Daily Sector Snapshot — 2/5/24
Chart of the Day: The Yield Curve/Recession Debate
AI Craze Closing In On Crypto Craze
Last Friday’s Bespoke Report was our quarterly Equity Market Pros and Cons edition. In it, we noted the boom of artificial intelligence both in terms of search interest (measured by Google Trends data) and mentions of the term in the earnings calls of mega caps. Google Trends data measures how much a given term(s) is being searched for on Google’s search engine. That interest is indexed with 100 being the peak in searches. Thus a reading of 75 would be when search interest is 75% of said peak, 50 would be 50% of the peak, and so on. Google Trends also allows for comparisons across multiple terms to evaluate relative search interest.
Given the topic of AI is extremely in vogue, we wanted to compare how search interest stands up to bitcoin, which before AI was the last tech craze among investors and the general public. Bitcoin, and crypto more broadly, came into the mainstream as the next big thing in tech in late 2017. As shown below, December 2017 would mark the height of Google searches for “Bitcoin”. A few years later in early 2021 when meme stocks were all the rage, search interest for Bitcoin again spiked, but that has been the closest it has come since to returning to 2017 levels of interest. Meanwhile, AI has come to the forefront.
As shown below, searches for “artificial intelligence” or the abbreviation “AI” began to explode higher a little over a year ago with the launch of ChatGPT. Search interest for each of those terms has not ceased rising, and all three just hit record highs last week. As for the actual index values versus Bitcoin, the Trends score for “artificial intelligence” has climbed to 56 and the index for “AI” has gone even higher to 65. That means that search volumes for “AI” are currently around two-thirds as high as search volumes for “Bitcoin” were at the peak in late 2017. That is to say that (as if it wasn’t obvious) AI is the buzzword of the time, but it’s not quite as buzzy (yet) as Bitcoin was several years ago.
While AI-related searches have quickly risen in popularity, the pace hasn’t been as rapid as it was for Bitcoin. In the chart below we show Google Trends scores for the same terms as above, but for each one, we show the two years before their respective peaks. While the bulk of the increase to peak searches for Bitcoin in 2017 occurred in just a few months, the more recent growth in AI searches appears to have been much more steady. That offers at least one counterpoint to assuage concerns over AI being a fad.
Bespoke’s Morning Lineup – 2/5/24 – Powell Sees His Shadow
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“It doesn’t need to be better than what we’ve seen, or even as good. It just needs to be good.” – Jerome Powell
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
After hitting record highs last week, sentiment in the equity market is a bit more subdued this morning as the major averages are all indicated to open modestly lower even as futures are off their overnight lows. Oil prices are lower while bond yields are higher. The only economic data on the calendar are PMIs for the services sector, and the rest of the week will be quiet on that front. We’re also past the peak of earnings season, but the pace will still be brisk. Already this morning, we have seen some notable reports from Caterpillar (CAT) and McDonald’s (MCD). Air Products (APD) is the only one of the major companies reporting that missed EPS forecasts, but the top-line results have been more mixed relative to expectations.
In his 60 Minutes interview on Sunday (taped on Thursday), Fed Chair Powell didn’t make any new headlines relative to his post-Fed meeting comments last Wednesday. He reiterated the stance that the FOMC would likely not be cutting rates at its March meeting by saying “it’s not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.” But he also reiterated that getting to 2% inflation isn’t a pre-requisite for cutting rates: “I’ve said that we wouldn’t wait to get to 2% to cut rates. In fact, you know, we’re actively considering now going forward cutting rates, and on a 12-month basis inflation, you know, is not at 2%. It’s between 2-3%.” Those comments along with his statement on Wednesday that he repeated in the quote at the top suggest that as long as inflation data comes in as it has been or better, the Fed will be cutting rates by the summer. Powell may not have “seen his shadow” last week, but rate cuts are still coming, it’s just going to be later rather than earlier.
While there was nothing new in his comments in Sunday’s interview, market pricing for the number of rate cuts between now and the end of the year is more modest now than it was last week before Friday’s January employment report. The chart below shows the number of 25 bps cuts that the Fed Funds market had priced in at various points this year before last week’s meeting, after the meeting, and now this morning. After last week’s meeting when Powell took March off the table, the number of cuts priced in for that meeting declined, but at the margin, they increased for every other meeting from May through December. After investors have had a weekend to sleep on it and see Powell’s 60 Minutes comments plus a speech from Fed Governor Michelle Bowman on Friday, the number of cuts priced in has declined significantly for every meeting between now and December.
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Bespoke’s Brunch Reads – 2/4/24
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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On This Day in History:
TheFacebook: META just had a pretty stellar earnings report this past week that saw its stock up 80 points, or 20.3%, in a single day on Friday. It was not long ago that the stock traded at just $88 a share in November of 2022. Since that low, META has exploded upwards of 400% and just traded at another new all-time high on Friday.
The company has seen ups and downs over the years, but it all got started 20 years ago today on February 4th, 2004. A Harvard student by the name of Mark Zuckerberg, along with his some of his college roommates and fellow students, launched“TheFacebook” from their dorm room. Initially, it was just limited to Harvard students, aimed at creating a network that connected people through a web of friends. That’s an idea we take for granted as part of our daily lives now, but it was once revolutionary to have an online platform that mimicked any individual’s unique social life. The platform quickly blew up and became wildly popular, and the rest, as they say, is history.
*This image is taken from a scene in The Social Network, depicting Zuckerberg working on the early stages of TheFacebook.
Investing
Passive Funds Overtake Active Thanks in Part to Advisory Shift (AdvisorHub)
In 2023, passive investment funds in the US, including mutual funds and ETFs, surpassed actively managed funds in total assets, reaching $13.252 trillion versus $13.244 trillion. This landmark shift, a first in 48 years, was propelled by significant annual growth of 22.6% in passive funds against 10.6% for active funds. Clients are moving away from commission-based trading to advisory accounts and advisors are moving from traditional broker-dealers to fee-only RIAs. [Link]
TIPSplaining a lousy inflation hedge (Financial Times)
In the pandemic era, investors poured their money into TIPS, hoping to mitigate the risk of inflation. However, 2022 saw investors facing significant losses in both nominal and real terms, with the TIPS market barely outperforming the nominal US Treasury market. The Fed’s response to inflation by raising rates resulted in increased real yields and led to lower TIPS prices and negative returns. This did not align with investor expectations, leading to around $30 billion being withdrawn from the four largest TIPS ETFs since their peak at the end of 2021. [Link]
Chinese Fervor for Overseas Stocks Is Breaking ETF Trading (BNN Bloomberg)
Chinese investors are increasingly seeking exposure to overseas equities, to the extent of paying premiums of up to 40% over the asset value in some ETFs. This surge in demand has led to trading halts and purchase limits on numerous ETFs tracking foreign stocks. Despite the high premiums, both retail and institutional investors are drawn to these ETFs due to stronger performances in international indices like the S&P 500 and Nikkei 225. The phenomenon underscores a broader shift away from Chinese equities amid frustration with their underwhelming returns. [Link]
This ETF outperforms by stressing corporate culture — but not ESG (MarketWatch)
The Harbor Human Capital ETF invests in companies with strong corporate cultures, as indicated by a proprietary index that assesses factors like employee engagement, management respect, and innovation. Launched in October 2022, the ETF aims to provide investors with the opportunity to invest in large-cap companies that are believed to have better performance potential due to their positive work environments. Since then, it has outperformed the S&P 500. [Link]
AI & Technology
Elon Musk Says Neuralink Has Implanted Brain Chip in Human (WSJ)
The first human has successfully received a Neuralink brain implant, marking a significant step in brain-computer interface technology, potentially aiding individuals with conditions like quadriplegia. The patient is reported to be recovering well, with the implant showing promising initial results in neuron spike detection. The development could be a potential breakthrough for severely disabled individuals, although it is expected to take years before the technology becomes widely available. [Link]
Battle Looming Between AI and Counter-AI, Says Official (US DoD)
The Department of Defense and other defense departments around the world are beginning to integrate AI, which could lead to a future “arms race” between AI and counter-AI. The department aims to leverage AI for threat analysis, vulnerability assessment, and enhancing the security of government and defense systems. AI’s role in processing vast amounts of data for threat detection is seen as crucial to staying ahead of adversaries and maintaining security in an ever-evolving digital environment. [Link]
The Hollywood Jobs Most At-Risk From AI (The Hollywood Reporter)
A study indicates that nearly 240,000 positions in Hollywood, particularly among sound engineers, voice actors, concept artists, and entry-level employees, could be affected by AI within three years. AI is developing abilities to efficiently produce content such as sound design, 3D assets, and realistic dubbing, posing a threat to traditional roles in the industry. The development sparks new reasons for concern regarding AI, this time among the elite in the entertainment business. [Link]
FCC moves to criminalize most AI-generated robocalls (NBC News)
The FCC is set to criminalize unsolicited robocalls that utilize AI-generated voices, following an incident involving a fake AI-generated message mimicking President Joe Biden. This proposal would extend the Telephone Consumer Protection Act (TCPA) of 1991 to include such AI-generated calls, as concern over AI’s role in scams grows. [Link]
Can This A.I.-Powered Search Engine Replace Google? It Has for Me. (NYT)
The AI-powered search engine Perplexity, founded by former OpenAI and Meta researchers, has attracted a lot of attention and investment for offering a new approach to online searches, namely tech insiders and investors like Jeff Bezos. Differing from traditional search engines like Google, Perplexity provides AI-generated summaries of web content rather than a list of links, aiming to make information gathering more efficient. Still, there are concerns about its accuracy and the impact on digital media, essentially making it unnecessary to visit websites anywhere. [Link]
Plane Problems
Kayak reports 15-fold increase in passengers filtering out 737 Max flights (The Independent)
Kayak is a travel search engine that allows users to filter and find the most ideal traveling and hotel plans. Since the recent incident with an Alaska Airlines 737 Max 9’s fuselage blowing out mid-flight, Kayak reported a massive increase in users filtering out flights on 737 Max 9s. The FAA has grounded dozens for inspection after a potentially fatal event and some travelers are taking no chances with the jet. Confidence is surely rattled and therefore, aircraft type is an important part of flying for travelers right now. [Link]
‘I would absolutely not fly a Max airplane’: Ex-Boeing manager raises alarm on jets returning to service (Los Angeles Times)
Some airlines have resumed flights with 737 Max 9 jets that had been grounded after the viral incident with Alaska Airlines. Many, including former Boeing employees, still express deep concerns about the safety of the Max planes, citing persistent issues and a culture prioritizing speed and profit over quality and safety. The decision to resume flights after specific inspections has been met with skepticism, suggesting a need for major change to truly ensure passenger safety. [Link]
EVs
Electric vehicles and hybrids surpass 16% of total 2023 U.S. light-duty vehicle sales (EIA)
In 2023, the United States saw a significant increase in the sales of hybrid vehicles, plug-in hybrid electric vehicles (PHEVs), and battery electric vehicles (BEVs), which collectively rose to 16.3% of total new light-duty vehicle sales, up from 12.9% in 2022. This growth was driven by an increase in the number of BEV models available, a shift towards offering hybrids in more popular size classes like crossovers, and a reduction in BEV prices, partly due to manufacturer price cuts and incentives from the Inflation Reduction Act. [Link]
Planning & Zoning
Legislature Advances Proposal Allowing Cafes in More Neighborhoods (The Urbanist)
The state of Washington is considering a legislative proposal that could increase the number of small neighborhood cafes within walking distance of homes, aiming to ease strict zoning laws that have long segregated commercial and residential uses. The move is seen as a way to enhance community access to services and strengthen local connections, also expanding the definition of cafes to potentially include venues serving alcohol with food. [Link]
Empty Nest Emptiness
When Junior Heads to College, Helicopter Parents Turn to Empty-Nest Coaches (WSJ)
“Helicopter parents” who become deeply invested in their children’s daily activities and development may experience deep sadness once those kids fly the coop. Enter empty-nest coaching, a niche that offers support and counseling for parents struggling with the emotional and logistical void left by their children’s departure. These coaches have even gone viral on social media platforms like TikTok for helping parents cope with their changing roles. [Link]
“Beware the Viral Graph”
Maybe young men and women aren’t so ideologically different (Good Authority)
This article challenges an article from last week’s installment of Bespoke’s Brunch Reads. Last week’s article showed a graph that went viral for the ideological gap between young men and women in the US. The contrast was eye-catching, but this article argues that these ideological differences are much smaller, averaging about a 5-point difference vs the 30-point difference suggested previously suggesting that the differences are also not necessarily more defined among young people. [Link]
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The Bespoke Report — Equity Market Pros and Cons — Q1 2024
This week’s Bespoke Report is an updated version of our “Pros and Cons” edition for Q1 2024.
With this report, you’re able to get a complete picture of the bull and bear case for US stocks right now. It’s heavy on graphics and light on text, but we let the charts and tables do the talking!
On page three of the report, you’ll see a full list of the pros and cons that we lay out. Slides for each topic are then provided on page four and beyond.
To read this report and access everything else Bespoke’s research platform has to offer, sign up for Bespoke’s “Leap Year” special today. Our Leap Year special gets you access to Bespoke Institutional (everything we publish!) for two months for just $29. You can either continue with the service past the first two months or cancel at any time. SIGN UP HERE.
Daily Sector Snapshot — 2/2/24
Bespoke’s Morning Lineup – 2/2/24 – The $170,000,000,000 Day
See what’s driving market performance around the world in today’s Morning Lineup. Bespoke’s Morning Lineup is the best way to start your trading day. Read it now by starting a two-week trial to Bespoke Premium. CLICK HERE to learn more and start your trial.
“Nobody goes there anymore. It’s too crowded.” – Yogi Berra
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
If Yogi Berra were alive today, we could only imagine how he would describe Meta Platforms (META). While the company owns the apps that everybody loves to hate, not only are most people on it, but thanks to AI-enhanced algorithms, they’re spending more time on them than ever. The result is a record high in META’s stock price and an overnight increase in its market cap of $170 billion. According to Bloomberg, that would rank as the fifth largest one-day gain in market cap for a single company on record. Can you imagine where META would be if people “liked” the product?
Turning to the rest of the market, futures were sharply higher on the back of earnings from META and Amazon.com (AMZN) overnight, while a 2.5% decline in Apple (AAPL) keeps the gains in check. All in, the S&P 500 was indicated to open up by about 0.7% while the Nasdaq was up over 1% as each index erased its declines from the mid-week “Fed-induced” decline.
Almost lost in the shuffle of all the earnings news after the close yesterday and this morning is this morning’s employment report for January. If you thought the results relative to expectations of AMZN and META knocked the cover off the ball, you may want to sit down for this one. Non-farm payrolls showed a monster increase of 353K relative to forecasts for a gain of just 185K, and the last two months were also revised higher. Average hourly earnings doubled expectations (0.6% vs 0.3%), and the Unemployment Rate came in at 3.7% versus 3.8%. The only negative in the report was average hourly earnings which dropped to 34.1 hours from 34.3 last month. This was a very strong report and will put the idea of good news being good news for the market to the test. The immediate reaction in equity futures was a decline as the Dow dipped into the red, while the gains in the S&P 500 and the Nasdaq were more than cut in half.
META’s 15%+ pre-market rally has the stock on pace to have its fifth-best day in reaction to earnings since the IPO in 2012. It will also be the ninth time that the stock rallied at least 10% on an earnings reaction day. A big question for traders is whether the stock tends to build on these gains after gapping up so much or does it give back some of the gains.
The chart below compares the relationship between META’s performance on its earnings reaction day versus its performance from that day up until its next earnings report. When the stock was down on its earnings reaction day or up less than 10% (non-shaded area in chart), its median performance up until its next earnings report was a gain of 5.8% compared to the 10.2% forward performance following the eight days when the stock rallied more than 10% on its earnings reaction day. History is never guaranteed to repeat itself, but when META rallied by double-digit percentages in reaction to earnings it tended to keep the rally going moving forward.
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The Closer – Mega Cap Earnings, PMIs, Construction Spending – 2/1/24
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Looking for deeper insight into markets? In tonight’s Closer sent to Bespoke Institutional clients, we begin with a review of the latest mega cap earnings (page 1) followed by a review of today’s manufacturing PMIs (page 2). We then dive into today’s productivity and cost data (page 3) as well as the surge in construction spending (page 4). We finish with a look at the latest housing inventory data (page 5).
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