely on. That seems to be changing. As this article notes, the latest data saw “Housing Permits and Starts Drift Lower”. Given the weakness in the market, highlighted by this article from Redfin, a pullback by builders might be a smart move. But if a “pullback” leads to lower labor demand and lower spending, how bullish equities should we be…? “We shall face whatever is coming to us.

P.S. High rates, i.e. lower prices for bonds, are apparently starting to hit the “friction zone” or “biting point” as Norinchukin Bank is making headlines after announcing “it would sell $63 billion of low-yielding US and European government bonds that had become unprofitable to hold”. Selling at a loss? Paging Mr. Taleb!