It’s Fed Week… Market Sees Cuts Coming

Are rates restrictive? And if they are - how do you know? That's the question the Fed will address tomorrow - but it's not easy to answer. For example, on the one hand there's a (large) cohort who believe the Fed are falling 'behind the curve' - therefore increasing the odds of a recession. They feel that growth risks are to the downside - and do not need to wait for both inflation and employment data to confirm what's ahead. On the other side of the coin - there are those who think we still run the risk of higher inflation if acting too early.

Is Momentum Waning? More on Why I’m Bullish Bonds into 2025

As part yesterday's missive - I talked to why I think bond yields are too high. For example, I offered a chart showing the declining trend in nominal GDP growth vs what we see with the US 10-year yield. Economic growth is clearly slowing and yet yields are going the opposite way. Why? Therefore, investors should ask themselves what is the catalyst which will take us back to a 3.0% 'growth' mode (i.e. what we saw over Q3 and Q4 of 2023)? For example, is it the consumer? They make up ~70% of GDP with consumption - however they are mostly tapped out (as we have heard in the latest earnings reports). What will it be?

Rate Cut Hopes for 2024 Start to Fade 

Just as market participants were starting to get hopeful rate cuts could be coming - that door was slammed shut. Yields surged opposite a stronger-than-expected monthly payrolls number. Heading into the print - the market was looking for softness in the labor market - with maybe 190K jobs added. Recent data had suggested jobs were slowing - paving the way for the Fed to cut rates as early as July (with a 70% chance assigned to September). As it turns out, monthly job gains were said to be 272,000. That said, there are some ambiguities with the report - with the unemployment rate jumping to 4.0%. Is Sahm's Rule about to trigger in the coming months?

When the Laws of Probability are Forgotten

Whilst the S&P 500 posted a negative week - it was a strong month for equities. The world's largest Index managed to add 4.8% for the month - hitting an intra-month record high of 5339. That's four of five winning months to start 2024. Perhaps completely enamored by all things AI (more on this in my conclusion) - investors basically shrugged off sharply higher yields and a series of disappointing inflation prints to push prices higher. What could go wrong? At the end of every month - it pays to extend our time horizon to the (less noisy) monthly chart. And whilst the weekly chart is useful - it tends to whip around. Longer-term trends (and perhaps investments) are often better examined using this lens.

Is the Market “Euphoric”?

It's that time of year... where "Sell in May and Go Away" makes its typically annual appearance. Personally I don't give it much weight... basically none. Who invests with the timeframe a few months? Not many that consistently make money. But therein lies the rub - this saying is only relevant as a function of how you choose to invest. Your time horizons are likely very different to mine. This post will offer background where the adage comes from. From there, I will try and answer the question of whether the market is "euphoric". And finally, I'll share some names that I've been adding to.... it's not NVDA.

Nvidia Can’t Stop Stocks Wobbling

What we've seen from Nvidia the past 18 months reminds me of Cisco in the late 1990's. I wrote about this recently... not much has changed. The path of earnings and the share price have been similar. NVDA's revenues are up over 2.5x on a YoY basis, causing EPS to be up over 4x over the same period. 18% EPS growth in a single quarter is very impressive but here's my question... will we see that in 2 or 3 years from now? We didn't from CSCO - it collapsed. Time will be the judge of that.... not me. Despite the expected "beat and raise" from the AI chip maker - the rest of the market fell sharply. Without NVDA's ~9% share price gain - the S&P 500 would have been down 1.5% for the day. That tells us how narrow this market is - extremely dependent on stellar earnings from a handful of companies like NVDA. That's not a healthy setup.

Are These Recession Indicators Broken?

At the conclusion of their July 26 '23, meeting, the Federal Open Market Committee (FOMC) voted to raise the target range of the federal funds rate by 25 basis points to 5.25% to 5.50%. The S&P 500 traded around 4,000 points at the time - some 16% off its ~4800 January high. Markets had reason to be worried... Investors had not seen the Fed this aggressive at any time in the past 40 years... and conditions seemed ripe for a recession. What's more, most widely cited indicators suggested this was a likely outcome. However, it didn't happen? Why not? Are popular recession indicators no longer relevant?

“Heads I Win and Tails You Lose”

After almost three decades at this game - something you learn is not to fight the tape. Trade against momentum at your own peril. Consider the news today... it was both bad and good. I will start with the (perceived) 'good'. The Consumer Price Index (CPI) was slightly cooler than expected. And whilst it's still a long way above the Fed's target of 2.0% - the market was thrilled it was only up 0.3% MoM and 3.4% YoY. Bond yields plunged and stocks ripped. Sure... 3.4% isn't great... but that's Main Street's problem... Wall Street doesn't care. However, the bad news was retail sales plunged. But wait a minute - that's also "good news" - as it could mean a more accommodative Fed. Heads I win and tails you lose.

For Now… Bad News is Still Good News 

Never confuse the stock market for the economy. They are two very different things. And whilst there are times when the two will trade in unison - there are also plenty of occasions when they diverge. Now is possibly the latter. For example, this week we had a plethora of 'less than positive' economic news. But it didn't stop the market surging back to near record highs. Why? Every bit of bad (or soft) economic news is a step closer for the Fed to lower rates.

Are Commodities Telling Us Something?

Forecasting things like (not limited to) GDP growth, unemployment and inflation is tricky business. Very few get it consistently right (especially policy makers). And whilst macro forecasting is generally a fool's errand - there are things we can observe to improve our probabilities of success (or at least reduce our risk). Consider inflation... whilst not perfect - there are a set of reasonably strong correlations which exist over extended periods. And it's these types of correlations we can use to our advantage.As I will demonstrate - over the past 5 decades (after the US dollar removed its peg to gold in 1971) - inflation levels have largely correlated to what we see with commodity prices.

Powell Appeases the Market… Or Does He?

For me, there were two (big) questions for the Powell this week: (1) are rate hikes off the table - given faster-than-expected inflation and continuing economic strength? and (2) when will the Fed commence QT tapering (and by how much)? Powell was unequivocal on possible rate hikes... forghedaboudit. Equities cheered. But why remove optionality? Why Powell is so convinced we don't see a re-acceleration in inflation? Admittedly it's a lower probability outcome... but we can't rule it out. But he apparently can...

‘AI’ Trumps the Fed, Inflation and the Economy

The Artificial Intelligence (AI) narrative continues to dominate sentiment. Whether it was Google, Meta or Microsoft... the (AI) earnings script was similar. Mega-cap tech companies so far have reported impressive earnings and revenue growth with respect to their AI strategies (across online ads, cloud and search). It was music to investor's ears. However, strength in tech earnings isn't necessary conflating to strength elsewhere. To that end, there is a strong bifurcation with earnings... and that raises some questions.