Wall Street was in a very optimistic mood last week, boosted by a highly positive take on the outcome of the Fed interest rate-setting meeting on Wednesday and its quarterly “Dot Plot” projections. AI confidence continued to thrive and the process of global interest rate cuts finally got under way in Switzerland. The upshot was the best week of the year so far for stocks.
Nvidia’s Developer Conference on Monday, which showcased spectacular new chips aimed at extending the company’s dominance of AI, briefly distracted Wall Street from its laser focus on Wednesday’s Fed meeting (see below). Along with Alphabet/Google’s announcement that it is in talks with Apple to build its artificial-intelligence engine Gemini into the iPhone, it powered a rally as Big Tech partied like it was 2023. Even poor old Tesla managed to get in on the act. Most of the indexes moved higher as a result.
On Tuesday morning, an era came to an end when the Bank of Japan became the last major central bank in the world to abandon negative interest rates. It moved its target range up to 0.00% to 0.10%, its first rate increase since 2007. U.S. stocks staged an afternoon rally after a shaky start, led again by Big Tech to notch another positive day.
Wednesday was Fed Day. As recently as December of last year, March 20th had been circled on everyone’s calendar as the assumed kickoff date for six or seven interest rate cuts in 2024. Those days are long gone, market-driven probabilities now point to June or even July as the most likely starting point for maybe just two or perhaps three cuts this year.
Not wanting to front-run the Fed, the market sat on its hands in advance of the entirely predictable announcement at 2pm ET of no change to interest rates, choosing instead to focus on the quarterly “Dot Plot” projections from individual committee members which, relative to December’s plot, predicted higher inflation for longer, stronger economic growth, lower unemployment and an unchanged median forecast of three interest cuts in 2024 (and projecting three more in 2025, down from four in the previous quarter’s plot) although an increasing number of committee members are now looking at no more than two cuts this year.
Chairman Jerome Powell’s press conference was a masterclass at saying absolutely nothing new and Wall Street decided to take the Dot Plot to mean that the Fed will tolerate slightly higher inflation for longer, keeping summer interest rate cuts on the table and Goldilocks still alive.
Stocks ripped higher in the last hour and a half of the day’s trading as a result and the trio of the S&P 500 index, the NASDAQ and the Dow Jones Industrial Average all closed the session at new record highs, the first time that has happened since late 2021.
On Thursday morning, the Bank of England held interest rates steady in the UK but another era began when the Swiss National Bank surprised everyone by cutting its rates by 0.25%, becoming the first major central bank to do so since the hiking cycle began at the beginning of 2022. Wednesday afternoon’s momentum followed through with U.S. stocks continuing to march higher on the back of the Fed’s continued three-rate-cuts-in-2024 projection, deeper and deeper into record territory.
With no major economic data and very few earnings reports on the docket, trading was muted on Friday as the bulls took a breather, even though the NASDAQ still managed a small gain on the day to set yet another new record high.
The fact is we’re going to exit 2024 with interest rates likely above 4.50% and that is absolutely not where we thought we’d be when this stock market rally began. So far, the economy has had enough impetus to withstand this, but that will not last forever.
The trick to a soft landing is the Fed being able to cut interest rates before the economy begins to lose momentum and that is why rate cuts sooner rather than later are so positive for markets, as they reduce the chance of a slowdown.
It’s for this reason that the most important economic data lately hasn’t been inflation, it’s the growth metrics starting to show signs of a loss of momentum. If data consistently starts to show that economic growth is cracking - but the Fed can’t cut interest rates in time because of sticky inflation - then the chances of a hard landing will rise sharply and that’s the biggest negative we all need to watch for going forward.
If the S&P 500 was at 4,000 or even 4,500, a slowdown wouldn’t be so worrisome. But it’s at 5,234, and if economic data begins to roll over, a >10% pullback can feasibly happen very quickly and even then, it’s tough to say we’d be at levels of solid support. The point here is that we don’t need real recession risk to cause a meaningful pullback. Just legitimate growth concerns could do it, given where valuations are.
Bottom line, we need to focus on growth. Acutely slowing growth is the rally killer we need to watch for. High inflation and higher interest rates aren’t, of themselves, rally killers. It’s that both of them make a slowing more possible and that’s the real problem.
For now, however, the bullish drumbeat of generally still-solid growth, largely falling inflation, impending Fed interest rate cuts and seemingly endless AI enthusiasm is alive and well and many major stock indexes are breaking new highs almost daily as a consequence.
OTHER NEWS ..
Still Risky .. Investors got a big wakeup call last week that the dangers of, and the fraud and bad actor risk associated with, crypto investing have not gone away, even now that Bitcoin (BTC) is available in a nice, user-friendly and regulated ETF wrapper. The BitMex crypto exchange said it was investigating “unusual trading activity”, including possible misconduct, that led to a flash crash in BTC on its platform after hours on Monday evening. At one point, the price of BTC against Tether’s USDT stablecoin fell to as low as $8,900 on BitMEX while it was trading above $66,000 everywhere else.
It appeared that this was one big “whale” investor, or perhaps a few, heavily selling BTC steadily over a few hours in what seemed to be a very planned and co-ordinated fashion. Over 400 bitcoins were dumped over the course of two hours.
Happy Talk .. Finland was crowned the world’s happiest country for the seventh consecutive year in the global life-satisfaction rankings, but a sharp drop in living standards among young Americans meant that the world’s biggest economy failed to make the top twenty happiest populations on earth for the first time ever.
Denmark and Iceland remained second and third, respectively, in The World Happiness Report unveiled on Wednesday by the United Nations Sustainable Development Solutions Network. The United States tumbled from 15th to 23rd in the world, “driven mostly by a large drop in the well-being of Americans under the age of 30,” the report said. The results are based on three-year averages, reducing the impact of changes over a single year and is based on factors such as gross domestic product, a sense of freedom, life expectancy, perception of institutional and political corruption in society, having someone to count on, generosity and levels and intensity of violence and crime, including political violence. Among specific age groups, Lithuania topped the world ranking for children and people under 30 (the U.S. came in 62nd in this category), while Denmark is the world’s happiest nation for those 60 and older.
UNDER THE HOOD ..
While the longer term uptrend has remained solidly in place from a technical standpoint, in the short term there had been signs in the last few weeks suggesting that a pullback in the major price indexes was increasingly likely. In the context of such a robust long-term market uptrend, any such pullback would even be viewed as a welcome rest for apparently overheated stocks and serve as an opportunity for the underinvested.
But last week many of those slightly shaky short term indicators actually began to repair themselves quite impressively and pretty much the entire technical picture looks rosy again across the board.
The new all-time price highs that appeared last week were not limited to the broad-based major price indexes. The S&P 400 Mid-Cap Index also reached a new all-time high, as did sector indexes in Financials, Industrials, Basic Materials and Technology. Even the Healthcare sector index is close to breaking its all-time high which it only just set last month.
Several market sentiment indicators are starting to reach extreme levels. This is not a reason to sell, but rather a comment on the investing environment. In the short term at least it may all be too good to be true.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
U.S. stock and bond markets will be closed on Friday in observance of Good Friday.
The final trickle of earnings releases this week will include those from GameStop, Walgreens, Carnival, Cintas and McCormick.
The Personal Consumption Expenditures (PCE) price index for February comes out on Friday. The core version is what the Fed uses to gauge what it views as the true inflation figure and is therefore a crucial reading. It is forecast to show a rise of 2.8% year over year, matching the January number.
Before then, we get to see the Durable Goods report on Tuesday.
ARTICLE OF THE WEEK ..
Josh Brown bluntly explains how financial media market predictions are such bullshit.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Communication Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - up 3.2% for the week.
Last week’s worst performing U.S. sector: Real Estate (two biggest holdings: Prologis, American Tower) for the second week in a row - down 1.3% 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 2.4% last week, is up 9.7% so far this year and ended the week 0.2% below its all-time closing record high (03/21/2024)
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 1.4% last week, is up 2.2% so far this year and ended the week 15.5% below its all-time closing record 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 rose 0.8% last week, is up 3.0% so far this year and is up 13.8% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.87%
One week ago: 6.74%, one month ago: 6.90%, one year ago: 6.42%
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.
The “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 ..
76% (379 of the 500 largest stocks in the U.S. ended last week above their 50D MA and 121 were below)
One week ago: 70%, one month ago: 64%, one year ago: 19%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
79% (395 of the 500 largest stocks in the U.S. ended last week above their 200D MA and 105 were below)
One week ago: 75%, one month ago: 72%, one year ago: 41%
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: 43% (46% a week ago)
⬌ Neutral: 30% (32% a week ago)
↓Bearish: 27% (22% a week ago)
Net Bull-Bear spread: ↑Bullish by 16 (Bullish by 24 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 .. 12% probability (6% a week ago)
No .. 88% probability (94% a week ago)
Will interest rates be lower than they are now following the Fed’s following meeting on June 12th?
Yes .. 75% probability (59% a week ago)
No .. 25% probability (41% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.625% (0.75% lower than where we are now, implying three rate cuts of 0.25% each in 2024)
One week ago: 4.625% (implying three rate cuts), 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 ..
3.05%
One week ago: 3.15%, one month ago: 3.34%, one year ago: 4.85%
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 1-month duration and the lowest rate (4.20%) is for the 5-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 0.41% to 0.37%, indicating a flattening in the inversion of the curve.
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.
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