THE WEEK IN REVIEW: June 16-22, 2024

All hail Nvidia!

Just when it couldn’t get any bigger — it did! Last week, Nvidia boasted a market cap larger than the combined stock market values of the UK, Germany and France. It also passed Microsoft and Apple as the highest-valued company in the world and has almost singlehandedly pushed the S&P 500 to 5,500 points.
What’s next? Will Nvidia
announce its independence and become a new country? Last year, we had the Magnificent 7 and were complaining about the market not having enough breadth plus the rest of the market not contributing. Now we have one company practically driving all the excitement, and most of the market is flat — so the question that needs to be asked is, how long will this last? Will Nvidia turn out to be the Bitcoin of 2021/2022 with all the associated hoopla and hysteria?

Has Nvidia planted a flag for the rest of the market to aspire to, and will everyone else sprint to catch up once we get an easing in interest rates? Right now, much of the S&P 500 is trading significantly below prior highs. If the tech giants just hold their ground and the rest of the market catches up, we can legitimately say we are witnessing batting practice before the ballgame for this current rally. But if the tech giants flow and flounder, then we might as well be headed to the parking lot after the seventh-inning stretch because this game is over and there’s no point watching until the bitter end.

The interesting thing is that there’s no clear direction pointing to either scenario, yet here we are, setting new highs and being rewarded for our discipline. The temptation is out there, but it’s hard to argue with a 15% return on the S&P 500 in the first half of this year, even if how we got here seems irregular. We will say it again: Now is not the time to get cute or fancy and try to outsmart the markets. Stay focused, don’t give in to fads and assess your risk tolerance. This is the time to make adjustments if you need them.

Rates rally — finally?

We’ve said before that yields will likely decline in the second half of 2024. Our take has been that the Federal Reserve would continue to dither, waiting on data and holding as long as it possibly could before making a move because it continues trying to push inflation to 2%. The market has decided to take the lead and do some of the heavy lifting for the Fed, and lower market rates will make the Fed’s job a little easier.

The concern here is if the Fed is in the process of making a policy mistake by keeping rates higher for longer, will lower rates accelerate the mistake or cushion it? Right now, the market is betting that we will not have a recession and that inflation will continue to approach 2%.

With that backdrop, rates have been dropping since last month, and the total return on bonds has been solid. At the same time, equity markets have been streaking upward (which we just discussed above). But are we really on an approach toward a soft landing, or are we about to hit the economic skids? Bond markets are betting on the former, and second-quarter gross domestic product (GDP) could go a long way toward settling that argument. For now, it feels good to have options, which isn’t something we could say a few years ago when the stock market was the only place we could turn to for any meaningful returns.
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Coming this week

• Summer is getting into full swing, and things may get pretty slow as people take vacations and offices are closed for long weekends. The data will continue as scheduled, but don’t expect a whole lot of extras. Get set for a much slower pace without a lot of drama unless something extraordinary happens. The good news is that markets are pretty optimistic, and it will take a lot to derail this positive momentum. Let’s hope for a slow, lazy summer without much excitement and a market that meanders upward.
• This week’s data includes consumer confidence on Tuesday plus new home sales and MBA mortgage applications on Wednesday.
• On Thursday, we’ll see the latest unemployment claims and the second revision of first-quarter GDP. The initial reading was revised from +1.6% to +1.3%; hopefully, it won’t be revised down again.
• Finally, on Friday we’ll get some spending and inflation data in the form of personal income and spending, plus the personal consumption expenditures (PCE) readings for May. The Fed likes this measure better than the Consumer Price Index (CPI), so here’s hoping for a continuation of declining inflation to bolster talk of more than one rate cut.
• Looking ahead to next week and the July 4 holiday: With the 4th falling on a Thursday, it will be the quietest market we’ve seen all year.