Has the market finally started to broaden beyond tech? Whilst it’s still too early to answer – there were signs of life this week in sectors which have failed to work this year. By way of example, the Russell 2000 and the Equal Weighted Index caught a bid – as the market started to price in at least one rate cut before the end of the year. And that makes sense. Companies that depend on leverage to supplement cash flows will stand to benefit more from rates cuts (vs their larger cap peers – who profit from higher rates due to cash hoards)
Is Momentum Waning? More on Why I’m Bullish Bonds into 2025
As part yesterday’s missive – I talked to why I think bond yields are too high. For example, I offered a chart showing the declining trend in nominal GDP growth vs what we see with the US 10-year yield. Economic growth is clearly slowing and yet yields are going the opposite way. Why? Therefore, investors should ask themselves what is the catalyst which will take us back to a 3.0% ‘growth’ mode (i.e. what we saw over Q3 and Q4 of 2023)? For example, is it the consumer? They make up ~70% of GDP with consumption – however they are mostly tapped out (as we have heard in the latest earnings reports). What will it be?
Nvidia Can’t Stop Stocks Wobbling
What we’ve seen from Nvidia the past 18 months reminds me of Cisco in the late 1990’s. I wrote about this recently… not much has changed. The path of earnings and the share price have been similar. NVDA’s revenues are up over 2.5x on a YoY basis, causing EPS to be up over 4x over the same period. 18% EPS growth in a single quarter is very impressive but here’s my question… will we see that in 2 or 3 years from now? We didn’t from CSCO – it collapsed. Time will be the judge of that…. not me. Despite the expected “beat and raise” from the AI chip maker – the rest of the market fell sharply. Without NVDA’s ~9% share price gain – the S&P 500 would have been down 1.5% for the day. That tells us how narrow this market is – extremely dependent on stellar earnings from a handful of companies like NVDA. That’s not a healthy setup.
“Heads I Win and Tails You Lose”
After almost three decades at this game – something you learn is not to fight the tape. Trade against momentum at your own peril. Consider the news today… it was both bad and good. I will start with the (perceived) ‘good’. The Consumer Price Index (CPI) was slightly cooler than expected. And whilst it’s still a long way above the Fed’s target of 2.0% – the market was thrilled it was only up 0.3% MoM and 3.4% YoY. Bond yields plunged and stocks ripped. Sure… 3.4% isn’t great… but that’s Main Street’s problem… Wall Street doesn’t care. However, the bad news was retail sales plunged. But wait a minute – that’s also “good news” – as it could mean a more accommodative Fed. Heads I win and tails you lose.
For a full list of posts from 2017…