There was only one name on Wall Street’s lips last week; chipmaker Nvidia, the last of the Magnificent Seven stocks to report Q4 2023 earnings on Wednesday evening. The first part of the week was spent in fear of the firm failing to meet strongly-enhanced expectations. Thursday was one big Nvidia-inspired celebratory party after it blew through those expectations and markets spent Friday nursing a quiet post-celebration hangover. The net outcome was yet another up-week for most Large Cap U.S. stocks.
The week began on Tuesday following the Presidents’ Day holiday with Big Tech dragging the whole stock market ecosystem lower and away from its all-time highs. With Wall Street breathlessly awaiting earnings and outlook from Nvidia, the so-called most important stock on the planet, up by 220% in the last twelve months and responsible for about a third of the total stock market gains so far in 2024, for confirmation that the chipmaker could meet expectations that were now sky-high, there was a sense that there was very little room for disappointment - that almost whatever the company’s earnings looked like, it was always likely to be a letdown vs. the now-astronomical expectation level brought about by market AI-mania.
As a result, the prices of Nvidia’s fellow big dog stocks also fell, anticipating a possible across-the-board “sell the news” reaction to the earnings report, since any signs that the AI boom may be slowing could lead to a big reversal in the stock price, so traders were understandably nervy. The price of Nvidia fell almost 4.5% on the day.
More of the same on Wednesday, as frenzied speculation about Nvidia’s upcoming report that night dwarfed almost everything else, even the rather downbeat minutes from the most recent Fed rate-setting meeting which seemed to confirm that officials are going to tread very carefully on interest rate cuts. Stocks fell at the outset and spent most of the session in the red before a late charge higher got prices back to pretty much flat by the close.
In the end, of course, we needn’t have worried as all fears of any disappointment failed to materialize. After the closing bell, Nvidia shattered even those absurdly raised expectations, delivering yet another jaw-dropping sales forecast, anticipating an amazing $24 billion in revenue this quarter. Even the most wildly optimistic of Wall Street estimates had been for about $21 billion. Results for the last quarter of 2023 also blew decisively through what had been anticipated. As Barron’s put it, “Nvidia is selling shovels in a gold rush”.
Predictably, stock markets responded by going on a massive rocket ride on Thursday, needing to completely reverse its caution from earlier in the week. Nvidia stock surged, increasing the company’s value by $277 billion in just six and a half hours to almost $2 trillion. The S&P 500 ripped higher, breaking through its recently-achieved record all-time high within the first ten minutes of trading. The tech-heavy NASDAQ-100 did even better, soaring to within a hair’s breadth of its own all-time record high which dates back to November 2021. Markets held on to those gains all day as the bulls celebrated the Nvidia report and bought up pretty much everything else they could lay their hands on as well.
Stocks struggled to follow through on a rather more sober Friday, with Big Tech in particular losing a little steam after the previous day’s powerful rally. The S&P 500 barely budged, while still posting a win for the week, although its Small Cap cousins lost ground across five days.
There’s little that Wall Street loves more than to come up with a clever new word for something. Previously, the current economic situation had always been described as Goldilocks, i.e. just right. After last week’s Nvidia-driven new leg higher in stock prices, a new term is being coined to describe what is even better than Goldilocks .. “Platinumlocks”. I’m not sure that one will stick.
But it’s indicative of the enormous level of optimism on Wall Street right now. The Fed is like a stern pastor warning from the pulpit about the need for patience and temperance on interest rate cuts, but the stock market just doesn’t want to listen and keeps slugging from the AI punchbowl, even while at the same time acknowledging that its overly-optimistic assessment from as recently as the beginning of this year of the timing and extent of interest rate cuts is now probably dead and buried (seven rate cuts in 2024??? Ha!!! .. the latest most likely projection is now for just three and the market-driven probability of any cuts at all before June is now only 8%, see FEDWATCH INTEREST RATE TOOL below).
The fact is that, to bring this rally to a crashing halt, actual news now needs to not just be disappointing, but outright bad because the current positive momentum in this market is just so strong. For inflation data, for example, to be powerful enough to challenge the bullish momentum, it has to show not just that inflation has stopped falling (as was in fact implied in the data earlier this month) but that it is rising again, because that will challenge the very idea of any upcoming rate cuts.
And we simply aren’t there right now, so the almost inevitable short-term over-bought pause or pullback that we are likely to experience in the next week or two probably will not represent any kind of meaningful turnaround in the upward trend.
OTHER NEWS ..
Joining The Club .. Amazon is finally joining the famous Dow Jones Industrial Average. With the caveat that the Dow Jones is a stupid index (I never pass up on an opportunity to repeat this), the e-commerce giant will replace Walgreens Boots Alliance in the benchmark index of just 30 U.S. stocks. The change will go into effect prior to the open of trading on Monday, February 26th.
Finally! .. Phil Collins was top of the charts, ironically singing about another day in Paradise, the last time the Japanese stock market as measured by the Nikkei Index last reached a new all-time high of 38,915 at the end of December 1989 .. until last week when, over 34 years later, that level was finally surpassed. This came in spite of the fact that we are only a week removed from learning that the country had fallen into a technical recession.
European stocks, as measured by the Stoxx Europe 600 Index also joined the Nikkei and the S&P 500 in the U.S. in making new all-time highs, boosted by strong performances in 2024 from Dutch chip equipment maker ASML Holding NV, Danish drugmaker Novo Nordisk A/S, German software giant SAP SE and French luxury goods manufacturer LVMH.
The Never-Ending Story .. The U.S. government shutdown clock is ticking (yet again!). Without another short-term spending bill or passage of four key appropriations measures, the government will stumble into a partial shutdown on this coming Friday, March 1st and will then completely run out of money and turn out the lights a week later on March 8th.
The Senate reconvenes after a recess on Monday (but it has to deal with the impeachment articles against Homeland Security Secretary Alejandro Mayorkas before anything else) and the House doesn’t get back to work until Wednesday. Expectations are for yet another kick-the-can-down-the-road decision, especially with the March 8th deadline involving $1.2 trillion in spending. The appetite for a political fight on the issue from the wackier corners of the Republican party seems a little more muted this time around.
UNDER THE HOOD ..
This weekly review monitors the latest level of both the Fear and Greed Index and also the % of stocks above 50 day and 200 day moving averages (see below). These are important in assessing the technical state of the market. Here’s how they stand ..
The currently elevated level of the Fear and Greed Index of 78, comfortably in the Extreme Greed zone suggests there are risks of a negative shift in sentiment resulting in a potentially sizable but probably temporary pullback in the broader stock market like we saw at times in 2023. However, the Fear and Greed Index can hold high and low levels for long periods during a strong trend in the market, which helps offer another degree of confirmation in favor of that underlying trend. And until we see a break down through the early February low reading of 63, optimistic sentiment will continue to support the bull market.
Both the 50 day and 200 day readings in the % of S&P 500 stocks above moving averages remain comfortably above their important 50% levels which means the majority of S&P 500 constituents remain in technical uptrends. The 200 day is the more reliable indicator of the two and while it is off the 2024 highs, it is steady and not in free fall like it was during last year’s two notable pullbacks.
A number of sectors are trading into resistance or reaching upside targets, meaning that the odds of a broader market pullback occurring in the near term is on the rise, but the market’s primary long term uptrend appears to be breathing normally with probabilities favoring further highs in the months ahead.
Anglia Advisors clients are welcome to reach out to me to discuss market conditions further.
THIS WEEK’S UPCOMING CALENDAR ..
Among the companies reporting their Q4 2023 earnings this week are Best Buy, Macy’s, Lowe’s, Zoom Video Communications, Salesforce, eBay, Anheuser-Busch, Snowflake, Baidu, Paramount, Beyond Meat, American Tower, TJX, Monster Beverage, Six Flags Entertainment, First Solar, Workday, Urban Outfitters and Domino's Pizza.
The economic-data highlight of the week will be possibly the most important inflation reading (because the Fed says so); the Core Personal Consumption Expenditures (PCE) index for January. The consensus estimate is for a year-over-year gain of 2.8%, which would be down from a 2.9% rise through December.
We will also get the second estimate of three for Q4 2023 Gross Domestic Product (GDP).
ARTICLE OF THE WEEK ..
“I never used to understand how billionaires could believe things that seemed so idiotic. How can you be so successful and so misguided at the same time?” Nick Magiulli answers his own question, using nonsense drivel courtesy of Bill Ackerman, Elon Musk and Jack Dorsey.
LAST WEEK BY THE NUMBERS ..
Last week’s market color courtesy of finviz.com
Last week’s best performing U.S. sector: Materials (two biggest holdings: Linde, Sherwin Williams) - up 2.7% for the week.
Last week’s worst performing U.S. sector: Communication Services (two biggest holdings: Alphabet/Google, Meta/Facebook) - down 0.7% 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 1.0% last week, is up 6.9% so far this year and ended the week 0.6% below its all-time closing record high (02/22/2024)
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 fell 2.4% last week, is down 0.4% so far this year and ended the week 17.6% below its all-time closing record high (11/05/2021)
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 fell 0.3% last week, is up 2.6% so far this year and is up 15.4% over the last three years.
AVERAGE 30-YEAR FIXED MORTGAGE RATE ..
6.90%
One week ago: 6.77%, one month ago: 6.69%, one year ago: 6.50%
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.
The 50-day moving average of the S&P 500 remains above the 200-day. This is a continued indication of a technical uptrend.
% OF S&P 500 STOCKS TRADING ABOVE THEIR 50-DAY MOVING AVERAGE ..
66% (332 of the 500 largest stocks in the U.S. ended last week above their 50D MA and 168 were below)
One week ago: 59%, one month ago: 73%, one year ago: 42%
% OF S&P 500 STOCKS TRADING ABOVE THEIR 200-DAY MOVING AVERAGE ..
73% (364 of the 500 largest stocks in the U.S. ended last week above their 200D MA and 136 were below)
One week ago: 70%, one month ago: 69%, one year ago: 56%
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: 44% (42% a week ago)
⬌ Neutral: 30% (31% a week ago)
↓Bearish: 26% (27% a week ago)
Net Bull-Bear spread: ↑Bullish by 18 (Bullish by 15 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 March 20th?
Yes .. 2% probability (10% a week ago)
No .. 98% probability (90% a week ago)
Will interest rates be lower than they are now following the Fed’s following meeting on May 1st?
Yes .. 8% probability (37% a week ago)
No .. 92% probability (73% 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: 4.375% (implying four rate cuts), one month ago: 3.875% (implying six 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.
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 (4.26%) 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 0.34% to 0.41%, indicating a steepening 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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