The Economy Is Acting Strange

Todd Moses
June 29, 2024

The global economy is playing by new rules, with home prices soaring, the S&P 500 climbing, and more volatility in the stock market.

Inputs that matter: The S&P 500 has climbed 15% in the first half of 2024.

  • Wall Street cast off fears of a US recession and never looked back, blazing a record-shattering path in the first half of 2024, fueled by muscular earnings and AI exuberance.
  • But a look beneath the surface reveals much greater turbulence among individual equities.
  • Traders say this lack of correlated movement — known as dispersion — among individual stocks is at historical extremes, undermining the idea that markets have been blanketed by tranquility.

The opportunity: Wall Street investment funds and trading desks are piling into dispersion trading, a strategy that typically uses derivatives to bet that index volatility will remain low.

  • At the same time, turbulence in individual stocks will stay high.
  • "It’s everywhere," said Stephen Crewe, a longtime dispersion trader and partner at Fulcrum Asset Management.
  • He believes these dynamics have surpassed even the most hotly anticipated economic data regarding their importance to financial markets.
  • "It almost doesn’t matter about GDP or inflation data at the moment," he added.

Zoom in: The options market has ballooned, with the number of contracts traded set to exceed 12 billion this year, according to Cboe, up from 7.5 billion in 2020.

  • The US May core PCE price index eased to +2.6% y/y from +2.8% y/y in April, which was right on expectations and the slowest pace of increase in 3 years.
  • The University of Michigan US Jun consumer sentiment index was revised upward to 68.2 from 65.6, stronger than expectations of 66.0.

Between the lines: Economists at Bank of America warned this week that the US housing market is “stuck, and we are not convinced it will become unstuck” until 2026.

  • The bank said home prices will stay high and go even higher.
  • The housing shortage will persist.
  • And mortgage rates may not fall much, even if the Federal Reserve finally delivers long-delayed interest rate cuts.

Follow the money: Just three companies—Apple, Microsoft, and Nvidia—make up a tenth of the market value of global stocks.

  • Nvidia has about 80% of the market for AI chips used in data centers, a business that’s ballooned as OpenAI, Microsoft, Alphabet, Amazon, Meta, and others have raced to snap up the processors needed to build AI models and run increasingly large workloads.
  • Microsoft shares are up about 20% so far this year.
  • Apple shares fell 1.1% this week, giving the iPhone maker a $3.29 trillion market value.

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