 Nvidia gives markets a spark
Markets were floating around early last week looking for direction. After being closed on Monday for Presidents Day, the mood was mostly sour with a negative bias. It seemed like we were looking for — and seeing — negativity everywhere. It probably comes down to “market top jitters,” when markets tend to start worrying about going higher and, in the absence of good news, look for reasons to take our gains and go home because surely the next step will be a market downturn. Not so fast. It only took blowout earnings from Nvidia, the artificial intelligence (AI) industry’s leading chip maker, to blow away all those fears and rocket us to new highs. Thursday was one of those days that goes toward the tally of “if you missed the top 10 days” over some period, your returns would be significantly less. The end of last week was a classic example of being rewarded for time in the markets and not caving in to emotions or market timing. Are there still concerns? Sure. Are markets being pushed higher by a small group of stocks? Yes. Is the 10-year treasury well above 4%? It is. Whether these things are reason for concern, optimism or alarm depends on your mindset. People whose mindset is “all I want is upside with no volatility” might want to buy a 10-year U.S. Treasury at 4% and call it a day. A 4% return for an investment you don’t have to worry about is pretty good, and it’s much better than anything that’s been available in recent years. If you’re optimistic, you may see this as an opportunity because we are at all-time highs despite inflation, Federal Reserve tightening and economic malaise. Once people feel better about the economy, interest rates begin to decline and inflation drops to normal levels, the rest of the market might catch up to the high-flying narrow group of stocks because the conditions have become more favorable and earnings prospects have improved. The mindset is the difference between pessimism and optimism. You need to be honest with yourself, pick a direction and stick to your plan. The cost of playing it safe (by forgoing larger gains for potential safety and security) is almost certainly lower returns. On the flip side, the cost of optimism is living with uncertainty and volatility with the potential of achieving much higher returns. Our recommendation is to commit to who and where you are, then commit to a plan and execute. Meeting minutes confirm Fed’s posture The Fed released the minutes from its late January meeting last Wednesday, and they really didn’t offer anything new. We were most likely at the end of rate hikes, and the Fed was going to be very careful as it processed economic data before committing to cutting rates later this year. The minutes showed most Fed officials were concerned about the risk that cutting rates too quickly could allow inflation to rise again after declining significantly in the past year. Only a few policymakers worried about a different risk: keeping rates too high for too long, slowing the economy and potentially triggering a recession. Regardless of what side of the debate you land on, an important thing to remember is the Fed was too late to the inflation game and played a little too much politics by going along with the “inflation is transitory” narrative. The Fed is not some sort of intergalactic council of financial wisdom and isn’t always correct. Fed Chair Jerome Powell wants to restore his credibility and has drawn the line at 2% inflation. It’s also an election year, so he wants to avoid looking political. The Fed’s most predictable course is to stay put, letting the economic data continue to deteriorate and waiting for inflation to creep closer to 2% before changing its posture. That sets the stage for a maximum of three cuts in 2024. Cutting too much too soon will reignite inflation and the Fed will be viewed as having failed in its attempt to tame inflation, likely destroying any credibility it has left. In addition, higher inflation in an election year would be unkind to incumbents and would be viewed as political, so the Fed will likely sit and do nothing for as long as it can. Coming this week Fed officials are on the speaking circuit this week. Their comments will be carefully scrutinized for further clues into what the Fed is thinking. We’ll get the latest new home sales figures on Monday. Inventory is still tight, prices are high and mortgage rates are back over 7%. The first revision of fourth-quarter 2023 gross domestic product (GDP) will be released on Wednesday. We’ll also see MBA mortgage applications and a lot of inventory data. On Thursday, we’ll have some inflation data for the Fed to ruminate on. We’ll also see personal income and spending, followed by personal consumer expenditures (PCE). If these numbers show improvement, markets will be pleased. Earnings continue to trickle in. So far, 79% of S&P 500 companies have reported their earnings. Three-quarters of those have shared positive earnings per share (EPS), while 65% have reported positive revenues. The blended year-over-year earnings growth rate for the S&P 500 is 3.2%; if that holds, it will mark the second consecutive quarter of earnings growth.
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 Markets get a wakeup call
After finishing at new records over Super Bowl weekend, the markets got a rude awakening when the Consumer Price Index (CPI) number for January came out last Tuesday. The markets shrugged off Federal Reserve Chair Jerome Powell’s warning after the most recent Fed meeting that six rate cuts were a bit of an overreach. But when the latest CPI number showed inflation remains stubbornly sticky, markets finally realized that imminent rate cuts aren’t on the horizon. It also became apparent that the current interest rate environment may persist until we see inflation drop from its current level of 3% to the Fed’s target of 2%. The news sparked fears that rates would remain higher for longer and possibly spur a recession — and the market rout was on. The Dow was down over 800 points on Tuesday before it bounced back somewhat as the day ended. Still, last Tuesday was the worst day in nearly a year for U.S. equity markets. Then came some soothing comments from Chicago Fed President Austan Goolsbee on Wednesday, who said the Fed will stay on track to lower rates. He told the Council on Foreign Relations that inflation doesn’t necessarily need to be as low as it was during the last six months of 2023 for the Fed to have confidence it’s returning to the 2% goal. Instead, he said that even if inflation comes in a bit higher for a few months, “it would still be consistent with our path back to target.” Goolsbee also noted that over the past seven months, the core Personal Consumption Expenditures (PCE) inflation gauge — which the Fed also closely tracks and strips out volatile food and energy prices — has been running at the Fed’s 2% target or even below. “Rate cuts should be tied to confidence in being on a path toward the target,” he said. “I think it’s worth acknowledging that if we stay this restrictive for too long, we will start having to worry about the employment side of the Fed’s mandate.” On Thursday, retail sales declined much more than expected, and the talk again shifted to how soon we might see rate cuts. The S&P 500 bounced back, and we ended Thursday at a new record. But then the Producer Price Index (PPI) came in higher than forecasted on Friday, slapping markets around again as we closed out the week on a down note ahead of a three-day weekend for Wall Street. It happens all the time: Fresh highs make markets squirrelly and hypersensitive to any news that either supports or refutes the narrative. This stokes volatility and things spiral from there. However, market sentiment is still very positive, and markets have a clear desire to move higher. It seems we’ve abandoned expectations for six rate cuts in 2024 and are now content with the three the Fed initially proposed starting mid-year. The good news is markets are in a positive mood and able to muscle through the waves of negativity for now. But as with all markets, the sentiment will shift, and we will have a correction sooner or later. We’ll talk about how we could handle that below, but it’s full steam ahead for now. Market is at new highs — now what? The market was at all-time highs last week, and some people are nervous. Questions are abundant: Is the Fed really going to cut rates? When? Will inflation come down? Will oil prices spike and supply chains be disrupted with additional international tensions? Will we have a recession? Who will be president, and what will that mean for markets? After listing all that, it’s no wonder people are nervous. But we can’t control everything. Instead, we should focus on things we can control — like our emotions. If the markets drop 1% from a recent high, here are some things you can do to keep emotions in check:
S&P 500 just keeps climbing How high will the S&P 500 go? The index topped 5,000 for the first time ever last week and has risen in 14 of the last 15 weeks, something it hasn’t done since 1972. It was a mostly calm and quiet week for markets, with one surprise on Monday as activity in the services sector unexpectedly jumped to a four-month high. Also on Monday, Treasury yields rose following comments from Federal Reserve Chair Jerome Powell on Sunday night’s “60 Minutes” that he saw no need to cut rates immediately. The comments were especially concerning since the interview was filmed prior to the latest jobs report showing we added 353,000 jobs last month. If he was determined to keep rates steady before, a strong jobs report definitely won’t change his mind — and that’s in direct conflict with the market’s narrative of rate cuts happening soon. If you’re confused about the current state of the economy, you’re definitely not alone. The data appears to be puzzling and conflicting. Jobs are strong, and the unemployment rate has been below 4% for two straight years. Markets are chugging along, and consumers are still … well, consuming. But it all seems to feel a bit tenuous and unsustainable, especially to Americans who say their long-term financial confidence feels fragile and vulnerable to social and political threats. Many years ago, economist Arthur Okun described the environment as a “high-pressure economy,” which seems an apt description of the current state of things. Pressure can be good; after all, you can’t produce diamonds without pressure. (And some athletes perform best under pressure. Just ask Patrick Mahomes.) But pressure has to go somewhere, or it just continues to build. The only question is when that will happen and what the results will be when it does. Coming this week
Inflation rates appear to be stuck. That’s according to the January Consumer Price Index (CPI) report, which showed inflation increased by 3.1% year over year. Core prices (CPI excluding food and energy) rose 3.9% from January 2023.
The increase wasn’t good news for markets, which have been counting on the Federal Reserve to start cutting interest rates soon. However, Fed Chair Jerome Powell said at the last meeting that they need to see the numbers cooperate before they will consider cutting rates. With inflation stuck above 3%, the data just isn’t there to support rate cuts anytime soon. The Dow dropped nearly 525 points in response, its largest one-day drop in nearly a year. The S&P 500 fell back below the 5,000 mark, while the Nasdaq fell 1.8% and the Russell 2000 tumbled nearly 4% for its worst intraday performance since June 2022. Treasury yields, which have been inching their way down, also popped back up following the CPI report. Markets have ignored signs (and comments from the Fed) that it was too soon for rate cuts as they’ve pushed upward over the last 15 weeks. Now that markets seem to be paying attention, they may start to worry that the Fed will hold rates too high for too long and potentially drive us into a recession. This week’s drop could be the opening volley of a rough patch for markets. One hundred years ago, on February 12, 1924, at Aeolian Hall in New York, Paul Whiteman and his band premiered the work Rhapsody in Blue.
The piece opened with a striking clarinet glissando that grabbed the listener's attention, setting the stage for a whirlwind musical journey. Throughout the composition, audience members encountered a rich tapestry of melodies and harmonies that evoked the bustling energy of urban life, punctuated by moments of introspection and contemplation. At the piano was composer George Gershwin who brought the somewhat backroom jazz style to the forefront of ‘acceptable’ popular music. Gershwin's use of lush orchestration and unexpected harmonic progressions created a sense of spontaneity and adventure, keeping the listener engaged and enthralled. The interplay between solo instruments and the orchestra adds depth and texture to the music, allowing individual voices to shine while contributing to the overall symphonic landscape. The juxtaposition of brassy brass sections and delicate strings, punctuated by the rhythmic pulse of percussion instruments, creates a sense of tension and release that propels the music forward with irresistible momentum. At its core, "Rhapsody in Blue" was and is a celebration of American musical heritage, fusing diverse influences from blues and ragtime to Broadway and beyond. Granted, to today’s ears, it isn’t very “jazzy,” and in hindsight, we don’t think of an orchestra playing sheet music to be in the jazz style. But for the music scene of the 1920s, it was groundbreaking. For me, the beginning trill of the clarinet reminds me of an orchestra warming up, separately getting ready to play before the conductor arrives and brings everyone together. And that is not unlike what financial planning should be…a harmony of separate instruments and an interplay of solos that add depth and texture to your financial life. And yes, the occasional sense of tension is part of that too, propelling you forward to a life well lived. On February 7, 1948, the Right Honorable Fifth Baron of Haden-Guest in the County of Essex was born in New York City.
Christopher Guest remained active in the British House of Lords until a 1999 act removed most of the hereditary peerage seats in Parliament. Aside from politics, Guest became a multifaceted actor, director, writer, and musician, known for his unique contributions to comedy in the country of his birth, where he holds dual citizenship. With a career spanning several decades, Guest has left an indelible mark on the entertainment industry. He first gained prominence as part of the ensemble cast of "This Is Spinal Tap," a mockumentary masterpiece that showcased his improvisational skills and comedic genius. Guest's signature mockumentary style continued to shine in films like "Waiting for Guffman," "Best in Show," and "A Mighty Wind," which he not only starred in but also directed and co-wrote. His films often feature an ensemble cast and explore the eccentricities and quirks of various subcultures with wit and charm. Guest's ability to blend satire with genuine human emotion has earned him critical acclaim and a dedicated fanbase. His contributions to comedy cinema have solidified his legacy as a true pioneer in the genre. Well, in recent weeks, stock markets (at least the S&P 500) have not waited for Guffman or anyone else as they charged into record territory. “The numbers all go to eleven. Look right across the board, eleven, eleven, eleven and…” So, the question is, does this one go to eleven? Maybe, but the best in the show remain stubbornly entrenched as the major tech giants again lead the markets higher with their impressive earnings season. Perhaps the good news is that signs of broadening are embedded in those earnings reports. It isn’t just AI providing the mighty tailwind in Q4, and economic growth remains decent, which may serve to float all of the rest of the boats for a while. In the words of Spinal Tap’s Viv Savage: “Quite exciting, this computer magic!” Powell pushes back — and markets get a dose of reality
Remember the “Soup Nazi” from Seinfeld? Well, Federal Reserve Chairman Jerome Powell channeled his inner “Soup Nazi” with an emphatic “No rate cuts for you” last Wednesday. He essentially poured cold water (or soup) all over the market’s expectations that rate cuts would start as early as the March meeting. In response, markets had a tantrum and handed us the worst day since last September. Markets have once more convinced themselves to expect a very narrow result and were shocked when reality intervened. Fortunately, the shock didn’t last long; markets quickly made the best of it, rallying on Thursday and Friday in the hopes that even though Powell said “no” in January, he may say something very different in March. Then we got the latest earnings report from Meta (Facebook), which showed that despite higher interest rates the big tech companies were still very profitable. The jobs number also blew away expectations (more in the next section). The trend of “bad news is good” didn’t play out, since stronger jobs and a resilient economy run counter to the case for lowering rates. Still, the data didn’t seem to dampen enthusiasm as we ended the week. Markets instead focused on solid earnings and visions of future rate cuts dancing in their heads. After all, if Meta can crank out earnings in the current rate environment, just wait and see what happens to Big Tech when rates start dropping. The market quickly made the shift from waiting for the Fed to pause to now expecting cuts. How many and how soon remains to be seen, but it’s clear we will have rate cuts — and those will likely create some near-term volatility. The mood could also sour if the economic, job growth and inflation data remain stubbornly high, which could lead the Fed to keep rates where they are for longer. And the closer we get to the election, the less enthusiastic the Fed will be to cut at all. But markets seem stubbornly locked into their expectations for a rate cut sooner rather than later. Jobs refuse to stop growing The market was looking for weakness on the jobs front but definitely didn’t get it last week. Consensus was calling for 170,000 new non-farm payrolls, and we got more than twice that at 353,000. Wages also grew above expectations (+4.5% vs. 4.1% year-over-year), while the unemployment and labor participation rates remained unchanged. The continued strong jobs and fourth-quarter gross domestic product (GDP) readings, along with a stalled inflation rate at just over 3%, are consistent with the Fed’s stated desire to hold back on lowering rates lest we see a resurgence of inflation. Markets were initially buoyed by the ADP report showing 107,000 new jobs, far below the consensus estimate of 145,000 and significantly lower than last month’s 158,000 reading. But then the Bureau of Labor Statistics (BLS) comes in nearly three times higher. Who is right: ADP or BLS? Based on the data, maybe we don’t need to see six rate cuts this year. The markets can turn anything to suit the prevailing mood, and right now expectations are based on an optimistic upward bias. Like a grounded teenager trying to explain why they need to use the car on Saturday night, the market seems to be torturing truth and logic in pursuit of the end goal. Markets were expecting six cuts, were flatly told there would be three possibly, and the data currently leans toward fewer cuts. Plus jobs, GDP and inflation are all signaling maintaining rates at current levels. Still, it’s Saturday night for the markets — “everybody” is going to this party and they don’t want to miss out. Coming this week
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Patrick HueyPatrick Huey is a small business owner and the author of two books on history and finance as well as the highly-rated recently-released fictional work Hell: A Novel. As owner of Victory Independent Planning, LLC, Patrick works with families and non-profit organizations. He is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Advisor in Philanthropy® and an Accredited Tax Preparer. He earned a Bachelor’s degree in History from the University of Pittsburgh, and a Master of Business Administration from Arizona State University. Archives
September 2024
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