K Shape Shift

There's been much hand-wringing over the "K-shaped" economic recovery since the Covid 19 recession lows, and with good reason. The massive stimulus that followed fiscal and monetary policy responses to that crisis created multiple economic distortions, not the least of which is now described as the 'affordability' crisis. Despite the stock market's all-time highs, the 'Average Josephine' is in a serious funk. This chart says it all.

University of Michigan Consumer Sentiment - S&P 500

In much of the market commentary, I hear a pessimism that seems to support this narrative. Yesterday was Blue Monday, and it showed on many a Wall Street veteran's face after the Powell news. The consumer recession is coming, said one message.

These charts are telling a different story.

Copper/Gold

The macro implications of the Copper/Gold ratio cannot be underestimated, especially at a major inflection point such as this. At risk of being accused of emulating Chicken Little, (gold/copper is falling!) I maintain the view that copper is in a secular bull phase that has farther to run. It's Phd in economics is inviolate. What's missing is a final push through the moving average in a decisive confirmation of the trend change.

Copper/Gold

Interestingly, however, the miners' stocks always signal this turn in advance!

Copper Miners/Copper

Value/ Growth

As with any maturing bull market, there is always a final phase that sees improved relative performance from cyclical stocks that are often of lower earnings quality. These types of equities dominate the 'Value" index. I previously featured this argument in late 2024, but the failure of that trend change can be laid at the feet of the Trump administration's meddling. With the mid-term elections looming, Trump has begun to respond to cries for pro-growth policies aimed at the lower-middle classes.

Value vs Growth

Small Cap

Additionally, the emerging outperformance of small-cap stocks (albeit in the early days) reflects the broadening of the economic benefits of lowered short-term interest rates over the past year. Ample credit availability and relaxed lending regulations are helping smaller firms expand. Also, the valuation gap continues to close as mega-cap momentum has started to decelerate. As investors "trade down" in their stock selection, smaller firms' access to capital improves, thereby supporting their expansion potential. This indicator has entered a bull phase.

Small Cap vs. Large

As in many countries, U.S. homes became unaffordable in 2020-22 due to the Fed's ZIRP, combined with supply shocks during COVID. Then, in 2023, their inflation-fighting stance raised interest rates, further limiting affordability and freezing resale supply. Adding to the woes, Trump's populist policies on tariffs and immigration further chilled homebuilding. That seems to be behind us now, as the chart below shows. Textbook buy signals are seldom this obvious.

Homebuilders ETF

As a direct play on the U.S. consumer, you can't get any better read than Walmart's stock. I have been arguing for a rotation from AI hyperscalers to the customers who benefit from AI productivity gains. Good call last week, Deck.

Walmart

Another confirmation is evident in the relative performance between the low-cost budget air carrier Southwest and its upscale competitor Delta.

Southwest/Delta

But could time heal the wound? These market signals indicate a shift in relative price performance that supports this notion. The K-shaped economy may be ready to shift shape.

Risk Model: 3/5 - Risk On

As we saw last week, the non-price variables (AAII, VXV, Cu/Au) are bullish while the market prices remain overbought (RSI, 200 Dma). What this says is unclear, but it's a tape I won't fight. With financial conditions so easy, a stable credit market and low volatility in Treasury markets, if it ain't broke, don't fix it, especially when the seasonality is in its positive phase.

For stocks, the "wall of worry" sometimes means that people worry that things are' too good'. That's a nice worry to have.