THE DEAN’S LIST: Priced For Perfect.

Last week, I told you that Wednesday's inflation report was the referee. It blew the whistle and called nothing, and the party rolled on until the S&P cleared 7,800 for the first time in history. Then, on Friday, retail sales fell 0.6% in a month when they were supposed to rise. The market wants an economy cool enough to keep the Fed friendly and warm enough to keep spending. We’ve had other cool consumer prints the past few years and even a few in a row in 2023. The Single-Digit Millionaire portfolio is built for exactly these scenarios.

Dean’s note:
The inflation report came first, and it behaved. Consumer prices rose 0.1% in July, with the annual rate easing to 3.4%. Core came in at 0.2%. Wholesale prices did even better, flat against expectations for a 0.2% increase. Every number landed within a whisker of what forecasters wrote down. So the no-hike story that last week’s soft jobs report started to stay intact, and the market did what a market at record levels does in the absence of bad news. It treated it like the presence of good news. By Thursday, the S&P had cleared 7,800 for the first time ever and closed at a record 7,798.99, its 27th record close of the year.

Then, on Friday morning, the Commerce Department released July retail sales, and the music paused. Sales fell 0.6% in a month; economists expected a 0.2% gain. Strip out autos, and they still fell 0.3%. The core measure that feeds the GDP math dropped 0.4%. Consumer sentiment came in at 51.0, below the 55.0 estimate. Markets have cheered weak data because weak data handcuffs the Fed. A soft jobs report was good news. A soft inflation print was good news. Weak spending is different. But one report is meaningless.

Retail sales are still up about 5% from a year ago. The biggest drags were autos, down 1.8%, and online sellers, down 2.2%, two categories that swing hard month to month on timing and promotions. Clothing rose 1.9%. Restaurants and bars rose 0.5%. People still went out to eat. That is not a household in retreat. 

The jobs report deserves the same treatment, because the headline hid the interesting part. July payrolls fell by 23,000. Private payrolls actually rose by 30,000. The government shed 53,000, and that one line did all the damage. Unemployment went down to 4.1% from 4.2%. Wage growth cooled to 3.2% over twelve months, the slowest since May 2021. So the honest read is not that the economy is shedding jobs. Private hiring is growing at a rate below replacement level, while the public payroll shrinks. We still think inflation cools in the back half of the year and job growth can pop back up. AI can buoy corporate profits without additional jobs in a way that was unimaginable 20 or 30 years ago, and this market is pricing that decoupling in real time.

Oil spent the week making me look smarter than I am. Last issue, I wrote that if the Hormuz talks collapsed, the whole 9% drop could come back on one headline. It took five days. Iran and Oman never reached an accord; the interim ceasefire expired; Washington kept up the pressure and started talking about the economic isolation of Iran; and crude rose more than 5%, with Brent back above 88 dollars. Fourteen dollars for a round trip, and not one tanker's schedule actually changed. Watch ships, not statements. Our plan is still built around a brokered solution that must be delivered before November.

And then there is the bond market, which refuses to join the party for a second straight week. In a week when consumer inflation was tame and wholesale inflation was flat, the 30-year Treasury yield went up, ending near 5.27%. Read that twice. The long end looked at the best inflation news in months and got more worried, not less. It is not pricing July’s inflation. It is pricing next year's, and oil back near 88 dollars is next quarter’s inflation report being written in advance. Households agree. Michigan's survey showed year-ahead inflation expectations ticking up to 4.3%. So here is where I land. The market is priced for a landing where the consumer slows just enough, oil behaves, the Fed stays put, and AI earnings keep beating. 

A week when the inflation data behaved, the consumer did not, and oil took back everything it had given up. Here is how it played out.

Monday (August 10): Oil surged as doubts grew that the US and Iran would reach a deal on reopening the Strait of Hormuz, and stocks rose with it. Iranian demands clouded the outlook, and the closure dragged into another week. Equities held near records ahead of a heavy inflation calendar.

Tuesday (August 11): The 10-year yield tested 4.75% before backing off. CoreWeave reported revenue that more than doubled to $2.58 billion and layered a $21 billion Meta contract onto its backlog, and the stock jumped 11% after hours.

Wednesday (August 12): July consumer prices rose 0.1%, right on forecast, with the annual rate easing to 3.4%. Yields pulled back, oil eased, the S&P closed at a record, and Cisco beat after the bell with 9.3 billion dollars in AI infrastructure orders for its fiscal year.

Thursday (August 13): Wholesale prices came in flat against expectations for a 0.2% rise. The S&P cleared 7,800 for the first time ever and closed at a record 7,798.99, its 27th of the year.

Friday (August 14): July retail sales fell 0.6% against expectations for a 0.2% gain, the biggest drop in more than a year, and consumer sentiment fell to 51.0. Stocks slipped from records, though the Russell 2000 rose 0.5% to a fresh record close. The 30-year yield finished near 5.27%.

Monday (August 17): The week ahead is light on data and heavy on retail earnings, with Home Depot on Tuesday, Target and Lowe’s on Wednesday, and Walmart on Thursday. After Friday's retail sales miss, those report cards just became the week’s main event. This morning brings the Empire State manufacturing index and the NAHB housing index.

July consumer prices rose 0.1% for the month and 3.4% for the year, both easing slightly from June and both right on forecast. Core inflation rose 0.2%. A day later, wholesale prices came in flat against expectations for a 0.2% increase.

The market reads both prints the same way. No surprise means no hike, and traders now put roughly 69% odds on the Fed holding steady at the September 16 meeting. A hike is still priced near 25%. A cut is priced at almost zero. Between here and that meeting sit another jobs report and another inflation reading.

Dean’s note:
A hike becoming less likely is not a cut getting closer. One in four is still the odds the Fed raises rates next month, and that is nothing. An in-line inflation print is not good news either. It is the absence of bad news, and markets can’t tell the difference when expectations are as dour as they have been. I have watched this wall-of-worry pattern through plenty of cycles, and it’s great for investors.

July retail sales fell 0.6%, the biggest monthly drop in more than a year and a hard miss against expectations for a 0.2% gain. Excluding autos, sales fell 0.3%. The core measure that feeds the GDP calculation fell 0.4%. Consumer sentiment dropped 7.6% to 51.0, and the 2-year Treasury yield slid toward 4.10% at Friday's lows.

Look under the hood, and it is narrower than the headline. Motor vehicles fell 1.8% and online sellers fell 2.2%, the two loudest and most volatile lines. Clothing rose 1.9%, health and personal care rose 0.7%, and restaurants and bars rose 0.5%. Year over year, retail sales are still up about 5%.

Dean’s note:
Read the line item, not the headline. A consumer who cancels a car purchase and skips an online cart but still books a table Saturday night is not a consumer in retreat. He is a consumer being choosy, and choosy shows up as a bad month long before it shows up as a bad year.

That said, I do not wave this away. Put it next to a jobs report where private hiring grew below replacement level and wage growth cooled to 3.2%, and you have two releases leaning the same way inside two weeks. One month is noise. Two prints pointing in the same direction are a lean, and we lean with the data.

A week ago, crude fell roughly 9% amid reports that Iran and Oman were close to reopening the Strait of Hormuz. This week, the talks stalled, the interim ceasefire ran to its expiry, Washington held its pressure on Iranian shipping, and the Treasury secretary floated the economic isolation of Iran. Crude rose more than 5%, with Brent back above $88 and WTI near $82.

Count the full move. Brent traveled roughly 14 dollars down and back over two weeks. In all that time, no accord was signed, and no reopening happened. The price did a round trip on words alone.

Dean’s note:
I wrote it last Monday, and I will quote myself, because it happened faster than even I expected. If the talks collapse over one clause, the whole drop round trips in a week. Five days, as it turned out. When a price moves on negotiations rather than cargo, every dollar of that move is rented, not owned, and rented moves are returned without notice.

Watch ships, not statements. We still believe a solution will be delivered before the November midterms because the political cost of gasoline heading into an election forces the issue. Be open-minded about what a solution might look like. It may not be the magical photo opp you expect on TV. The markets will tell you what’s real and what’s not.

The AI earnings kept beating. CoreWeave's revenue more than doubled to 2.58 billion dollars, and it added a 21-billion-dollar contract with Meta, though its net loss widened to 626 million due to surging interest costs. Cisco beat on earnings, booked 9.3 billion dollars of AI infrastructure orders for its fiscal year, and raised guidance. Applied Materials beat on both lines.

The stocks told a different story. CoreWeave popped 11% after hours, but Cisco gave back its gains despite the strong quarter, Applied Materials fell on a beat, and Broadcom dropped Friday with no bad news of its own.

Dean’s note:
When a company beats, and the stock falls, the market is not grading the quarter. It is grading the price, and the verdict is that the price has already reached its best. That is priced perfectly at the single stock level, and it showed up three times in one week.

Notice what sits underneath CoreWeave's blowout. Revenue doubled, and the loss widened with it, because the buildout rides on borrowed money at the highest long rates in a generation. Demand for AI computing is not the question, and I want to be careful there, because a profit miss and a demand miss are not the same animal. A great company and a great stock are not the same thing.

In a week when consumer inflation was tame and wholesale inflation was flat, the 30-year Treasury yield rose anyway, finishing near 5.27%. The 10-year tested 4.75% on Tuesday, eased after the inflation data, and ended around 4.68%.

The short end told the opposite story. The 2-year yield fell toward 4.10% at Friday's lows as bets on further rate hikes faded. The curve is splitting the same way it did after the jobs report. The Fed question is settling down. The inflation question refuses to.

Dean’s note:
Two weeks running, the long bond has watched everyone else celebrate and quietly raised its hand with the same objection. It does not care about July’s inflation. It cares about what inflation averages over the next thirty years, and it just watched oil reverse a 9% drop in five days after one negotiation stalled.

Households are doing the same math, which is why year-ahead inflation expectations ticked up to 4.3% in the Michigan survey even as the actual prints cooled. I keep calling the bond market the adult in the room, and it’s not panicking. It is refusing to leave the doorway. Until the 30-year breaks fall below 5, the real estate market pays the skeptic’s toll.

Stay invested. Stay selective. And learn how the absence of bad news differs from the presence of good news.

The market got the inflation news it wanted, ran to a record, and then met the one kind of weak data it cannot cheer. Here is what I am taking from the week.

•   Inflation behaved. Consumer prices rose 0.1% in July, with the annual rate at 3.4%, and wholesale prices were flat. Markets price roughly 69% odds of a hold on September 16. Say that precisely. A hold is the base case, a hike is still live at about 1-in-4, and a cut is priced at almost nothing.

•   The consumer got choosy, not broken. Retail sales fell 0.6%, but autos and online sellers did most of the damage while clothing and restaurants rose. Sales are still up about 5% from a year ago. Watch this week's Walmart, Target, Home Depot, and Lowe's reports, because register tape beats survey answers.

•   The jobs headline hid the story. Payrolls fell by 23,000, but private payrolls rose by 30,000 while government payrolls fell by 53,000, and unemployment ticked down to 4.1%. Private hiring is growing at a rate below replacement level. That is a real cooling, and not the same thing as an economy shedding jobs.

•   Oil took back everything it gave up. The 9% drop round-tripped in five days once the talks stalled. Until an actual tanker transits the strait, that premium is rented, and the inflation outlook rents right along with it.

•   The 30-year yield rose to 5.27% in the best inflation week in months. The long end is pricing next year, not last month, and oil near $88 is driving that pricing. Borrowing costs might remain elevated until that number falls below 5 and stays there.

•   Three AI beats got sold. Cisco, Applied Materials, and Broadcom all fell on good or great news. That is a price problem, not a demand problem, and it shows how much perfection is baked into the AI trade before Nvidia reports on August 26.

•   Small caps hit a record. The Russell 2000 closed at a fresh high for the third time in a week, while the Dow lagged, which is money changing seats, not money leaving the building. A Fed done threatening hikes is oxygen for the little guys who borrow to grow.

•   Keep contributing to your 401(k). The limit is 24,500 dollars, and if you are 60 to 63, the super catch-up takes you to 35,750. A record week is when contributions feel pointless, and a red week is when they feel scary. The automatic paycheck deduction does not feel anything, which is exactly why it wins.

The market is priced for a landing where everything goes right, and this week, the first thing went mildly wrong. That is not a reason to sell. It is a reason to check what you own and why. This week is quiet on data and loud on retail earnings. Then the week after brings the fireworks. NVIDIA reports on Wednesday, the 26th, after the close, and Chair Warsh gives his first Jackson Hole keynote that Friday morning. 

- Dean

P.S. The number that sticks with me this week is 14. That is where the VIX sits, the price of insurance on this whole market, while the S&P sits a hair under 7,800 after touching it for the first time, oil swings fourteen dollars on a stalled negotiation, and the consumer just printed its worst spending month in over a year. Insurance is cheapest when nobody thinks they need it, and it is priced this low for one reason. Everyone is sure the landing is soft. Calm this deep is itself a bet, and most people holding it do not know they made it.

And one more thought. Mark the last week of August on your calendar, because the market just scheduled its two biggest exams back to back. NVIDIA, the company carrying more of this market's weight than any other, reports on Wednesday evening, August 26. About thirty-six hours later, Chair Warsh steps up for his first Jackson Hole keynote as Fed chair, Friday morning the 28th, at a symposium themed on financial innovation and payments. This week's AI beats got sold, which tells you the bar for Nvidia is somewhere in the stratosphere. And a new chair speaking to a theme that broad tends to say more than the market expects. A market priced for perfection takes two tests in one week, and it has not studied for surprise in months.

👉 What if the way to handle a market priced for perfection is not guessing which test it fails, but holding a plan that passes either way? My Single-Digit Millionaire portfolio blends stocks, cash, gold, and a little bitcoin, so one earnings night, one speech in Wyoming, or one headline out of a Strait you will never sail through does not decide your whole year.
This newsletter is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Consult with a qualified financial advisor before making any investment decisions.