Last week was all about Big Wednesday, with pretty limited price movements on any of the other four days. Interest rate cut sentiment has now swung back to more hopeful again, with the futures-driven expected number of interest rate cuts this year moving up from one to two. This was in the same week that the Fed moved its own projection of the number of 2024 cuts lower from three to one. Huh? The S&P 500 posted its seventh weekly gain in the last eight weeks.
As a highly consequential week began on Monday, Wall Street was laser-focused on a potentially massive day on Wednesday with the latest inflation data and the Federal Reserve interest rate announcement / quarterly dot plot chart / Chairman Jerome Powell’s press conference all coming within hours of each other. Stocks spent most of the week’s first session playing defense, hovering around the unchanged line. Small gains were eventually eked out by the close, with markets holding their collective breath ahead of Wednesday’s possible earthquake.
After a stuttering start on Tuesday, stock indexes turned things around later in the day, especially those with a heavy weighting in Apple (AAPL) whose price broke out, surging over 7% during the session to a new record high on the back of its AI integration announcement (see OTHER NEWS below) and once again eclipsing Microsoft (MSFT) as the biggest company in the world by market value. The S&P 500 closed at yet another all-time record high before Wall Street traders headed home for a mug of hot cocoa and an early night ahead of the following day’s guaranteed drama.
Financial D-Day began on Wednesday with the very Fed-friendly pre-market release of the latest Consumer Price Index (CPI) measure of retail inflation which showed that, according to the headline rate, there was basically zero inflation in the U.S. in the month of May and that the annualized rate has fallen to +3.3%. The more important Core inflation rate, which strips out food and energy costs, showed a lower-than-expected +0.2% increase in May and +3.4% annualized, cooling to the slowest pace in more than three years.
The interest rate environment began changing before our very eyes. Treasury rates plunged with the 10-year rate plummeting to its lowest levels of the year and both stocks and bonds were off to the races, exploding out of the gate the moment the market opened, including AAPL roaring even higher again and both Alphabet/Google (GOOGL) and Oracle (ORCL) reaching their own new record all-time highs during the session.
The Dot Plot report of the Fed’s economic projections, notably prepared before the CPI release, showed the average number of interest rate cuts in 2024 anticipated by the committee members falling from three in the previous report in March to just one this time around (four of nineteen committee members even projected no cuts at all this year). However, it raised average expectations for the number of cuts in 2025 from three to four.
Wall Street looked at all this and seemed to pivot to the idea that an increased risk of recession caused by the Fed not cutting interest rates appears to now outweigh the increased risk of inflation caused by cutting them. Stock prices eased a touch following Powell’s press conference but still finished the day with very healthy gains, with the S&P 500 and NASDAQ having galloped even deeper into all-time record territory.
On Thursday morning, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers confirmed an apparent resumption of the inflation downturn, with prices actually falling by -0.2% in May, versus an expectation of a small increase, for an annualized rate of just +2.2%.
Stock prices bounced around a bit following Wednesday’s euphoria, finishing the session a smidge higher with the S&P 500 scoring its fourth consecutive record close, but markets appeared to still be digesting the previous day’s somewhat bewildering information dump.
The indexes took a breather on Friday, going nowhere basically, even though the NASDAQ advanced fractionally to record its latest all-time record high.
The top four U.S. stocks by market valuation that drive the indexes – Apple, Microsoft, NVIDIA and Alphabet/Google – have now swollen to a valuation of over $11 trillion (that’s $11,000,000,000,000), meaning that they now collectively account for well over 20% of the total U.S. stock market value (and growing by the day) and just these four stocks alone are bigger than every other stock market in the world, including China, Japan and all the Europeans.
Other than providing a handy dinner party anecdote (you’re welcome!), there are two important things to take from this.
The recent almost daily new all-time highs in the indexes which are heavily weighted towards these stocks mask what is going on under the surface. The average stock has actually struggled over the last few weeks (the number of stocks above their 50-day and 200-day moving averages has been falling steadily for weeks at the same time as the indexes have been making all these new highs, see LAST WEEK BY THE NUMBERS below) and it can be very misleading to evaluate overall day-to-day or week-to-week broad stock market behavior by just looking at what is happening to the S&P 500 or the NASDAQ, since they are primarily driven by these monster stocks.
Properly diversified portfolios will also contain the other 496 Large-caps, Mid-caps, Small-caps, Micro-caps, European stocks, Asian stocks and Emerging Market stocks and none of these are even close to matching the recent performance of those four stocks. So Teflon-index-watching investors may not even notice (until it’s too late) if things were to start deteriorating fast and hard among the vast majority of stocks.
Any notably negative company-specific news in this group could potentially send absolute shockwaves through the indexes, causing serious price declines. As I never tire of saying in this weekly report, the kryptonite here for the stock market is sudden slowing economic growth which could actually create such negative news and possibly bring on the resulting stock market fallout.
To be a thousand percent clear, these are concerns about what may happen in the future, not what is currently happening. But it’s important to recognize that the aggregated data is beginning to show that things might potentially be heading in that direction.
OTHER NEWS (APPLE AND ELON EDITION) ..
Apple Jumps In The AI Deep End .. Apple announced its long-awaited new artificial intelligence features last Monday, including tools supported by OpenAI’s ChatGPT. The company says the platform, called Apple Intelligence, will help summarize text, create original images and retrieve the most relevant data when users need it. “AI for the rest of us”, according to the tech giant who also unveiled new versions of operating systems for the iPhone, iPad and Mac. The stock zoomed higher to new record highs in response (see above).
One person not so impressed is famously freedom-loving and consumer-choice advocate Elon Musk who bizarrely announced that he would ban all iPhones from the properties of the multiple companies he runs if Apple’s plans went ahead.
(Even More) Toxic Elon Revelations .. In other Elon news, the Wall Street Journal dropped a bombshell report on Tuesday based on conversations with over fifty people and having viewed many text messages, essentially exposing Musk as a sex pest acting with impunity at his Space X company, persistently sexually harassing multiple current and former employees and college interns and indulging in power-imbalanced inappropriate behavior with a number of them, including arranging to have sex with an employee at his home with his children asleep upstairs.
He also allegedly offered to buy a horse for one woman in exchange for a sex act, flew another over to Europe using a private jet to stay in his hotel room during a Google conference he was attending there and taking professional retribution against those who either turned down his predatory advances or broke off romantic relationships before he was quite ready to.
The day after the report dropped, a related law suit was filed against Musk which further expanded the laundry list of revelations, including that he personally “interjected into the workplace vile sexual photographs” and internally distributed explicit videos, even participating in some including one demonstrating the “correct” method of spanking a co-worker.
Predictably, Musk denied the allegations through his lawyers - as he has regularly done with similar accusations over the years from other employees, as well as ongoing claims that his rampant drug use has an effect on his judgement.
The legal action came on the eve of the announcement of the outcome of a Tesla shareholder vote about giving Musk a compensation package of $56 billion even though he has overseen a 56% decline in its share price since it peaked in November 2021. The vote passed.
ARTICLE OF THE WEEK ..
Keep on top of your damn beneficiary designations!! A cautionary tale.
THIS WEEK’S UPCOMING CALENDAR ..
This will be a holiday-shortened week for U.S. investors, with markets closed on Wednesday in observance of Juneteenth.
Still a few more Q2 earnings announcements are due including CarMax, Accenture, Lennar, KB Homes, Darden Restaurants and Kroger.
The only major economic data coming out will be Retail Sales for May on Tuesday.
On Thursday, both the Bank of England (BOE) and the Swiss National Bank (SNB) will announce monetary-policy decisions. The SNB is expected to follow up its March cut with a second quarter-point reduction. The BOE is forecast to hold its benchmark rate target unchanged.
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) for the second week in a row - up 5.6% for the week.
Last week’s worst performing U.S. sector: Energy (two biggest holdings: Exxon-Mobil, Chevron) - down 2.4% for the week.
SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price rose 1.6% last week, is up 14.2% so far this year and ended the week at its all-time record high.
IWM, the Russell 2000 Small Cap ETF, tracks the Russell 2000 index, made up of the bottom two-thirds in terms of company size of a group made up from among 3,000 largest U.S. stocks. Its price fell 1.4% last week, is down 1.0% so far this year and ended the week 18.1% below its all-time 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 0.4% last week, is up 4.1% so far this year and is up 16.6% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.95%
One week ago: 6.99%, one month ago: 7.02%, one year ago: 6.69%
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.
FEDWATCH INTEREST RATE TOOL ..
Will interest rates be lower than they are now after the Fed’s following meeting on July 31st?
Yes .. 12% probability (8% a week ago)
No .. 88% probability (92% a week ago)
Will interest rates be lower than they are now after the Fed’s next meeting on September 18th?
Yes .. 68% probability (50% a week ago)
No .. 32% probability (50% a week ago)
Where is the Fed Funds interest rate most likely to be at the end of 2024?
4.875% (0.50% lower than where we are now, implying two rate cuts before the end of 2024)
One week ago: 5.125% (implying one rate cut), one month ago: 4.875% (implying two 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.
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 ..
42% (212 of the S&P 500 stocks ended last week above their 50D MA and 288 were below)
One week ago: 48%, one month ago: 63%, one year ago: 69%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
64% (321 of the S&P 500 stocks ended last week above their 200D MA and 179 were below)
One week ago: 67%, one month ago: 80%, one year ago: 61%
Closely-watched measures of market breadth and participation, providing a real-time look at how many of the S&P 500 index stocks 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: 45% (39% a week ago)
⬌ Neutral: 30% (29% a week ago)
↓Bearish: 25% (32% a week ago)
Net Bull-Bear spread: ↑Bullish by 20 (Bullish by 7 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).
HIGH YIELD CREDIT SPREAD ..
3.20%
One week ago: 3.20%, one month ago: 3.08%, one year ago: 4.18%
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 3-month duration and the lowest rate (4.20%) 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 rose from 0.44% to 0.47%, indicating a steepening 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.
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