May 31, 2023
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“These are the days that must happen to you.” – Walt Whitman
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After opening right near their highs of the day and reversing lower throughout the trading day yesterday, equity futures are staring at a weak open this morning. Treasury yields are lower along with crude oil even as the debt ceiling deal moved out of Committee and is set for a full vote. Investors will be watching the Chicago PMI and JOLTS reports later this morning, but overnight, we had some weak economic data out of China and lower-than-expected inflation data out of Germany where the y/y increase in CPI dropped to 6.1% which was actually the lowest reading since last March. Some of these tech stocks have had a huge run in the last several days/weeks, so a pause should surprise no one.
The last 12 months haven’t been the best of times for crude oil, and the last two days have been no different. After a decline of nearly 4.5% to kick off the week yesterday, WTI is trading down over 2.5% this morning putting it within $1 of a 52-week low. A year ago, prices were coming off a peak of just over $130 per barrel after Russia invaded Ukraine but were still firmly in triple-digit territory. Bulls made another attempt to run crude back near the March 2022 high but came up short, and things only got worse from there. Since then, it’s been a steady march lower, and the price of a barrel of crude has nearly been cut in half.
For crude oil bulls, the last two months specifically have been a major disappointment especially when you consider the fact that China’s reopening was supposed to be a major catalyst. First, on 4/2, OPEC announced a surprise production cut. While the news caused a brief spike in prices, the rally stalled out right at the 200-day moving average (DMA) and prices were back at 52-week lows in a month. Then last week, a Saudi minister publicly noted that oil speculators who were betting against crude oil should ‘watch out’. In a bull market, those comments would have caused a buying frenzy, but in a bear market, jawboning has a very short half-life, and it wasn’t even enough to get WTI back above its 50-day moving average.
With crude failing its attempt to break above the 200-DMA back in April, the extended streak of closes below the 200-DMA has extended further. At 190 trading days through today, the current streak is the longest since the 427 trading day streak ending in April 2016. It would take nearly another year to challenge that streak, but the current streak already ranks as the fifth longest since 1984. Not only that but if the current streak lasts another month, it will move into third place overall.
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May 30, 2023
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“I hate the idea of trends. I hate imitation; I have a reverence for individuality.” – Clint Eastwood
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House Speaker Kevin McCarthy and President Biden have reached an agreement on the debt ceiling that they can get through the House and Senate and onto the President’s desk within the June 5th deadline. Futures are higher this morning in reaction, but the continued run in tech stocks on the back of NVIDIA’s (NVDA) monster gains last week has the Nasdaq leading the way. NVDA is up about 4% in the pre-market putting it on pace to be the first semiconductor company to reach the trillion dollar valuation threshold. Dow futures are actually modestly lower as anything not tech-related continues to trade heavily.
With Monday being a holiday, we’re kicking off the week with a relatively large data slate this morning as Case Shiller housing data will be released at 9 AM, followed by Consumer Confidence at 10 AM, and the Dallas Fed report at 10:30. The rest of the week will also be busy capped off with the jobs report on Friday.
This morning’s trading is an exact continuation of last week which was an exact continuation of the ‘haves and have nots’ trade that’s been in place all year as the sectors which have been leading this year continued to lead while everything else lagged. The only three sectors that traded higher last week – Technology, Communication Services, and Consumer Discretionary – are also the only three sectors that are up more than 1% on the week (they’re all up over 15%), and the only three sectors trading above their 50-day moving average (DMA). Besides being above their 50-DMAs, all three are also trading in overbought territory with the Technology sector trading at its most overbought levels since 2004!
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May 26, 2023
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“Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.” – Albert Einstein
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Futures are off their lows of the morning and trading in positive territory on reports that negotiators in Washington are close to a deal on the debt ceiling that could be voted on next week. Throughout this whole saga, there have been several false alarms, so some healthy skepticism is warranted. Ultimately, the debt ceiling will be raised and this whole charade will be out of the headlines until it comes up again in a couple of years. Next up for the markets is dealing with the surge of issuance that will follow in the coming months.
In the near term, Fridays are likely to get a lot quieter in the coming months, but even though we’re heading into a holiday weekend, there’s still a lot of economic data on the calendar with Personal Income, Personal Spending, PCE, Wholesale Inventories, Durable Goods, and Michigan Confidence. Buckle up. Get ready. And enjoy the first weekend of summer.
Regarding the current state of the market, the picture on the surface looks the opposite of what’s going on below the surface. Starting with the S&P 500, after hitting a high for the year last Friday, stocks have experienced a bit of a pullback this week. If it weren’t for NVIDIA (NVDA) on Thursday, the S&P 500 would probably be heading into today on a four-day losing streak. Still, as shown in the chart of SPY below, we’re only a little more than 1% from the high price for the year, so at this point, the pullback looks like nothing more than a scratch.
At the sector level, though, the picture looks nothing like it does at the index level. Just two sectors are up since last Thursday’s close, and the remaining nine sectors are all down over 1% with five of them down over 2.5%. Not only that but six sectors are trading at oversold levels. The fact that most sectors are oversold, and only three sectors are above their 50-day moving average (DMA) isn’t the picture you would think of if someone told you that the S&P 500 was 1% from its high for the year.
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May 25, 2023
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“The age of AI is in full throttle.” – Jensen Huang
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The above quote from NVIDIA (NVDA) CEO Jensen Huang wasn’t from last night’s conference call, but the keynote speech of the company’s GTC conference in 2020 – three years ago. If AI was in full throttle back then, where is it now?
While we’ve been on recession watch for the US economy, this morning, we got news that the German economy has now moved into recession territory as Q1 GDP was revised to a decline of 0.3% following Q4’s contraction of 0.5%. Despite the recession in Europe’s largest economy, ECB policymakers are out this morning calling for more rate hikes to combat rising wages. Equity markets in Europe are lower across the board, but only fractionally.
In the US, the debt standoff continues, and Fitch weighed in this morning by placing the AAA rating of US debt on credit watch for a possible downgrade. It’s been a busy morning for economic data, including GDP, jobless claims, Personal Consumption, and Core PCE, and they all came in higher than expected except for jobless claims which were both lower than expected. All of these reports suggesting stronger-than-expected growth aren’t good if you’re hoping for the Fed to pause, but as of now, futures haven’t reacted much. Dow futures are lower while Nasdaq futures are surging thanks to the surge in NVDA.
The overnight move in NVDA reminds us of the Lenin quote, “There are decades where nothing happens; and there are weeks where decades happen.” Words really can’t describe the move in NVDA overnight. While the company has been public for well over 20 years now, a quarter of its entire market value has come in the last 17 hours!
With the stock trading up over 27% in the pre-market, it isn’t on pace to be the best performer in reaction to earnings this season. However, it would be just one of 18 (out of thousands of stocks that have reported) to rally 25% in reaction to its earnings report. What is remarkable, though, is how NVDA’s market cap compares to the other stocks that have surged 25% in reaction to their earnings reports.
As shown in column four of the table below, NVDA had a market cap of $755.24 billion before reporting earnings yesterday. Of the 17 other stocks that rallied over 25% in reaction to earnings, none has a market cap of even $10 billion, and those market caps include the impact of the 25%+ move. At the opening today, NVDA will have a market cap of closer to a trillion! The combined market cap of the 16 other companies that rallied 25% in reaction to earnings is $27 billion, but this morning alone, NVDA’s market cap will increase by more than 9 times that.
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May 24, 2023
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“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” – John Maynard Keynes
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You may be looking at the drop in futures and think that there has been some bad news regarding the debt ceiling. Since there has been no breakthrough agreement on that front, the lack of progress is probably playing a partial role, but the real culprit appears to be the hotter-than-expected inflation reading in the UK. That report has both the FTSE 100 and Europe’s STOXX 600 down sharply and trading below their 50-day moving averages.
Here in the US, investors will continue to watch DC for signs of where negotiations over the debt ceiling are going, but other than the Fed Minutes at 2 PM, there are no significant economic data releases on the calendar, so given that European stocks have been leading things lower, it will be hard for bulls to make any headway while those markets remain open for trading.
Getting back to the UK inflation report, economists were forecasting headline inflation to rise 8.2% which would have been a nearly two-percentage point decline relative to March’s reading of 10.1%. The actual reading, however, came in 0.5 percentage points higher at 8.7%. Outside of the last year when every other reading was higher than April’s, it was the highest y/y reading since May 1982 and came up just shy of falling below the peak of 8.4% from June 1991. If there could ever be a way during a period when high inflation was the market’s major concern that a 52-week low reading in inflation would not be considered a good thing, this was it.
Regarding the UK, we wanted to look at how UK stocks have performed relative to the US over the long term. Even though it’s spring, the first thing that comes to mind is skiing. The chart below shows the relative strength of the MSCI United Kingdom ETF (EWU) versus the S&P 500 SPDR ETF (SPY) over the last ten years. For much of this period, it has been a straight downhill for UK stocks relative to the US. Over the last two years, though, the slope has flattened out, and the two ETFs have essentially performed in line with each other (lower chart). While bulls on international stocks may be hoping the last two years have been the early stages of a base to rally from, more inflation prints like today’s could signal more downhill ahead.
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May 23, 2023
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“You need to get one thing done well, or else you don’t have permission to do anything else.” – Larry Page
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After a strong week, equity futures are taking a breather this morning as they await an agreement progress on the debt ceiling. Interest rates are higher once again this morning, and European stocks are lower following the release of PMI data for May. Those indices for the US will be released at 9:45, and then at 10 AM, we’ll get the releases of New Home Sales and the Richmond Fed Manufacturing reports.
How many times over the last six months have you heard someone say that Alphabet (GOOGL) missed the boat on AI to Microsoft (MSFT)? Things really got bad for GOOGL after the rushed launch of Bard, its answer to ChatGPT, earlier this year. At that point, GOOGL was underperforming MSFT by a high single-digit percentage margin since the launch of ChatGPT at the end of November, and more than a few were questioning the company’s future. At its I/O event two weeks ago, though, GOOGL had a much more impressive presentation related to how it was incorporating AI tools into its services, and the stock has come climbing back nearly erasing all its post-ChatGPT underperformance gaining 24% compared to MSFT’s 26% since the launch on 11/30/22. While Alphabet may not have originally done AI well, after the improved showing at the I/O event, the market is giving the stock, to borrow from the Page quote above, ‘permission’ to rally.
GOOGL’s recent performance hasn’t just been notable in that it has made up much of the ground that separated it from MSFT, but also, over the last ten trading days, it has rallied over 15% taking the stock to 52-week highs. While the stock remains more than 17% below its all-time highs from 2021, when a stock is trading at its highest levels in over a year, ‘missing the boat’ is not the first phrase that comes to mind.
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None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. This is not personalized advice. Investors should do their own research and/or work with an investment professional when making portfolio decisions. As always, past performance of any investment is not a guarantee of future results. Bespoke representatives or clients may have positions in securities discussed or mentioned in its published content.
