Higher for Longer
Both Mish and I have held consistent views since late last year that interest rates would stay elevated for longer. As I have been suggesting over the past few weeks, volatility should pick up from continuing economic uncertainty. Contrarian economic signals (both positive and negative) are weighing heavily on interest rates, and that, in turn, is producing added doubt and volatility.I must admit that I took my cue more from Mish’s insistence that inflationary cycles don’t go down easily, and that inflation would likely stay elevated longer than everyone was expecting. Especially with a growing and robust, mostly fully employed economy. For inflation to decline the economy needs to slow dramatically, and we have not seen enough of those signs to believe that is happening. More importantly, in an election year, the current administration is going to do all they can to keep the economy chugging along.Most investors (and economists) have been operating on the rhetoric put out by the Federal Reserve last November that suggested we could see as many as 7 rate cuts. Of course, their narrative is that it will always be data dependent. Since the beginning of 2024 the data, especially with regard to inflation, has not been supportive of any rate cuts.Inflation readings are way above expectations, and parts of the economy, such as unemployment claims, consumer sentiment readings, retail sales, Michigan PMI, and a host of other data points, are just not trending down enough to contribute to a “slowing” narrative.Yes, we have seen inflation, both at the producer and consumer price levels, heading down with the right trajectory, but clearly not anywhere even close to the Fed’s target rate.
More Negative Inflation Information Came Out this Past Week
The Federal Reserve policymakers said on Tuesday that the U.S. Central Bank should wait several more months to ensure that inflation really is back on track toward its 2% target before cutting interest rates.On Wednesday, Goldman Sachs CEO David Solomon said he does not expect the Federal Reserve to cut interest rates this year. “I’m still at zero cuts,” Solomon said at a Boston College event. “I think we’re set up for stickier inflation.” As a side note, I am wondering if he heard Mish in the past six months when she appeared on her national TV interviews?Solomon’s comments stand in contrast to market expectations for at least one rate cut by the Fed this year. Traders reduced bets on Wednesday for more than one rate cut this year after the release of the Federal Reserve’s April 30 – May 1 policy meeting minutes showed that rate-setters thought inflation could take longer to ease than previously thought.Solomon told an audience of about 150 senior corporate executives and Boston College students that while he believes the U.S. economy is fundamentally strong, not all Americans are experiencing growth or the impact of inflation the same way.Solomon said, “inflation is not just nominal, it’s cumulative.” He cited a conversation that he had recently with the CEO of a grocery chain that has seen customers cutting back on the size of their purchases in response to rising prices. “We’re starting to see the average American slowing down and changing his habits,” Solomon added.
Interest Rates are Running the Show
The Federal Reserve’s comments and the release of the minutes sent interest rates up and stocks down as the market was hit especially hard on Thursday, giving up any gains made earlier in the week. Notice the steep climb higher from Wednesday to Thursday on the 10-year Treasury rates (see below).
And the S&P reacted negatively on Thursday due to rising interest rate concerns (you may recall that two weeks ago, we suggested that the Fed should be hiking and not lowering rates, something we realize would be wholly unpopular and not likely to happen).See the S&P 500 chart for the last five days below. Notice how closely correlated the movement on the rising 10-year interest rates and the downward move of the S&P 500 are Tuesday to Thursday below and above.
We offer the following chart to illustrate how much the stock market has become dependent on the expectations for possible interest rate cuts. We also suggest that if earnings had not been so robust during this past earnings season, we would likely have not seen the continued strength in the face of higher interest rates and stickier inflation data. See chart below:
Housing Woes Continue
Mostly due to low demand for mortgage applications, the average 30-year fixed mortgage fell below 7% for the first time since early April. New home sales for April came out this past week and showed a disappointing 634,000 homes sold versus expectations of 675,000 homes.Additionally, existing home sales retreated 1.9% month-over-month in April, according to the National Association of Realtors (NAR), during what is typically the busiest season. See chart below on the fall of mortgage rates:
Homebuyers Remain on the Sidelines
Despite pent-up demand for homes, buyers are hesitant to enter the market even after this week’s rate dip. According to the Mortgage Bankers Association (MBA), the volume of purchase mortgage applications fell by 1% this past week. But mortgage applications are 11% lower than the same week a year ago.Purchase activity continues to lag despite this recent decline in rates. “Potential buyers still face limited for-sale inventory and high list prices,” said Joel Kan, deputy chief economist.This is one area of the economy that might precipitate the Fed to act sooner than later to reduce the Fed overnight lending rates, which could lower mortgage rates. Housing issues, many of them due to higher interest rates, continue to be a concern since it is a significant portion of the economy and is adding to negative consumer sentiment. Of course, it also affects car purchases and the use of credit cards. This concerns the Fed.
Tech versus Interest Rates
While the negative commentary occurred on Tuesday and Wednesday, investors anxiously awaited the Nvidia earnings release after the bell on Wednesday. As expected, these earnings were blow-out numbers.Nvidia shares surged over 10% following the company’s latest earnings report, which exceeded investor expectations and demonstrated the high demand for its artificial intelligence chips.It was eye-popping to see that their data center revenue soared by an impressive 427% during the first quarter of 2024. Demand for Nvidia’s graphic processing units is driven by the major cloud services providers—Amazon Web Services, Microsoft Azure, Google Cloud, and Oracle Cloud, as well as hundreds of other companies that have entered the AI arena. According to the company, those four major cloud companies listed above accounted for approximately 45% of Nvidia’s $22.56 billion in data center sales in Q1 of 2024.While Nvidia benefits from the exponential growth in artificial intelligence, other areas of the economy associated with the boom, such as certain commodities and electric utilities, are struggling to keep pace with the demand as the industry expands at lightning speed.Interestingly enough, all of the stock market indices were largely down on Thursday, but Nvidia was one of the few bright spots in the market after the dismal down day. See heat map chart from Thursday’s close below:
Here is another chart on just how big an impact Nvidia had on the stock market on Thursday:
Nvidia helped power the technology sector (XLK) to a 1.59% positive return for the week of May 20. The Nasdaq 100 (QQQ) was a close second, up 1.37% for the week. The S&P 500 index (SPY), facing higher interest rates, was flat for the week, and the small-cap Russell 2000 index (IWM), more heavily influenced by interest rates, was down -1.27%.The 30 stock Dow Jones Industrial Average (DIA), which has a few mega-cap financial stocks, was down -2.33% for the week. Tech had its best week so far in 2024 and since November of last year. See chart below:
It’s Not Just About Nvidia
Many investors are under the impression that Nvidia may be solely driving the chip train. This is not so. While Nvidia is the leader and up 100% year-to-date so far, there are many semiconductor stocks positive on the year so far in 2024. However, these 9 other semiconductor stocks have helped to fuel this chip bull market and are up over 10% year-to-date. They are as follows:
These stocks and others have propelled the semiconductor sector into one of the best bullish cycles this year. See chart below:
Positive Tailwinds for the Stock Markets
Even though the different stock indices got banged up on Thursday, we saw a healthy recovery on Friday. As we said in last week’s commentary, these pullbacks (the most recent being approximately 5% during April for the S&P 500 index) are healthy and work off some of the overbought indicators. Clearly, we are in a healthy bull consolidation, at least for the majority of large and mega-cap stocks. Inflows remain positive, as indicated in the chart below:
We are entering the period considered the summer doldrums. The adage, “sell in May and go away,” may not apply in the all-important election years, as shown below:
Additionally, the amount of stimulus still being put into the economy (like the CHIPS and Inflation Reduction Acts), along with an accommodative money supply coupled with robust earnings (both top and bottom line), may help keep the markets on positive footing for the remainder of the year. Of course, we all expect some periods of consolidation, pullbacks, and normal corrections.We provide the next couple of charts to show what “other” people think of the chance that we can continue having a positive market throughout the remainder of 2024. Please see below:
And Ryan Detrick’s take on the same concept:
A Note on Gold and Gold Mining Stocks
This past week, we witnessed a substantial selloff in the metal stocks, with gold, copper, aluminum, and silver (though not as much) having some retracement. This was most likely caused by a) an overheated buying frenzy into the metals, and they could have been getting ahead of themselves and needed to digest the recent gains, and; b) talk of interest rates staying higher for longer (or even one more hike) helped boost the US dollar, and that usually works to pullback momentum in the metals.If/when we experience some economic weakness and there is talk about when the Fed will cut rates, or the interest rate market begins to price in a reduction, it is likely the metals and miners will once again take off to new potential highs. Here are two charts that we think are supportive of the metals moving higher. See below:
I will now turn it over to Keith and Geoff who summarize some other market factors that may have played a part in the week’s trading. Once again, we wish you and your families a happy and enjoyable Memorial Day weekend. Good luck in your trading and investing for this coming week.
Risk On
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More By This Author:The Debate Continues – Will They, Or Won’t They?The Fed, Interest Rates and Jobs Sway the Markets. Which Direction Are We Headed?Markets Snap Back – But Uncertain Economic Conditions Persist
