The Federal Reserve remains in a holding pattern, circling the airport until a safe runway opens up on which to land the plane, following an absolute deluge of earnings reports and important economic data last week. Stagflation, anyone? Use of this rather scary term that is reminiscent of a 1970s stock slump is probably premature at this point, but the chances of a “worst of both worlds” outcome of simultaneous stubbornly high inflation and rapidly slowing economic growth do appear to have increased a little over the last few weeks.
In terms of last week’s earnings, the market took Meta/Facebook and a loaded pistol behind the woodshed, but lavished confetti and a lot of love on the likes of Microsoft, Alphabet/Google and even Tesla, which was enough to help carry the indexes higher for the first week in four.
Following a quiet weekend on the newswires and a technically very oversold condition, the six-day losing streak for stocks finally came to an end on Monday with an impressive rebound led by NASDAQ tech and Small Caps ahead of a slew of earnings reports from a number of big-time names, to recover some of the ground lost from the previous week’s miserable performance. This added strength to the idea that a 5% decline from recent highs might be viewed as simply a retreat from unsustainably over-optimistic expectations thereby removing excess froth, rather than a sudden and more fundamental negative turn. Later in this report, I’ll discuss what might change this view.
The feel-good vibes continued into Tuesday, as some stellar earnings reports came out, accelerating the recovery in stock prices, again powered primarily by NASDAQ tech and Small Caps.
Predictably however, 2024’s biggest POS stock, Tesla (TSLA), bucked the earnings trend after-hours on Tuesday with a disastrous report, showing that profits collapsed, the cash-burn rate rocketed, sales missed expectations and margins shrank in a marketplace that seems to be falling out of love with the company’s product. However, a hefty 43% decline in the stock price since January has a lot of calamitous news already baked in and the stock actually rallied hard on the announcement that the firm was being forced to bring forward the launch of some new, cheaper vehicles and that is working on some form of licensing agreement for its self-driving technology with a “major automaker”.
The two-day rally cooled off on Wednesday, with stocks taking a breather and closing unchanged ahead of Meta/Facebook (META) taking the baton with its report after the closing bell. Meta’s report was kind of the mirror image of Tesla’s. It mildly beat expectations on revenue and doubled its profits from a year ago, but upcoming scenarios (like massive imminent capital expenditure resulting from yet another apparent pivot towards the latest shiny object - this time from the metaverse to AI) worried Wall Street and the stock got pounded hard in after-hours trading.
Thursday morning’s estimate for Gross Domestic Product (GDP) disappointed, showing that the U.S. economy likely grew at an annualized rate of 1.6% in Q1 2024, well below the 2.4% expectation and a significant slowdown on its recent pace.
Traders extrapolated some of Thursday’s data into expectations for the next day’s inflation report and didn’t like what they saw. Market interest rates spiraled higher again, partly driven by the futures-driven expectation of when the first interest rate cut is most likely to be now being pushed out to December. The annihilation of Meta/Facebook’s stock price continued and the indexes were rattled and got beaten up pretty badly.
Two of Meta/Facebook’s Magnificent Seven cohorts, Microsoft (MSFT) and Alphabet/Google (GOOGL) fared much better when their earnings releases hit the markets after the closing bell. Pretty much everything to do with Microsoft looked great and handily beat expectations, especially in the cloud computing arena. Alphabet/Google’s results were so impressive that the firm was even able to announce its first-ever dividend and also a stock buyback. Again, cloud computing was at the forefront of the good news.
On Friday morning, we learned that the Federal Reserve’s go-to Core Personal Consumption Expenditures (PCE) price index measure of inflation remained zippy, increasing 0.3% from the prior month and 2.8% from a year ago, but all pretty much in line with expectations. This allowed Wall Street to properly celebrate the previous night’s earnings when the market opened and stocks enjoyed a jolly day to cap a nice week.
It’s important to understand that the rally from the October lows did not stall because things went suddenly “bad.” It happened because they aren’t as good as everyone was hoping they would be and those hopes were very, very optimistic. Given that, what is it that would turn this pullback into something more sustained and damaging?
Growth slows. If growth rolls over, we could be looking at stagflation. In stagflation, the S&P 500 could quite easily trade down to a level of 15X multiple of earnings. That implies a decline of over 1,000 points from here. Growth is the single most important influence on the economy and if it meaningfully slows, look out below. The key indicators to watch: new payrolls, unemployment rate (both coming out this week).
Rate hikes back on the table. The heavy lifting for the October-March rally was driven by markets assuming that rate hikes were over. If this turns out to not be true, it’ll create a major valuation reset and a give-back of the entire rally is not off the table. The key indicator to watch: futures market rate cut expectations (see FEDWATCH INTEREST RATE TOOL, shown below and every week in this report).
Oil price spikes. The conflicts in Russia/Ukraine and Israel/Hamas spreading regionally would guarantee this, but there are other possibilities including the disruption of global shipping and OPEC supply cuts. Rising oil would increase headline inflation and the optics and politics of high oil and higher inflation would likely eliminate any possibility of a rate cut. The key indicator to watch: WTI crude oil prices, especially a move towards or even beyond $100/barrel.
AI enthusiasm wanes. While AI enthusiasm hasn’t been the reason stocks have rallied, it has contributed to the magnitude of the gains and that’s why it matters. If doubt about the transformative power of AI starts to creep in, that will add downward pressure to prices in the tech sector which will gravely impact the major indexes, which are very tech-heavy. There’s no doubt that we are now entering the “show me” phase of AI, a phase that crypto for instance hasn’t managed to get out of for years. The key indicator to watch: Nvidia’s stock price (NVDA). It’s the darling of AI enthusiasm and the firm’s earnings on May 22nd will be watched closely.
The general macroeconomic set-up is still positive for stocks. However, we cannot lose sight of the fact that that can absolutely change and these are the four factors that we’ll be watching for any sign of that.
OTHER NEWS ..
Sector Takeaways .. What can the relative performances of particular sectors tell us about the stock market as a whole .. ?
The fact that both the Consumer Cyclical and Consumer Defensive sectors are both rated as underperforming emphasizes growing investor concerns about the outlook for the health of the consumer in 2024,
the strong underperform ratings on Real Estate and Utilities reiterate there are ongoing worries about a “higher-for-longer” Fed policy rate,
the outperformance rating of Energy underscores upside inflation risks, and
the neutral performance rating on Technology and Communication Services suggest the market leaders of 2023 are taking a breather here in Q2 2024.
No Shrimp On The Barbie For You, Elon .. An Australian court ordered X/Twitter to remove graphic videos of a brutal Sydney church murder and its associated promotion of Russian-generated, dangerous and false conspiracy nonsense. CEO Elon Musk pointedly refused to have anything taken down. Australian government officials, including Prime Minister Anthony Albanese, have commendably been at the forefront of trying to finally hold social media companies and their billionaire owners to account for what they publish and promote and last week Musk was referred to as, among plenty of other things, an “out of touch, arrogant billionaire who thinks he is above the law and common decency” , a “bloke who’s chosen ego and violence over common sense” as well as, memorably, a “social media knob with no social conscience” .
In between getting rid of 10% of Tesla’s workforce, having to recall every single Cybertruck ever sold, endorsing conspiracy theories surrounding Trump’s fraud trial, lawyering up to make damn sure he squeezes every last penny of his disputed $50 billion+ Tesla pay package and ineptly seeking to interfere in Brazilian domestic constitutional politics, Musk somehow found time last week to push back online against his Australian critics, predictably playing his usual tiresome“free speech” card as an excuse for refusing to do anything to address online violence and harmful disinformation.
Continuing Lower .. U.S. births declined in 2023 to their lowest level in more than 40 years, continuing a two-decade trend of Americans having fewer children. Total births for the year fell 2% to 3.59 million, according to preliminary data released Thursday from the U.S. National Center for Health Statistics.
Birth rates in the U.S. have been particularly stifled by specific factors like a lack of paid family leave, student loan debt and skyrocketing health costs.
THIS WEEK’S UPCOMING CALENDAR ..
This week will be the busiest of Q1 2024 earnings season, as more than 150 S&P 500 companies are scheduled to publish their results, including Apple, Amazon, Eli Lilly, Pfizer, CVS, Qualcomm, Paramount, Advanced Micro Devices, Super Micro Computer, Etsy, Mastercard, ConocoPhillips, Moderna and Monster Beverage.
On Wednesday afternoon, the Federal Reserve’s interest rate decision-making committee is overwhelmingly expected to keep rates unchanged. As usual, however, Chairman Jerome Powell’s post-announcement press conference will be closely scrutinized for clues about future Fed actions.
The Job Openings and Labor Turnover Survey (JOLTS) on Wednesday is expected to show 8.7 million job openings on the last business day of March.
Then there’s Jobs Report Friday. Consensus calls for a gain of 210k payrolls in April, which would be down from the 303k from the previous month. The unemployment rate is expected to remain unchanged at 3.8%.
ARTICLE OF THE WEEK ..
“When a geopolitical risk arises, our natural tendency is to immediately become foreign policy experts, and also believe that we can confidently link complex .. political situations to financial market outcomes.” An investor checklist for dealing with geopolitical risk.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Technology (two biggest holdings: Microsoft, Apple) - up 3.7% for the week.
Last week’s worst performing U.S. sector: Basic Materials (two biggest holdings: Linde, Sherwin-Williams) - up 0.5% for the week.
SPY, the S&P 500 Large Cap ETF, is made up of the stocks of the 500 largest U.S. companies. Its price rose 2.8% last week, is up 7.5% so far this year and ended the week 2.9% below its all-time record closing high (03/27/2024)
IWM, the Russell 2000 Small Cap ETF, is made up of the bottom two-thirds in terms of company size of the group of the 3,000 largest U.S. stocks. Its price rose 2.7% last week, is down 1.2% so far this year and ended the week 18.2% below its all-time record closing high (11/08/2021)
DXY, the U.S. Dollar index, is an index that measures the value of the U.S. Dollar against a weighted basket of six other major currencies (the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krone and the Swiss Franc). It was unchanged last week, is up 4.6% so far this year and is up 16.8% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
7.17%
One week ago: 7.10%, one month ago: 6.79%, one year ago: 6.43%
Data courtesy of: FRED Economic Data, St. Louis Fed as of last Thursday.
FEAR & GREED INDEX ..
“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffet.
The Fear & Greed Index from CNN Business can be used as an attempt to gauge whether or not stocks are fairly priced and to determine the mood of the market. It is a compilation of seven of the most important indicators that measure different aspects of stock market behavior. They are: market momentum, stock price strength, stock price breadth, put and call option ratio, junk bond demand, market volatility and safe haven demand.
Extreme Fear readings can lead to potential opportunities as investors may have driven prices “too low” from a possibly excessive risk-off negative sentiment.
Extreme Greed readings can be associated with possibly too-frothy prices and a sense of “FOMO” with investors chasing rallies in an excessively risk-on environment . This overcrowded positioning leaves the market potentially vulnerable to a sharp downward reversal at some point.
A “sweet spot” is considered to be in the lower-to-mid “Greed” zone.
Data courtesy of CNN Business as of Friday’s market close.
The 50-day moving average of the S&P 500 remains above the 200-day. This is a continued indication of an ongoing technical uptrend.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE ..
45% (224 of the S&P 500 stocks ended last week above their 50D MA and 276 were below)
One week ago: 34%, one month ago: 73%, one year ago: 38%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
71% (357 of the S&P 500 stocks ended last week above their 200D MA and 143 were below)
One week ago: 68%, one month ago: 77%, one year ago: 46%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the largest 500 publicly-traded stocks in the U.S. are trending higher or lower, as defined by whether the stock price is above or below their more sensitive 50-day (short term) and less sensitive 200-day (long term) moving averages which are among the most widely-followed of all stock market technical indicators.
The higher the reading, the better the deemed health of the overall market trend, with 50% considered to be a key pivot point. Readings above 90% or below 15% are extremely rare.
WEEKLY US INVESTOR SENTIMENT (outlook for the upcoming 6 months) ..
↑Bullish: 32% (38% a week ago)
⬌ Neutral: 34% (28% a week ago)
↓Bearish: 34% (34% a week ago)
Net Bull-Bear spread: ↓Bearish by 2 (Bullish by 4 a week ago)
For context: Long term averages: Bullish: 38% — Neutral: 32% — Bearish: 30% — Net Bull-Bear spread: Bullish by 8
Survey participants are typically polled during the first half of the week.
Data courtesy of: American Association of Individual Investors (AAII).
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now following the Fed’s next meeting on May 1st?
Yes .. 2% probability (4% a week ago)
No .. 98% probability (96% a week ago)
Will interest rates be lower than they are now following the Fed’s following meeting on June 12th?
Yes .. 11% probability (17% a week ago)
No .. 89% probability (83% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
5.125% (0.25% lower than where we are now, implying one rate cut in 2024)
One week ago: 5.125% (implying one rate cut), one month ago: 4.625% (implying three rate cuts)
All data based on the Fed Funds rate (currently 5.375%). Calculated from Federal Funds futures prices as of the market close on Friday. Data courtesy of CME FedWatch Tool.
HIGH YIELD CREDIT SPREAD ..
3.24%
One week ago: 3.39%, one month ago: 3.15%, one year ago: 4.64%
This closely-watched spread is a strong indicator of the risk inherent in the professional marketplace and the extent to which such risk is growing or easing. The high-yield credit spread is the difference between the interest rates offered for riskier low-grade, high yield (“junk”) bonds and those for stable high-grade, lower yield bonds, including deemed risk-free government bonds, of similar maturity.
A reading that is high/increasing indicates that “junkier” bond issuers are being forced to move their yields higher to compensate for a greater risk of default and is considered to be a reflection of broadly deteriorating economic and market conditions which could well lead to lower stock prices.
A reading that is low/decreasing indicates a reduced necessity for higher yields. This reflects less prevailing market risk and more stable or improving conditions in the overall economy and for stock prices.
For context .. this reading was regularly below 3.00% for much of the 1990s, got as high as 10.59% after 9/11 and the subsequent Dotcom Crash of 2002, peaked at 21.82% in the Great Financial Crisis in December 2008 and spiked from 3.62% to 10.87% in the space of about a month during the February/March 2020 COVID crash. The historical average since 1996 is a little over 4.00%.
Data courtesy of: FRED Economic Data, St. Louis Fed as of Friday’s market close.
US TREASURY INTEREST RATE YIELD CURVE ..
The highest rate on the yield curve (5.51%) is being paid for the 2-month duration and the lowest rate (4.67%) is for the 10-year.
The most closely-watched and commonly-used comparative measure of the spread between the higher 2-year and the lower 10-year fell from 0.35% to 0.29%, indicating a flattening in the inversion of the curve last week.
The interest rate yield curve remains unusually “inverted” (i.e. shorter term interest rates are generally higher than longer term ones). Based on the 2-year vs. 10-year spread, the curve has been inverted since July 2022.
Historically, an inverted yield curve is not the norm and has been regarded by many as a leading indicator of an impending recession, with shorter term risk regarded to be unusually higher than longer term. The steeper the inversion, the greater the deemed risk of recession.
Data courtesy of ustreasuryyieldcurve.com as of Friday. The lightly shaded area on the chart shows the current Federal Funds rate range.
WWW.ANGLIAADVISORS.COM | SIMON@ANGLIAADVISORS.COM | CALL OR TEXT: (646) 286 0290 | FOLLOW ANGLIA ADVISORS ON INSTAGRAM
This material represents a highly opinionated assessment of the financial market environment based on assumptions and prevailing data at a specific point in time and is always subject to change at any time. Although the content is believed to be correct at the time of publication, no warranty of its accuracy or completeness is given. It is never to be interpreted as an attempt to forecast any future events, nor does it offer any kind of guarantee of any future results, circumstances or outcomes.
The material contained herein is not necessarily complete and is wholly insufficient to be exclusively relied upon as research or investment advice or as a sole basis for any investment or other financial decisions. The user assumes the entire risk of any decisions made or actions taken based in whole or in part on any of the information provided in this or any Anglia Advisors communication of any kind. Under no circumstances is any of Anglia Advisors’ content ever intended to constitute tax, legal or medical advice and should never be taken as such. Neither the information contained or any opinion expressed herein constitutes a solicitation for the purchase of any security or asset class.
Posts may contain links or references to third party websites or may post data or graphics from them for the convenience and interest of readers. While Anglia Advisors might have reason to believe in the quality of the content provided on these sites, the firm has no control over, and is not in any way responsible for, the accuracy of such content nor for the security or privacy protocols that external sites may or may not employ. By making use of such links, the user assumes, in its entirety, any kind of risk associated with accessing them or making use of any information provided therein.
Those associated with Anglia Advisors, including clients with managed or advised investments, may maintain positions in securities and/or asset classes mentioned in this post.
If you enjoyed this post, why not share it with someone or encourage them to subscribe themselves?
