There are a few words and phrases sure to spark fear (or at least nostalgia) among those who experienced the dot-com era firsthand. Consider this a partial list: “cash burn,” “irrational exuberance” and, one that might have escaped notice, “whisper numbers.” Here’s how it worked: When a company releases its quarterly earnings, management is scored on how well actual performance lived up to published analyst expectations; if you beat those expectations by, say, earning more per share or reporting higher sales that Wall Street predicted, your stock often goes up. But if you disappoint those same analysts by earning less than they hoped, your stock often falls. 

For fast-growing internet stocks caught up in the hype, simply beating published estimates and raising guidance about future quarters wasn’t always enough, especially during the most intense phase of the dot-com era. Instead, a second set of estimates sometimes emerged regarding a company’s upcoming quarter. These more aggressive estimates – whispered back and forth between those with more detailed estimates – were referred to as “whisper numbers” and became the new standard to which reported results were held. Miss those estimates and the punishment could be just as severe as missing the more-conservative estimates the sell-siders had published in analyst reports. 

Why the history lesson? Once in a while, I’ll see a headline that reminds me of those heady days in the late 1990s when the rapid digitization of everything was underway. 

For example, last week’s walk down memory lane came by way of chipmaker and AI-standout Nvidia, which easily beat Wall Street’s earnings estimates, raised its topline guidance for the coming quarter to a cool $20 billion and still got clocked. What for? Take your pick: 

• A case of “buy-the-rumor, sell-the-news” 

• Management’s comments regarding its ability to sell into China 

• $20B worth of expected fourth-quarter sales (which, by the way, was higher than the $18B or so that analysts had previously published) was viewed as underwhelming 

Let me be clear: I’m no expert in either semiconductors or AI, and the most insightful thing I can tell you about Nvidia is that it seems to be missing a vowel or two in its name. But that last explanation of why the stock underperformed sharply after upbeat guidance and an otherwise positive earnings report last week looked enough like a case of Nvidia missing its “whisper numbers” that it triggered my 1990s-era sensibilities in an uncomfortable way. Couple that with a view that the market might be getting a little ahead of itself with the “advent of AI,” and it provided another reason to be skeptical of the market’s latest reason to rally. 

Again, a clarification. I’m not trying to foretell widespread market doom by drawing a parallel between today’s AI-inspired run-up and the crazy days of the dot-com era – there are far too many differences between the two periods to make so dire or bold a prediction. Instead, I’m pointing out anecdotes that, in hindsight, might prove interesting if markets finally decide that some of the hype supporting stretched valuations that have grown up in and around the AI theme was just that: hype. 

Let’s turn our focus to the economy. Last week’s Thanksgiving holiday gave us a reasonably light economic calendar, dominated by the release of the official notetaking of the Federal Reserve’s November 1 meeting (which, as you likely recall, was the second consecutive pause in the Fed’s rate-raising campaign).¹ Two things stood out: 

• First, participants in the meeting found inflation expectations to be “well-anchored,” a reference to the idea that inflation isn’t likely to spontaneously re-ignite simply because consumers will it to. 

• Second, an acknowledgement that “financial conditions had tightened substantially” – a reference to the dramatic run-up in long-term U.S. Treasury rates that confronted markets just as the Fed was getting ready to make its most recent decision. 

Both of those became justifications for the Fed’s latest pause, so let’s take them one at a time. First, one group that may disagree with the idea that inflation expectations are “well-anchored” is the University of Michigan, which provided an update of its consumer sentiment data last Wednesday.² While the headline confidence number was a little better than expected, inflation expectations continued to rise “…even though respondents have taken note of the slowdown in inflation… and appear worried that softening inflation could reverse in months and years ahead.” 

Specifically, near-term inflation expectations cataloged by the UofM ratcheted up another +0.3% to 4.5%, while expectations concerning the next five years rose +0.2% to 3.2%, leaving that estimate of future inflation higher than at any point since around 2008, when the idea of a commodity “super-cycle” was all the rage. While those numbers aren’t necessarily alarming in and of themselves, the fact that inflation expectations are consistently drifting higher even while consumers enjoy cheaper gas and acknowledge cooler inflation in an adjacent breath seems more consistent with the image of an anchor dragging along in the sand than one snagged on a rock on the bottom of the sea. 

Next up, the idea of “tightening financial conditions.” Here, participants at the Federal Open Market Committee (FOMC) November 1 meeting were referencing a run-up in interest rates and a decline in stocks that was occurring even in the absence of explicit pressure from the Fed. That, as much as anything, may have inspired the wait-and-see attitude that the FOMC adopted when it decided to pause on rates during its last meeting. Since then, however, stocks have rallied and rates have fallen, causing at least half of that would-be tightening in financial conditions to rewind. 

In fact, both items – “well-anchored inflation expectations” and “tightening financial conditions” – were probably central to the Fed’s decision to pause. And, as detailed above, progress on both items now feels at least a little bit outdated. Of course, to be fair, participants in the November 1 FOMC meeting didn’t yet have access to any of last week’s information. 

But they do now, and so do markets. 

Which suggests to me that it might be at least somewhat naïve to overwhelmingly assume, as markets are, that the Fed will remain on hold and its next move will likely be lower. Again, not a prediction of doom or necessarily a forecast for resumed tightening at the Fed’s next meeting in mid-December, just trying to inject a note of caution. 

What to watch this week

It’s sort of a mixed bag this week, with multiple reads on housing, manufacturing and prices and the Fed’s own collection of economic anecdotes – the Beige Book – released on Wednesday afternoon. Meanwhile, holiday spending trends will remain in focus on Monday, when online retailers offer their response to the selling spree sponsored last Friday by brick-and-mortar retailers. So far, trends for last Friday’s Black Friday event look reasonably good, with spending volumes up and discounts not as deep as feared. But as online shopping continues to take wallet share from old-school malls and small-town storefronts, Cyber Monday may be a better indication of how generous consumers plan to be this season. Stay tuned. 

Regardless of how much consumers are or aren’t spending on gifts, Tuesday’s read on consumer confidence from the Conference Board will be an opportunity to see whether declining confidence and rising inflation fears evident in the University of Michigan’s data are present in that survey as well. The Conference Board’s data continues to suggest that a recession will develop in the near term, something entered into evidence last week when the group released its latest results for its Index of Leading Economic Indicators.³ This week’s consumer-focused data from the Conference Board will serve as a cross-check. 

With inflation on consumers’ minds, this week’s two reads on inflation could generate some additional interest. On Wednesday, we’ll get the second estimate of third-quarter Gross Domestic Product (GDP), including the so-called GDP price deflator, a somewhat esoteric read of inflation that nonetheless sometimes generates a reaction among market participants and policymakers. More significant, though, is Thursday’s release of the Bureau of Economic Analysis’ income and outlays release. That report details how much American consumers are earning and spending, which promises to be interesting given the uncertainty swirling around consumers’ continued spending in the face of mounting headwinds. But more to the point, the income and outlays report also includes Personal Consumption Expenditures prices – long preferred by the Fed itself as a measure of consumer inflation. A surprise here would likely catch the market’s attention and could serve to validate (or refute) consumers’ growing fear re-accelerating price pressures. 

For a window into the goods-producing sector of the economy, we’ll get the Dallas Fed’s regional manufacturing survey on Monday, followed by the Richmond Fed’s version on Tuesday. Both are likely to show continued weakness, a message that has been nearly universal in other similar surveys of real activity such as those released last week. Then on Friday, we’ll get final purchasing managers’ indices for the manufacturing sector from both S&P Global as well as the Institute for Supply Management. The Institute for Supply Management and Purchasing Managers’ Index (PMI) have been painting a mixed to declining picture of manufacturing for months, including last week’s stagnant-as-we-go reading of the flash PMIs from S&P Global. Embedded within that report, however, was a hint that declining backlogs and weak order activity had caused U.S. employers to shed workers in aggregate for the first time since June 2020.⁴ A confirmation of that trend in Friday’s final PMI report could represent an important shift in employment trends and signal a much-awaited loosening of the U.S. labor market. With both manufacturing and services now hovering very close to neutral, a break in either direction could tip the economy’s hand. 

Finally, we’ll get several views into the health of the U.S. housing market, which remains pressured by high mortgage rates, thin inventories and still-high prices. New and pending home sales data will be released on Tuesday and Thursday, respectively, but aren’t likely to generate much excitement, as trends there are well-known. Instead, look to Tuesday’s twin reads on home prices (one from FHFA and another from S&P/CoreLogic/Case-Shiller) as more likely to capture the market’s attention. Housing transaction volumes – an important driver of economic growth for multiple reasons – aren’t likely to recover until home prices relent or mortgage rates fall. Unfortunately, I doubt Tuesday’s data will provide much relief on either front.

1 https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20231101.pdf 

2 http://www.sca.isr.umich.edu/ 

3 https://www.conference-board.org/topics/us-leading-indicators 

4 https://www.pmi.spglobal.com/Public/Home/PressRelease/b72b9c19b3bd48e78027009aad143044 

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