ANGLES.

Despite the politically consequential events in Pennsylvania the weekend before, the assassination attempt appeared not to have been that much of a game-changer on Wall Street since a Trump victory in November had been pretty much assumed already and was then simply priced in more strongly than ever over the course of the week. But there were plenty of other factors in play during what ended up being quite a wild few days.

Wall Street didn’t miss a beat and picked up on Monday right where it had left off the previous Friday; gains across the board on the back of interest rate cut optimism - but most notably in 2024’s forgotten Mid and Small Cap world, for the third consecutive day of a noticeable widening in the breadth of the rally as the market-driven predicted most likely number of 2024 interest rate cuts moved up from two to three.

Interestingly, traditional beneficiaries of Republican governance such as old school oil producers, regional banks and gun-related companies were among the leaders while likely Republican punching bags like Blackrock (BLK), UnitedHealth Group (UNH), green energy and emerging market stocks did far less well.

On Tuesday a surprisingly hot pre-market Retail Sales print, which showed an increase in June vs. the expectation of a decrease, was thrown into the mix as was the announcement of Trump’s running mate choice, J.D. Vance, who has in the past publicly called for the breakup of Google, vocally opposes American support for Ukraine against Russia and who bizarrely just claimed that the UK was the world’s first Islamist country with a nuclear weapon.

After a strong start in the same vein as the last few trading days, Large Cap stocks began to show some signs of exhaustion during the afternoon session with the tech sector again taking the day off, but Small Caps kept up their epic rally as what was already becoming dubbed the “Great Rotation” out of larger, tech-related names and into smaller, more consumer-related names continued in anticipation of the broadening of the rally as interest rate cuts finally begin in September (now considered pretty much a certainty - see FEDWATCH INTEREST RATE TOOL below).

But things took a sudden and very nasty turn on Wednesday. Tech in general and chip and AI-related stocks in particular were taken behind the woodshed on the back of the idea that the U.S. is floating the notion of tougher trade curbs with China and concerns surrounding a likely Trump/Vance approach to international trade, fueled also by a growing sense that the whole AI hype thing could just have got ahead of itself with some high profile stocks being simply overpriced as a result.

Stock indexes plunged - but the rotation trade still persisted as the smaller cap indexes fell much less hard than those with a high Mega Cap Tech allocation which took a real beating. The NASDAQ index suffered its worst daily nose-dive since late 2022 and, perhaps ominously, the usual dip-buyers were notable only by their absence.

On Wednesday evening, in his convention speech, Vance took on the populist attack-dog role right away and promptly took aim at financial markets, saying that a Republican administration “will not cater to Wall Street” and its “barons” who “crashed the economy”, presumably some kind of reference to 2008 and the Great Financial Crisis. He also pledged to “stop the Chinese Communist Party from building their middle class on the backs of American citizens.”

The European Central Bank kept interest rates unchanged on Thursday morning but warned of multiple risks to economic growth in the Eurozone. U.S. stocks appeared initially to have at least stopped Wednesday’s severe bleeding, but once it became clear that there was still no sign of the cavalry in the form of the extensive, rebound-producing “buying of the dip” that has accompanied all recent sharp declines, stock prices sank substantially further across the board resulting in a second consecutive rotten day, with even the Great Rotation trade losing steam.

America woke up to a global tech outage on Friday caused by a botched Crowdstrike update to Microsoft systems. Exchanges around the world were only lightly impacted and the broad stock sell-off swiftly resumed when U.S. markets opened and only intensified as the session went on, with Crowdstrike’s stock price (CRWD) especially punished. There was still no sign of the dip-buying cavalry as Mega Cap Tech stock prices struggled to find a floor.

In the five trading days following July 11th, the Russell 2000 Small Cap Value Index soared by 8% at the same time as the Large Cap tech stock index slumped by 5.5%. The 2024 performance gap between the NASDAQ and the Russell 2000 Small Cap index shrank from 20% to 10% over the same time period. It was the largest one-week Small Cap outperformance of Large Cap in history.

Traders appear to be taking a lot of chips (pun intended) off the table ahead of the beginning of Mega Cap Tech earnings this week, not to mention the release of big GDP and inflation data (see THIS WEEK’S UPCOMING CALENDAR below). It could take just one big earnings miss or one negative headline from a highly weighted company to take the major indexes down even further. Conversely, a spectacular rebound from these lower prices could also be on the cards if the earnings news is impressive and the dip buyers return en masse.

Let’s buckle up!

OTHER NEWS ..

Foreign Buyers Fleeing The U.S. .. It’s not just Americans who can’t afford U.S. homes. International purchases hit a record low as foreign buyers balked at the dollar’s strength and a dearth of available US properties. Non-U.S. citizens bought 54,300 previously-owned homes in the country in the twelve months through March, a 36% decline from the same period a year before.

Purchases were constrained in part by the same inventory shortage that’s challenged domestic house hunters in recent years. Owners clinging to pandemic-era cheap mortgages are keeping thousands of potential listings off the market, and that’s driving up prices for properties that are available.

Soccer Chaos Ahead Of 2026 World Cup .. The Copa America soccer final between Argentina and Colombia in Miami last weekend was supposed to be a showcase dress rehearsal for North America’s upcoming hosting of what is by far the world’s biggest sporting event, the 2026 World Cup. Instead, it descended into embarrassing chaos with video footage showing mostly Colombian fans storming the gates before kickoff and ultimately being allowed in to the stadium by overwhelmed stewards. Many of these fans were ticketless and consequently some ticket-holders who had paid many thousands of dollars for tickets and travel failed to get into the game at all and ended up watching it on a big screen in the parking lot.

The tournament organizers were also criticized for failing to provide adequate security protection for the players’ families, some of whom appeared to come under attack from rival fans, leading to some players jumping into the stands and fighting with supporters.

Not a good look just two years out from the event.

ARTICLE OF THE WEEK ..

You can now use your workplace retirement plan as an ATM for emergencies of up to $1k a year.

THIS WEEK’S UPCOMING CALENDAR ..

Q2 earnings season will continue to be investors' main focus this week with about a quarter of the companies in the S&P 500 scheduled to release, including Alphabet/Google, Tesla, Verizon, UPS, AT&T, Honeywell, SAP, NXP Semiconductors, Unilever, General Motors, Coca-Cola, Visa, Comcast, 3M, Lockheed Martin, NextEra Energy, American Airlines, Southwest Airlines, Newmont, Chubb, Las Vegas Sands and Chipotle.

On Thursday we will get the first estimate (of three) for Q2 Gross Domestic Product (GDP) The consensus estimate is for an annualized U.S. growth rate of 1.9%, versus a final number of 1.4% in Q1.

The Fed relies heavily on the Personal Consumption Expenditures (PCE) price index for its inflation estimate and consequent interest rate policy and the lat…

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The surprising outcome of the French parliamentary elections the previous day, where the left, centre and right all essentially cancelled each other out to create a legislative power vacuum and potential political deadlock in France for years to come, caused nervousness and volatility in European markets on Monday, which continued for much of the week.

With such a big slate of upcoming potential catalysts; Fed chairman Jerome Powell talking in Congress for two days starting the next day, big inflation data coming out on Thursday and Friday, French election fallout and Q2 earnings season kicking off (and all of this with the potential to be overshadowed at any moment by a potential intensity spike in the Biden candidacy psychodrama), it was perhaps not surprising that traders in the U.S. weren’t willing to place any large bets to start the week and stock prices basically flatlined all day.

All eyes were on Washington DC on Tuesday, where Powell began facing two days of questions from mostly financially illiterate, grandstanding lawmakers in Congress. Wall Street tried to pick out any signals about the timing of future interest rate cuts from his words, but was mostly unable to do so other than from his bland familiar refrain that the Fed still needs “more good data” to strengthen the case that inflation is moving toward the central bank’s 2% target.

In the end, a nothing-burger came out of DC during the session and stock prices barely budged for the second day in a row, even though the S&P 500 and NASDAQ indexes still managed to sleepwalk themselves to marginal new all-time highs yet again.

Stocks began Wednesday in a buoyant mood with overnight reflection on Powell’s testimony having pushed the narrative further in the direction of a September interest rate cut (and maybe - just maybe - a shock cut later this month?). The optimism only accelerated as the day went on, with the S&P 500 closing above 5600 for the first time ever for its 37th all-time record high of the year. The NASDAQ joined in on the fun, reaching its 27th high. Importantly, the gains were broad-based across all market capitalizations, sectors and countries.

The latest Consumer Price Index (CPI) measure of retail inflation which was released pre-market on Thursday was pure Goldilocks. Prices actually fell in June, down -0.1% for an annualized inflation rate of +3.0% (the lowest since April 2021) and the Core (ex-food and energy) number to +3.3%. Importantly, under the hood, we saw a lot of price calming in important categories like housing and food which seem to have finally turned the corner and even insurance costs stabilizing. All of this was better than expected.

You would have thought that Wall Street would go into some kind of exuberance overdrive. But reality intervened when markets opened. The first few earnings reports of the Q2 season from the likes of Delta Airlines and PepsiCo were disappointing. Also, the market-driven probability of a rate cut in September had already run a lot higher to more than 80% before the CPI release and has now been pretty much priced in - ending the week at 94% (see FEDWATCH INTEREST RATE TOOL below).

While the recently-struggling Small Cap indexes had a really good day on the back of rate cut optimism, the S&P 500 was hit by a severe bout of profit-taking and Mega Cap exhaustion concerns and the index fell quite heavily in spite of the fact that a lot more of its component stocks moved higher than lower. This implied a investor rotation from the recent winners to recent laggards.

This process was accelerated by nervousness surrounding social networks Meta/Facebook, Snap, Pinterest and Nextdoor as European Union regulators charged Elon Musk's X/Twitter with breaching its online content law and potentially liable for fines equating to 6% of its global revenue.

The afore-mentioned intensity spike in the Biden psychodrama came to pass on Friday after his horrendous, gaffe-ridden Thursday night. We also learned pre-market of a somewhat hotter-than-expected Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers and some mixed earnings from some of the big banks. With increasing difficulty, Wall Street continued to shrug off looming political uncertainty and managed to focus on improving interest rate cut prospects and stocks shifted solidly higher across the board with the indexes more than recovering all the previous day’s losses.

As if any more was needed, the Trump assassination attempt on Saturday has injected further drama and uncertainty into what is becoming a tumultuous election campaign, even four months out from polling. Wall Street may not be able to ignore it much longer.

Notwithstanding the last couple of days’ price action, the issue of the lack of breadth associated with the rally continues to be somewhat troublesome, given the recent performance canyon between Mega Cap and mostly AI-related stocks and the other 99% of the investable stock universe. Only 22% of S&P 500 components are performing as well as the index this year (historically a very low number) and seven of the eleven S&P 500 sectors recently fell to 52-week lows relative to the record-busting S&P 500 index itself. The longer this selectivity and discriminating demand exists, the greater the risk it ultimately poses to the rally.

Evidence of the slowing momentum of the US economy has shifted from anecdotal to data-driven in the last few weeks. The question now becomes; how fast is it slowing? The response is absolutely critical quite simply because a severe economic contraction will end this nine-month old bull market and could well reverse it, since it will likely disproportionately damage the prices of the stocks that been on a rocket-ride as the rally’s main drivers.

To be absolutely clear, I am not saying that such a contraction is going to happen. Right now, it is not happening. Jumping directly in front of a fast-moving freight train is always a foolish idea, price takes precedent at the end of the day and the dominant uptrend and market momentum needs to be highly respected.

What I am saying is the stock market at current valuations is not even acknowledging the possibility that a severe economic contraction could happen. And that is at least noteworthy and potentially concerning.

Just because storm clouds may be gathering on the horizon, it does not necessarily mean that a storm will hit us. It does mean, however, that we need to continue to monitor conditions closely to avoid being possibly blindsided.

OTHER NEWS ..

Does The Outcome Of A Presidential Election Matter To Stock Markets? .. The data says that it doesn’t. The S&P 500 rose 60% under Trump and has risen 60% under Biden. The index increased about 200% under each of the very different two-term presidencies of Reagan and Obama.

As for presidential campaigns, the only year before 2024 where there was significant market volatility in the final weeks going into an election since the 1950s was in 2008 when there was obviously a lot of other financial market stuff going at that time, to say the very least! Recent events, however, suggest that the 2024 campaign may be far more turbulent than usual and could create at least short term volatility if even more chaotic dominos start to fall.

Getting Into It .. Americans are playing the stock market in record numbers, with almost three in five investing in stocks, according to a Charles Schwab survey. Members of Gen Z start investing when they’re 19 years old on average compared with 32 years old for Gen X and 35 years old for Baby Boomers. Sports betting has also exploded, with Americans wagering more than $220 billion in the past five years, according to the American Gaming Association. Stock trading seems to be becoming interchangeable with the online betting in the sports world.

Don’t Mess With Texas? .. Against the traditional advice from the locals, Hurricane Beryl is severely messing with Texas and is comfortably coming out on top.…

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Following the car crash of a presidential debate and an apparent outbreak of civil war in the Democratic party, Wall Street strategists and traders have already begun gaming out how an increasingly-likely Trump victory in November will look, especially as it was further enhanced by Monday’s Supreme Court decision on presidential immunity. As one analyst put it; “It’s still too soon to fully price in an election outcome, but probably not too early to leg into it”.

The sense is that a second Trump presidency would drive market interest rates higher on the back of the prospect of the widespread imposition of international tariffs feeding stagflation in the U.S., anticipated ballooning deficits and a President apparently intent on directly interfering in Fed interest rate policy.

Q3 and H2 began with a holiday-interrupted week on Monday and a return to what we have seen a lot of recently; Mega Tech performance papering over the cracks in the rest of the market. On the same day that the tech-heavy NASDAQ reached a new all-time record, three-quarters of the stocks in the S&P 500 moved lower.

As U.S. markets opened on Tuesday, the backdrop was rather miserable with European markets tumbling and oil prices near multi-month highs amid escalating tensions in the Middle East and hurricanes in the Atlantic, where Hurricane Beryl became the earliest-ever Category 5 storm in the area.

The Job Openings and Labor Turnover Survey (JOLTS) showed open job positions increased to 8.14 million from a downwardly-revised 7.92 million reading in the prior month. That was somewhat higher than expected and could therefore be perceived as a small speed bump on the road to imminent interest rate cuts.

However, Mega Tech continued to backstop the rest of the market and the indexes moved moderately higher with the S&P 500 and NASDAQ both closing once again at all-time record highs in a low volume session that had one eye on Friday’s critical Jobs Report.

Wednesday was a half-day in advance of the July 4th holiday and the focus remained on the potential back-to-back fireworks, real ones at the following day’s celebrations and then possible metaphorical ones with Friday’s employment info. Predictably, the abbreviated session was something of a snoozer but even that couldn’t prevent marginal new record highs being reached yet again.

Following Thursday’s holiday, during which there was a strong intensification of the doubts surrounding Biden’s viability as a realistic presidential candidate, Wall Street trading desks operated with mostly skeleton crews on Friday even though probably the most important economic data point of the month, the Jobs Report, was released before the opening bell. 

We learned that the U.S. added another 206k jobs last month, a bit more than had been expected, but there was a downward revision for the two previous months. The revisions helped bring the three-month average down to +177k, the slowest pace of job growth since January 2021 by that measure. The rate of unemployment slightly surprisingly ticked up to 4.1% and average hourly earnings were up +3.9% in June from a year earlier, marking their smallest gain since 2021.

This all seems to have confirmed Wall Street’s view that the economy is slowing, but not in a drastic way that would prompt more aggressive rate cuts. A hot labor market makes it more difficult to lower interest rates but there likely wasn’t anything in the report to lead Fed officials to push for a July rate cut. September, however, is still very much on the table (see FEDWATCH INTEREST RATE TOOL below).

Friday’s thinly-populated stock market was moderately impressed and we saw a Goldilocks extension of the rally on rising hopes of that September rate cut, which of course generated more new record highs for the S&P 500 and the NASDAQ.

Attention turned towards a potentially consequential upcoming several days in U.S. politics with a Biden ABC interview airing that night and an apparently growing group of Democratic lawmakers, donors and party activists getting louder and louder about the need for a change of candidate, especially as more states now seem poised to slip into battleground territory. Electoral politics was also rumbling in the background elsewhere in the world (see below).

Also on Wall Street’s mind in the upcoming days will be the fact that the Q2 earnings season begins this week with the traditional curtain-raiser of results from the big banks and we’ll get some more critical inflation data (see THIS WEEK’S UPCOMING CALENDAR below).

OTHER NEWS .. OVERSEAS ELECTIONS EDITION

While the November election here has suddenly rushed to the front of the news agenda in the last week or so, the UK and France are at the end of their electoral campaign cycles.

Former British Prime Minister Rishi Sunak was brutally booted from power as voters mercilessly punished his scandal-ridden center-right Conservative Party, which suffered a historic thrashing after more than 14 years in power. This was only the second change of government in the country in 27 years.

The new UK PM is Sir Kier Starmer, the leader of the center-left Labour Party which consigned the Conservatives to the worst defeat in their entire history (the party was founded in 1834), with a record-breaking number of senior cabinet ministers (and also former Prime Minister Liz Truss) losing their parliamentary seats and now out of a job. Another record set in this election was the number of votes cast for other smaller parties, some of them with much more extremist agendas, beyond the traditional duopoly of Conservative and Labour.

Unlike in the United States, the leader of the winning party in a UK election takes over as Prime Minister immediately, within hours of the result being determined. Local financial markets had long ago priced in this landslide Labour victory and there was very little immediate reaction.

Meanwhile, on the other side of the English Channel, centrist French President Emanuel Macron’s enormous gamble to call early parliamentary elections when he didn’t have to has been variously described as “an incomprehensibly rash decision” and “playing Russian Roulette with the fate of the nation”. It appears to have massively backfired. In the second and decisive poll this weekend, it seems likely that the far-right National Rally party of Marine LePen will come out on top, maybe even with an outside chance of a working majority in the French parliament, which would install 28 year-old Jordan Bardella as Prime Minister. Results are expected to be confirmed tonight.

The French political system allows for “cohabitation” between a President and an ideologically-opposed Prime Minister and there are still three years left until the next scheduled Presidential election. Local financial markets have been very jittery, uncertain about National Rally’s economic agenda and fearing the political gridlock that may result from a cohabitation outcome with Macron effectively becoming a lame duck President for a very extended period of time.

ARTICLE OF THE WEEK ..

Two-thirds of existing mortgages with <4% interest rates. $100k income households only being able to afford 37% of home listings (normally 62%) ..Welcome to America’s frozen, broken housing market.

THIS WEEK’S UPCOMING CALENDAR ..

U.S. inflation data and the first handful of Q2 earnings reports will be the highlights this week. Federal Reserve Chairman Jerome Powell, will sit for two days of testimony before lawmakers.

The latest earnings season kicks off this week with results incoming from JPMorgan Chase, Wells Fargo, Citigroup, Bank of New York Mellon, PepsiCo and Delta Air Lines.

The economic-data highlight of the week will be the Consumer Price Index (CPI) measure of retail inflation for June. The consensus estimate calls for a +0.1% increase during the month, after the index was unchanged in May. The important Core reading, is expected to be up +0.2% month-over-month. We will also get to see the Producer Price Index (PPI) measure…

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Last week saw the end of the month, Q2 and H1. As I will summarize next week in my Q2 Quarterly Report, stock indexes broadly did ok over these periods, but last week confirmed that some two-way volatility is creeping into the Mega Tech names that have carried this eight month rally. The highlights of the week were always going to be the presidential debate and some big inflation data on Friday, but I’m not sure the needle moved much.

A broadly sluggish session to start the week on Monday was characterized mainly by a continued deepening price deterioration in the recent “darling” risk assets of AI stocks and crypto. Nvidia (NVDA) plunged again to reach a 13%+ correction, shedding $430 billion in value in just three trading days (that’s more than the entire value of Mastercard!) - but 70% of the Large Cap S&P 500 stocks actually moved higher on the day. This further exposed the divergence that I’ve been referencing in this report for months. Bitcoin had its worst day in years. Even the hottest trades are not one-way bets.

In a complete reversal of fortunes on Tuesday, there was a solid rebound in AI and crypto, with NVDA recovering all of its Monday losses. Dip-buyers can take most of the credit. At the same time, big consumer names like Walmart, Nike and Home Depot all struggled on fears that the relentless level of Americans’ retail spending may be starting to top out.

Things stabilized somewhat on Wednesday with stock prices across the board drifting around aimlessly, despite decent earnings and outlook from Fedex (FDX), considered to be something of a proxy for the current state of economic conditions.

Thursday was another uneventful one ahead of the debate that evening and the important inflation data the next day. Mega Tech continued its recovery but Walgreens (WBA), a favorite of dividend stock hunters but recently booted from the Dow Jones Industrial Average index, got punished really hard after some very undistinguished quarterly results.

The excruciating first (and very possibly only) presidential debate on Thursday night simultaneously reduced and increased political uncertainty. On one hand, much of the doubt about the outcome of a Trump v. Biden head-to-head is now rapidly evaporating as a result of what we all saw on Thursday night. But the now somewhat more elevated sense that Biden is simply no longer a viable candidate, leading to a Trump v. ?? head-to-head, could inject a massive level of ambiguity into the process.

The week, the month, Q2 and H1 came to an end with something of whimper on Friday. Wall Street decided to, for the moment, put growing political volatility concerns on the shelf as something to worry about later, choosing instead to focus on the publication of the important Core Personal Consumption Expenditures (PCE) price index which increased just 0.1% for the month and showed that this measure of annualized inflation fell to 2.6%, the lowest reading since March 2021.

Wall Street’s response was something of a shrug, partially because the numbers mostly matched expectations and also because the major indexes are trading not far below all-time record levels and this data certainly wasn’t unexpectedly spectacular enough news to push anything meaningfully higher from there. In the end, we saw prices sink a little on pretty low volume.

There is an old adage on Wall Street that “Bull markets climb a wall of worry; bear markets slide down a river of hope.” The stock market, excluding select Mega Caps, remains in a corrective phase since mid-May which is still unresolved.

It is important to recognize that the top three stocks in the market: Microsoft (MSFT), Apple (AAPL), and Nvidia, now make up 20% of the weight of the entire S&P 500 Index and NVDA alone represents 20% of the Technology sector. Out of eleven sectors, only the Technology and Communication Services sectors are outpacing the YTD gains by the S&P 500 index.

In order to reignite broad demand and further gains in stock prices, Wall Street needs to have a more concrete sense of the Federal Reserve's first interest rate cut and some stability at least in U.S. consumer behavior that seems to turning negative. In order for stocks to rally from here, there needs to be a broadening out in the number of stocks fueling the gains.

There remains a lot of noise in this market about economic growth, inflation, earnings, the Fed, geopolitics and coming up soon, the election. But, for all the noise, the facts remain as such: The bullish mantra that has powered stocks higher since November of last year remains largely intact.

And as long as that remains the case, then the downside risks for this market should remain limited. That said, we should continue to be concerned about the rate at which growth is slowing, not so much because of any recession risk but instead because, at these price valuations, any significant moderation in growth is simply not built in.

OTHER NEWS ..

Beep, Beeeeep .. New York City had the world’s worst congestion for the second year in a row, costing the city an estimated $9.1 billion in lost time. In total, traffic congestion is estimated to have cost the U.S. over $70 billion. Other U.S. cities in the top ten include Chicago, Los Angeles and Boston. Mexico City ranked second on the list, followed by London and Paris.

Greed is Good .. The FTX bankruptcy was looking like a hedge-fund trade for the ages. Many of them were set to make hundreds of millions of dollars for intrepid vulture investors buying claims from impacted investors. Then things got messy. Hedge funds and other distressed investors rejoiced last month when bankruptcy managers said the corporate carcass of FTX, Sam Bankman-Fried’s collapsed crypto exchange, had enough assets to more than make its creditors whole. 

Since FTX’s 2022 implosion, hedge funds had scooped up the rights to customers’ frozen accounts for pennies on the dollar, with five firms alone buying claims with a combined face value of about $2.4 billion. That meant a huge payday was in store. But, according to a Wall Street Journal article last week, many former FTX customers are abruptly reneging on deals and lawyering up after suffering from seller’s remorse.

The core problem underlying this is that FTX claim values have jumped as the prospect of a larger eventual payout has grown, thanks in part to a fierce rebound in crypto prices. That means many FTX clients who sold their claims quickly missed out on getting a better price later on or securing a direct payout from the FTX estate.

Highly Organized Forward Planners Rejoice! .. Disney’s Florida theme parks will let visitors reserve a space for shorter lines on rides as much as one week in advance, in an effort to address complaints about the process.

Disney hotel guests will be able to book ride reservations seven days ahead for their entire stay. Others can do so three days in advance. Presently park attendees can only book spots on the day of their visit, with many waking up at 7 a.m. to get first crack at them. The changes take effect July 24th.

ARTICLE OF THE WEEK ..

When investing is NOT like poker.

THIS WEEK’S UPCOMING CALENDAR ..

Stock and bond markets will close early on Wednesday and remain closed on Thursday in observance of Independence Day.

It’s an interrupted jobs week in the U.S. On Tuesday, we get the Job Openings and Labor Turnover Survey (JOLTS) report. It’s expected to show 7.9 million job openings on the last business day of May, which would be roughly 150k less from April.

Then we see the critical June Jobs Report on Friday. The consensus call is for 195k new payrolls created, after a 272k gain in May. The unemployment rate is forecast to stay at 4.0%.

In between on Wednesday, the Federal Open Market Committee will publish minutes from its recent mid-June meeting.

The first round of voting in the two-part French parliamentary elections takes place this weekend, possibly opening the door to a historic shift in the political and economic landscape in Europe.

LAST WEEK …

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Stocks moved cautiously higher in a bifurcated week, with the S&P 500 achieving its eighth weekly advance from the last nine and ending up just south of all-time record levels, but tech stocks started slumping later in the week, particularly AI-related ones. With a jam-packed week coming up in terms of important economic data releases, there are some concerns that any disappointments could trigger something of a sell-off from these stratospheric levels.

The S&P 500 and NASDAQ indexes both closed at record highs yet again on Monday (that was the 30th record day this year for the S&P 500 and the sixth record day in a row for the NASDAQ), driven by another powerful rally (although notably on relatively low volume) in several AI-related Big Tech names, after Morgan Stanley called rising concerns about the possible over-valuation of AI-related stock prices “misguided”.

There was something of a rebound in European markets, recently battered by political turmoil across the continent. Treasury interest rates stayed muted which is helping a lot. Wall Street seems to be doing the Fed’s job for it, pushing market rates lower and lower over the last couple of weeks.

On Tuesday morning we learned that Retail Sales barely budged in May, rising just 0.1% and the prior months were revised lower. This pointed to a notable downshift in consumer spending after stronger readings earlier in the year.

Wall Street seemed unable to decide whether this was a welcome pullback that allows the economy to cool just enough to tame inflation and facilitate imminent Fed interest rate cuts or was a more ominous trend that hinted at deepening economic weakness.

With the day feeling a bit like a synthetic Friday ahead of the midweek market closure due to the Juneteenth holiday, the result was a low-trading-volume lackluster session with no real conviction either way, but Nvidia did manage to end Apple’s brief one week stint as the world biggest company by catapulting into the #1 spot with a $3.3 trillion+ valuation.

After a day off on Wednesday, traders put their game faces back on again on Thursday. Before the U.S. markets opened, the Bank of England kept local interest rates unchanged (unsurprising in the midst of a general election campaign) but the Swiss National Bank raised some eyebrows with another rate cut.

Stock prices pulled back a little, particularly in some of the AI tech names that had soared recently, resulting in Nvidia’s spell as the biggest company in the world coming to an end after just one trading day, ceding the spot as top dog to Microsoft.

Friday was a “triple-witching day” on the futures and options exchanges with about $5.5 trillion dollars’-worth of contracts in indexes, single-stocks and ETFs expiring along with multiple index rebalances. Triple-witching days are often characterized by prodigious amounts of hedging trades in mostly big name stocks, often in the last few minutes of the trading day, as institutional traders roll over existing positions or start new ones and the rebalancing of indexes can require significant purchases and sales of particular stocks that are respectively entering or exiting the index.

Stock prices sank further at the open, again pushed lower by AI names dropping further, but then stayed pretty stagnant the rest of the day. The triple-witching volatility kept within a narrow range and fears of related wild price swings never materialized.

I’m not a huge fan of technical analysis, but certain data points can be valuable in assessing where we stand, particularly at possible specific milestones. I know a lot of readers just read or listen to the first part of my weekly reports without looking too hard at the second part where all the numbers lie (LAST WEEK BY THE NUMBERS below), but there are definitely some technical breadcrumbs there when it comes to getting a picture of the situation in financial markets right now ..

While the S&P and the NASDAQ are relentlessly reaching new highs ..

* we would expect a least a majority of the eleven sectors to be in a technical uptrend but just two (Technology and Utilities) are, based on their setups, momentum readings and relative performance to the broader market. Interestingly, these two sectors are 1) the traditionally most volatile and 2) the traditionally least volatile. This is unusual and underscores the extremely thin leadership in the stock market right now.

* the number of S&P 500 stocks trading above their 200-day moving averages (see below) fell to a new 2024 low. This is a significant and potentially meaningful divergence with the performance of the index itself which continues to make record highs over and over again That doesn’t happen often. The takeaway is that the average stock is actually struggling, despite what we see in Mega Cap world.

* the Fear and Greed Index from CNN takes into account a multitude of factors (see the details below) and measures the mood and confidence of market participants. Typically when markets are moving higher and certainly when multiple new highs are continually being recorded, you would expect the reading to head quickly into the Greed Zone, then eventually into the Extreme Greed Zone where the danger of the acute risk-on sentiment causing a swift, sharp reversal in prices becomes more elevated, with a crowded trade and and all bets being one-way. This is how markets cycle. However, we ended last week stuck in the Fear Zone indicating that many professionals seem to feel concerned that the current exuberance may be misplaced when applied to all of the S&P 500 stocks.

As I alluded to in last week’s report, a microscopic number of stocks are driving everything right now. For example, just one stock, (NVDA) is responsible for more than a third of the S&P 500’s 14%+ gain so far this year, which is historically unheard of outside the tech bubble in the early 2000s. For my younger readers, that ended badly.

The data from the stock exchanges and the options market are showing that frothy retail investors and underperforming institutional traders are chasing gains in a FOMO frenzy only in this tiny subset of names instead of fishing in the overall broad market.

The vitality brought about by AI mania better not subside anytime soon because there have been weeks recently when it was literally the only reason that the indexes moved higher. That is why Thursday and Friday’s negative price action in AI is troubling.

Any continued backsliding in AI stocks would mean that the market will have seen some damage to two of the four “pillars of the rally” (stable growth, falling inflation, sooner-than-later rate cuts and AI enthusiasm) which would mean that the outlook for stock markets in general would worsen, not strengthen. This is especially true since the market now assumes that the two other pillars (falling inflation and imminent Fed rate cuts) are happening anyway, which means they are less substantial influences on how markets move now.

While risks to this rally continue to build in the distance, mostly in the form of a potential economic slowdown, the path of least resistance in the medium term remains higher for stocks with Mega Cap Tech poised to continue leading the bullish charge higher. Until it doesn’t.

In the words of the late, great David Bowie, “Take your protein pills and put your helmet on.”

OTHER NEWS ..

Housing Data Update [Prospective New Buyers, Cover Your Eyes] .. We got a lot of insight into the housing market last week. Mortgage rates fell again, reaching their lowest level since early April. Bigger picture though, it’s cold comfort for buyers looking at rates that are still almost triple what they were just three years ago (plus the massively inflated cost of homeowner’s insurance). 

Wednesday’s print on new-home construction was gloomy, we saw a 5.5% drop in housing starts in May to the slowest pace since June 2020 and the previous months were revised lower. Compared to May of last year, new housing starts are now 19.3% lower, driven by softer …

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Last week was all about Big Wednesday, with pretty limited price movements on any of the other four days. Interest rate cut sentiment has now swung back to more hopeful again, with the futures-driven expected number of interest rate cuts this year moving up from one to two. This was in the same week that the Fed moved its own projection of the number of 2024 cuts lower from three to one. Huh? The S&P 500 posted its seventh weekly gain in the last eight weeks.

As a highly consequential week began on Monday, Wall Street was laser-focused on a potentially massive day on Wednesday with the latest inflation data and the Federal Reserve interest rate announcement / quarterly dot plot chart / Chairman Jerome Powell’s press conference all coming within hours of each other. Stocks spent most of the week’s first session playing defense, hovering around the unchanged line. Small gains were eventually eked out by the close, with markets holding their collective breath ahead of Wednesday’s possible earthquake.

After a stuttering start on Tuesday, stock indexes turned things around later in the day, especially those with a heavy weighting in Apple (AAPL) whose price broke out, surging over 7% during the session to a new record high on the back of its AI integration announcement (see OTHER NEWS below) and once again eclipsing Microsoft (MSFT) as the biggest company in the world by market value. The S&P 500 closed at yet another all-time record high before Wall Street traders headed home for a mug of hot cocoa and an early night ahead of the following day’s guaranteed drama.

Financial D-Day began on Wednesday with the very Fed-friendly pre-market release of the latest Consumer Price Index (CPI) measure of retail inflation which showed that, according to the headline rate, there was basically zero inflation in the U.S. in the month of May and that the annualized rate has fallen to +3.3%. The more important Core inflation rate, which strips out food and energy costs, showed a lower-than-expected +0.2% increase in May and +3.4% annualized, cooling to the slowest pace in more than three years.

The interest rate environment began changing before our very eyes. Treasury rates plunged with the 10-year rate plummeting to its lowest levels of the year and both stocks and bonds were off to the races, exploding out of the gate the moment the market opened, including AAPL roaring even higher again and both Alphabet/Google (GOOGL) and Oracle (ORCL) reaching their own new record all-time highs during the session.

The Dot Plot report of the Fed’s economic projections, notably prepared before the CPI release, showed the average number of interest rate cuts in 2024 anticipated by the committee members falling from three in the previous report in March to just one this time around (four of nineteen committee members even projected no cuts at all this year). However, it raised average expectations for the number of cuts in 2025 from three to four.

Wall Street looked at all this and seemed to pivot to the idea that an increased risk of recession caused by the Fed not cutting interest rates appears to now outweigh the increased risk of inflation caused by cutting them. Stock prices eased a touch following Powell’s press conference but still finished the day with very healthy gains, with the S&P 500 and NASDAQ having galloped even deeper into all-time record territory.

On Thursday morning, the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers confirmed an apparent resumption of the inflation downturn, with prices actually falling by -0.2% in May, versus an expectation of a small increase, for an annualized rate of just +2.2%.

Stock prices bounced around a bit following Wednesday’s euphoria, finishing the session a smidge higher with the S&P 500 scoring its fourth consecutive record close, but markets appeared to still be digesting the previous day’s somewhat bewildering information dump.

The indexes took a breather on Friday, going nowhere basically, even though the NASDAQ advanced fractionally to record its latest all-time record high.

The top four U.S. stocks by market valuation that drive the indexes – Apple, Microsoft, NVIDIA and Alphabet/Google – have now swollen to a valuation of over $11 trillion (that’s $11,000,000,000,000), meaning that they now collectively account for well over 20% of the total U.S. stock market value (and growing by the day) and just these four stocks alone are bigger than every other stock market in the world, including China, Japan and all the Europeans.

Other than providing a handy dinner party anecdote (you’re welcome!), there are two important things to take from this.

* The recent almost daily new all-time highs in the indexes which are heavily weighted towards these stocks mask what is going on under the surface. The average stock has actually struggled over the last few weeks (the number of stocks above their 50-day and 200-day moving averages has been falling steadily for weeks at the same time as the indexes have been making all these new highs, see LAST WEEK BY THE NUMBERS below) and it can be very misleading to evaluate overall day-to-day or week-to-week broad stock market behavior by just looking at what is happening to the S&P 500 or the NASDAQ, since they are primarily driven by these monster stocks.

Properly diversified portfolios will also contain the other 496 Large-caps, Mid-caps, Small-caps, Micro-caps, European stocks, Asian stocks and Emerging Market stocks and none of these are even close to matching the recent performance of those four stocks. So Teflon-index-watching investors may not even notice (until it’s too late) if things were to start deteriorating fast and hard among the vast majority of stocks.

* Any notably negative company-specific news in this group could potentially send absolute shockwaves through the indexes, causing serious price declines. As I never tire of saying in this weekly report, the kryptonite here for the stock market is sudden slowing economic growth which could actually create such negative news and possibly bring on the resulting stock market fallout.

To be a thousand percent clear, these are concerns about what may happen in the future, not what is currently happening. But it’s important to recognize that the aggregated data is beginning to show that things might potentially be heading in that direction.

OTHER NEWS (APPLE AND ELON EDITION) ..

Apple Jumps In The AI Deep End .. Apple announced its long-awaited new artificial intelligence features last Monday, including tools supported by OpenAI’s ChatGPT. The company says the platform, called Apple Intelligence, will help summarize text, create original images and retrieve the most relevant data when users need it. “AI for the rest of us”, according to the tech giant who also unveiled new versions of operating systems for the iPhone, iPad and Mac. The stock zoomed higher to new record highs in response (see above).

One person not so impressed is famously freedom-loving and consumer-choice advocate Elon Musk who bizarrely announced that he would ban all iPhones from the properties of the multiple companies he runs if Apple’s plans went ahead.

(Even More) Toxic Elon Revelations .. In other Elon news, the Wall Street Journal dropped a bombshell report on Tuesday based on conversations with over fifty people and having viewed many text messages, essentially exposing Musk as a sex pest acting with impunity at his Space X company, persistently sexually harassing multiple current and former employees and college interns and indulging in power-imbalanced inappropriate behavior with a number of them, including arranging to have sex with an employee at his home with his children asleep upstairs.

He also allegedly offered to buy a horse for one woman in exchange for a sex act, flew another over to Europe using a private jet to stay in his hotel room during a Google conference he was attending there and taking professional retribution agai…

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Last week provided a perfect example of how you can create any narrative you like simply by cherry-picking data. The glass-is-half full crowd needed to look no further than central banks around the world last week starting the interest-rate cutting cycle, job openings data showing an orderly resumption of pre-COVID labor market normality backed up by stats showing unemployment at an economically-ideal 4% and over two-thirds of stocks now trading above their 200-day moving average.

Team Trouble Ahead could instead point to a scorching, out-of-control Jobs Report last week that is wrecking the Fed’s plans to lower interest rates any time soon in a stagnating economy, whispers of the need to raise rates instead of cutting them growing louder all the time and less than 50% of stocks now trading above their 50-day moving average.

Stocks fell early on Monday, helped lower by a report showing that U.S. factory activity shrank at a much faster pace than expected, indeed manufacturing output appears to have come close to stagnating. As the session wore on, however, prices slowly clawed their way back and a last-gasp surge meant the S&P 500 actually finished the day fractionally higher.

On Tuesday morning we learned from the latest Job Openings and Labor Turnover Survey (JOLTS) that the number of job openings in the U.S. fell to 8.06m, that’s 1.8m less than a year ago and its lowest level in over three years, implying a continuation of a Fed-friendly, slow-motion and relatively low-pain cooldown in the labor market.

Once upon a time not so long ago stocks might have been expected to immediately shift higher on the back of such data, but it was met with an indifferent shrug by Wall Street. Stock prices initially drifted a little lower then perked up a bit after lunch but there was little conviction either way and the market’s attention began to turn to Friday’s main event, the Jobs Report.

There was a lot of green on the screen on Wednesday partly as a bit of a delayed reaction to Tuesday’s pro-Fed-interest-rate-cut JOLTS data and partly on the back of a rather surprising actual rate cut from the Bank of Canada (BOC), the first of the big global central banks to start an interest rate reduction cycle. Business borrowing conditions continued easing as Treasury interest rates fell for the fifth day in a row and stocks sprang sharply back into all-time record high territory again for both the S&P 500 and the NASDAQ.

On Thursday morning the European Central Bank (ECB) followed the BOC’s lead with its own widely-anticipated first interest rate cut since 2019 to 3.75% -widening the margin by which it is lower than the Fed’s rate to 1.625%. U.S. stock prices returned to snooze mode ahead of the important jobs data the next day and basically went nowhere the entire session.

On Friday morning, the Jobs Report proved to be a confusing mess for the Fed. Payrolls smashed through estimates with a jaw-dropping 272k (average estimate: 180k) new jobs created in May but the unemployment rate rose to 4.0% for the first time since late 2021 (average estimate: 3.9%). The rate of annual wage growth increased by a higher-than-expected 0.4% in May to 4.1% annualized.

This all raised questions about whether the Fed’s interest rate policy is biting hard enough in terms of its goal of cooling the labor market, in turn handing a big “I Told You So” to that still-small but growing group who see a scenario of the next Fed move having to be an increase rather than a cut in interest rates. The last dregs of a market-driven probability of a rate cut in July evaporated completely and the likelihood of a rate cut before the election fell below 50/50 for the first time.

Once again the stock market did not react as one might have expected. Instead of plunging, it rather uncharacteristically took the report mostly in its stride, remaining reasonably calm even though Treasury interest rates spiked back, ending the session with relatively tame losses, all things considered and the S&P 500 and NASDAQ maintained their gains for the week.

The Q2 earnings season is all but over and the general sentiment is that things were “fine”. However, beyond the glitzy releases from the Fab Five, you can find signs of froth if you are looking for them. U.S. public companies are the absolute best in the world at controlling costs and maintaining margins and it was really this superpower that caused Q2 to be regarded in a good light, rather than overwhelming evidence of solid aggregate demand.

Over the past few weeks, we’ve seen numerous companies from multiple industries post disappointing results and projections on a combination of underwhelming sales and margins. The number of companies expressing concerns on earnings calls about reduced demand or a more discerning consumer is rising quickly.

This, of course feeds into the absolute biggest concern for financial markets .. a sudden sharp economic slowdown that has not in any way been factored in to where stock prices currently sit.

None of this means that the S&P 500 can’t run up another 5%-10% if we get good vibes from Jerome Powell this week after the do-nothing June Fed meeting, evidence that inflation has resumed its downward trajectory in the Consumer Price Index (CPI) measure of retail inflation, a drop in Treasury yields and continued bottomless AI enthusiasm but the evidence of slowing growth is increasing on both the macro- and micro-economic fronts and I personally think markets are being a bit too complacent about it.

OTHER NEWS ..

A Wild Ride .. Nvidia rose over 5% on Wednesday, briefly becoming the world’s second-largest company ahead of Apple and behind Microsoft and also became just the third company ever to break through the $3 trillion ($3,000,000,000,000) valuation level just three months after first topping $2 trillion. However, a government announcement the following day of an anti-trust investigation into the firm saw the valuation then dip back down to below both that of Apple and the $3T level.

Buyers Aren’t Standing For It Any More .. The U.S. housing market - long crippled by an inventory drought - is finally starting to see listings rise after what has essentially been a revolt among potential homebuyers brought about by both mortgage rates and prices showing no signs of moving lower. In many places, buyers just aren’t showing up any more. Previously-spoiled sellers are grappling with demand being choked off during what’s typically the hot season. As inventory grows stale, more owners are being forced to cut their asking prices than at any time since November 2022, according to Redfin Corp. 

He’s Baaaaack .. Meanwhile in the tiresome world of meme stocks, the highly anticipated YouTube livestream from the High Priest of Meme, Keith “Roaring Kitty” Gill on Friday lasted 48 minutes with beer, props, awkward attempts at humor and stock charts and had as many as 650k people watching at its peak. GameStop shares promptly tanked 40% and trading was halted by the exchange 17 times after the firm decided to drop an unexpected earnings report showing a 30% plunge in sales revenue and announced a share-sale plan. Oh dear.

ARTICLE OF THE WEEK ..

Want to Pay Cash? That’ll Cost You Extra

THIS WEEK’S UPCOMING CALENDAR ..

It will be a huge week on the macroeconomic and monetary policy fronts.

The Consumer Price Index (CPI) measure of retail inflation for May comes out pre-market on Wednesday morning. just hours before the Fed announces its June meeting interest rate decision at 2pm ET swiftly followed by chairman Jerome Powell’s press conference. Markets are overwhelmingly pricing in no chance of a change in the committee's federal-funds interest rate target.

The following day, we get the Producer Price Index (PPI) measure of wholesale inflation experienced by manufacturers.

We will hear from the Bank of Japan about its interest rate decision on Friday.

Oracle, Broadcom and Adobe will report earnings this week. Apple will host its annual developers' conference on…

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The melt-up momentum in U.S. stocks since late October of last year is showing signs of faltering after a mixed four trading days ended a five-week winning streak. It may be dawning on investors that “higher for longer” interest rates might be undergoing a rebrand to “higher for the foreseeable future”. There’s certainly not very much right now that is serving to create any sense of urgency for the Fed to cut interest rates.

Having said all that, the month of May came to an end and it was a positive one for all the major stock indexes after a tough April.

Markets opened cautiously on Tuesday, following a Memorial Day long weekend which saw increasing violence and an escalating death toll in the Middle East, including an exchange of fire across the Egypt/Israel border. Fed speakers continued their “Higher For Longer” tour, hammering home the message about interest rates every time they found themselves within ten feet of a microphone, even occasionally re-raising the specter of a potential need to raise rates instead of cutting them.

By the end of the day, however, the NASDAQ had reached another record high, closing above 17,000 for the first time ever. It was driven upwards by seemingly never-ending frantic buying of Nvidia stock (NVDA), which is now worth more than the combined value of Amazon (AMZN), Walmart (WMT) and Netflix (NFLX). The other broad indexes, however, all finished mostly flat for the session.

Concerns about rapidly rising intermediate Treasury interest rates gripped markets on Wednesday and stocks took a substantial dive at the open and stayed down in the dumps all day with the S&P 500 sinking back below 5300 again. Things weren’t helped by poor results and downbeat outlooks from American Airlines (AAL) and UnitedHealth Group (UNH) which caused negative contagion among other stocks in their respective industry groups.

The first of the week’s two big data releases, the second of three official Gross Domestic Product (GDP) estimates, was released on Thursday morning and we learned that the U.S. economy grew at 1.3% annual pace in Q1, the slowest pace in almost two years and below expectations, largely because of softening consumer spending.

Stock prices remained under pressure even though Treasury yields did ease a touch following the GDP release. Investors suffered another down-day (particularly Salesforce (CRM) which swiftly fell 20% after a poorly-received earnings report), with markets bracing for the following day’s inflation data.

Trump’s criminal conviction on all felony counts came after market hours on Thursday, giving Wall Street time to decide by the opening bell on Friday that it didn’t really care. It chose instead to focus on perhaps the most influential inflation reading, the Core Personal Consumption Expenditures (PCE) Price Index, which came out pre-market and increased 0.2% between March and April and 2.8% year-on-year. This was all exactly as expected and while it showed that inflation may not be quite as sticky as some fear, it was considered unlikely to have had much impact on the Fed’s thinking

This stopped the bleeding at least and despite Dell (DELL) being brutally punished simply for not quite meeting crazy-high expectations, stocks recovered some of the ground lost in the two previous sessions.

Markets can’t go up every day and we will doubtless experience more volatility in the short term. As I have been faithfully documenting in these reports each week, the number one cause of market turbulence has been Wall Street’s constantly-fluid expectations for when the Fed will cut interest rates.

In April, stocks dropped because markets thought the Fed might not cut rates at all in 2024 or, heaven forbid, even raise them again. In the first half of May, that chatter quietened down, markets rebounded and thought the Fed could cut interest rates twice in 2024 with the first cut probably in September. Now it seems there may be another rethink going on.

Those always-shifting expectations will continue to create something of an unstable environment but this uncertainty won’t last forever. Eventually the Fed’s timetable will become clear and longer term investors simply need to ride out this period of ambiguity and let the institutional equity traders, hedge funds and day traders be the ones who lose sleep worrying about the precise timing of Fed interest rate policy.

The medium- and longer-term outlook for the economy and stocks remains largely positive as things stand. We shouldn’t get too wrapped up in the interest rate cut psychodrama. The precise timing of such cuts isn’t going to bring this rally to an end. But a meaningfully slowing economy or Fed rate hikes could. That’s what we need to watch for.

It’s important to separate the signals from the noise.

OTHER NEWS ..

A Reckoning .. Many pre-COVID-era homebuyers are about to see their cost of home ownership skyrocket. They are among the more than 1.7 million owners of homes bought since 2019 with an adjustable-rate mortgage. These loans average about $1 million to finance more expensive properties (or regular properties in expensive areas) and are set at a “teaser” rate lower than the prevailing 30-year rate for the first few years, but after that they adjust once or twice a year based on current borrowing costs.

About 330k of these buyers are now coming out of their fixed period and interest rates have of course soared to a two-decade high since their purchase. Another 100k of them are facing the same fate within the next year. Although a cap system on rate increases can sometimes take the edge off things, there are plenty of homeowners who could face an overnight increase in their monthly mortgage payments of 25%-40% or more. And that’s before even before taking into account increasing property taxes and homeowners insurance premiums, both of which are also spiraling significantly higher in many cases.

Plan B Destinations .. Travelers are increasingly opting to skip Europe’s most-visited cities and beachside venues in favor of less-frequented destinations for summer vacations this year. Fresh data shared with Bloomberg by Chase Travel shows that the cities with the biggest year-on-year tourism increases this summer are the off-the-beaten-track destinations of Brussels, Munich, Zurich and Warsaw, although the most-booked cities in Europe are still London, Paris and Rome.

The shifting emphasis toward secondary cities largely reflects ballooning prices of everything in the traditional big city destinations and record heat in often air conditioning-free Mediterranean literal hotspots.

ARTICLE OF THE WEEK ..

“Young investors in their 20s and 30s may not even recall a time when the U.S. didn’t dominate global markets .. but they should think twice about abandoning international markets.”

THIS WEEK’S UPCOMING CALENDAR ..

Still a few Q2 earnings reports left: Crowdstrike, Bath & Body Works, Hewlett Packard, Lululemon, DocuSign, Campbell Soup and J.M. Smucker.

It’s jobs week with the Jobs Report on Friday. The consensus estimate is for growth of about 183k payrolls in April, which would be a small increase from March. Before that, we have the Job Openings and Labor Turnover Survey (JOLTS) which is forecast to show about 8.4 million job openings, 100k lower than a month prior.

In contrast with an on-hold Federal Reserve, the European Central Bank is widely expected to lower its benchmark interest rate target on Thursday. A quarter-point cut would take it down to 3.75%.

LAST WEEK BY THE NUMBERS ..

Last week’s market color courtesy of finviz.com

Last week’s best performing U.S. sector: Utilities (two biggest holdings: NextEra Energy, Southern Co.) - up 3.0% for the week.

Last week’s worst performing U.S. sector: Technology (two biggest holdings: Microsoft, Apple) - down 1.5% for the week.

* SPY, the S&P 500 Large Cap ETF, tracks the S&P 500 index, made up of 500 stocks from among the largest U.S. companies. Its price was unchanged last week, is up 11.1% so far this year and ended the week 0…

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Last week’s narrative was dominated by Nvidia’s earnings, which ended up being a splendid story. Markets in general, however, were flattish for the week, as investors seemed to lurch from one side of the canoe to the other, suddenly concerned again that interest rate cuts could be further away and less frequent than previously thought.

The most popular futures market-driven scenario now sees no interest rate cut until December, so only one reduction this year. For context, at the beginning of last week, expectations were around 80% for a first cut in September and two reductions for the year.

The week started with the geopolitical temperature elevated by the death of Iranian president Raisi and the application for an arrest warrant for war crimes for Netanyahu among others which pushed up the prices of oil and so-called “safe havens” like gold early on Monday, but the stock market continued to head steadily upward with more new record highs, especially for any index that included “the most important stock on planet Earth” , Nvidia (NVDA) as investors piled into the AI giant’s stock in anticipation of the earnings report later in the week. Another big index component, Microsoft (MSFT), impressed Wall Street with the announcement of some new AI-powered additions to its PC product line.

Stocks drifted slightly higher again on a rather dreary Tuesday which saw more all-time record highs for the S&P 500 and the NASDAQ, driven mainly by the fact that .. well, there was no real reason not to. Investors still couldn’t get enough of NVDA which touched its own new all-time high ahead of the release of its eagerly-awaited earnings report after the close the next day.

While breathlessly waiting for that report during the session on Wednesday, traders tried to keep themselves occupied by poring over a very disappointing pre-market earnings report from Target (TGT) and the minutes from the most recent Fed interest rate-setting meeting that seemed to show most committee members coalescing around the idea of higher-for-longer interest rates with very little sign of any dissent. Stock prices floated lower in response.

When we finally got to see Nvidia’s results on Wednesday evening, we received an emphatic answer to the question as to whether spending on AI computing remains strong. Q2 revenue was $27 billion, up 262% from a year earlier. Earnings were a staggering 461% higher than a year prior. Gross margins were massive at 79%. Sales forecasts and outlook were sensationally bullish. This all trashed even the highly-elevated market forecasts.

Oh, and the firm announced a 10-for-1 stock split. As one analyst put it, "It's Nvidia's world. Everyone else is just paying rent.”

NVDA surged more than 10% at the open on Thursday, but was very much the outlier for the session as the rest of the market revisited some fairly bleak retail earnings reports/outlooks and the somewhat rate-cut-unfriendly tone of the Fed minutes from the day before, emphasized by further statements during the day from Fed officials, once again sticking to the party line that it would not be wise for them to cut rates until they had a solid degree of confidence that inflation appeared to be under control. The implication being that, at this exact moment in time, they lack that confidence.

The indexes all moved sharply lower on Thursday as prices seemed to fall into an “air-pocket” created by the rapid resumption of price-chasing by investors since the beginning of May, with the S&P 500 falling back below 5300.

Most of Thursday’s damage was, however, repaired on what turned out to be an ultra-low volume but pretty cheery Friday ahead of a long weekend, mostly driven by gains in Big Tech (including, you guessed it, NVDA yet again).

It’s not that any events on Wednesday and Thursday were definitively market-negative. They weren’t. It’s just that investors once again got too giddy in their expectations and some of last week’s non-Nvidia-related developments simply served to partially correct that too-rosy view (see my “canoe” analogy in the opening paragraph).

Like it or not, the Fed is very much in a higher-for-longer interest rate mode. “Longer” likely means a few months but that’ll depend on the economic data. If data is too strong, “longer” may well mean until December of this year, or maybe even beyond then. What “longer” definitely does not mean is, for example, a July cut instead of a June one.

The only way the Fed cuts interest rates before September is if growth utterly collapses and if that happens, stocks will be on such a serious downward march already that something as trivial as a rate cut or two won’t be enough to rescue the situation.

We should not be surprised if the market’s recent wobbles continue for a while longer as investors start to talk themselves into yet another new interest rate paradigm. But, that’s likely a temporary condition and nothing last week materially and negatively altered the largely favorable intermediate term outlook for stocks.

OTHER NEWS ..

????? .. Half of Americans think that the U.S. stock market has fallen this year, according to a major poll published by Guardian/Harris last week and there are a number of other quite alarming economic and financial knowledge gaps among the group of people who are about to decide who becomes the most powerful individual on the planet.

According to the poll results;

* 49% of Americans falsely believe the S&P 500 index is down for the year. In reality, it’s up over 11% so far in 2024, after rising about 24% in 2023.

* 72% of Americans falsely believe that the rate of inflation in the U.S. is increasing. In fact, as measured by the Consumer Price Index (CPI), it is now two years deep into a process of falling sharply from a peak of 9.1% in June 2022 and has been fluctuating between 3% and 4% for the last year, moving lower to a reading of 3.4% earlier this month.

* 49% of Americans falsely believe that the rate of unemployment, which has been below 4% for the last two-and-a-half years according to the Bureau of Labor Statistics, is at a 50-year high, in spite of the fact that it’s actually at a 50-year low.

* 56% of Americans falsely believe that the U.S. is currently experiencing a recession, even though the broadest measure of the economy, quarterly Gross Domestic Product (GDP), has grown for eleven of the last thirteen quarters since the dark days of early COVID back in 2020 and grown solidly every single quarter uninterrupted for the last two years.

These high levels of apparent ignorance of what is actually happening are perhaps at least partly explained by the rather disturbing finding from the same poll that over 60% of Americans distrust what they are told in official government economic data releases.

Where On Earth? .. Oxford Economics last week released its inaugural Global Cities Index, which it claims is the most comprehensive evaluation of the world’s largest urban areas. The index was compiled using five broad categories - economics, human capital, quality of life, environment and governance - with higher weightings placed on economic factors such as GDP and employment growth.

.. and the winners of the best places to live in 2024 are (in order of the overall scores):

* New York

* London

* San Jose

* Tokyo

* Paris

* Seattle

* Los Angeles

* San Francisco

* Melbourne

* Zurich

ARTICLE OF THE WEEK ..

Biden or Trump? Based on history, the stock market won’t care.

THIS WEEK’S UPCOMING CALENDAR ..

Stock and bond markets will be closed on Monday for Memorial Day. One day settlement for U.S. securities transactions goes into effect on Tuesday when markets reopen. Expect a few teething problems.

Just a few laggards left to report this week for Q2 2024 such as Costco, Dell, Best Buy, Gap, HP Inc., Dollar General, Agilent and Ulta Beauty.

The economic-data highlight of the week will be Friday's Personal Consumption Expenditures (PCE) Price Index for April that the Fed relies on to measure inflation. The consensus estimate is for a year-on-year inflation rate of 2.7%, unc…

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It was a fourth straight week of higher stock prices with markets in a sweet spot right now as recent data has shown that growth is slowing but still positive, corporate earnings and outlooks are proving to be very strong and disinflation may have slowed, but it has not stalled.

This is also a market that once again seems to be happy talking itself into the idea that the Fed is going to cut interest rates in the not-too-distant future (a first cut in September and then another one sometime before year-end is currently the futures market’s best guess). Fed officials are sticking to the script, however, continuing to hammer home the higher-for-longer mantra in their speaking engagements last week.

Even as Wednesday’s release of the Consumer Price Index (CPI) measure of retail inflation loomed into view on Monday, there was not a lot of enthusiasm on the part of traders to take a strong view one way or another ahead of the numbers and the outcome was a fifth consecutive trading day of barely any movement in the major indexes, but with the S&P 500 still managing to hold above the important 5200 level. Beneath the index level, the news of the day was dominated by a resurgence of meme stock mania (see OTHER NEWS below).

Tuesday morning’s starter to the main course that was the following day’s CPI, was the Producer Price Index (PPI) measure of wholesale inflation experienced in April by manufacturers which came in hotter than expected, rising +0.5% for the month and +2.2% for the year. However, the prior month’s number was revised down to a very chilly -0.1% and that seemed to balance things out as far as Wall Street was concerned. The net effect ended up being positive for stocks, with a late rally carrying the indexes higher, albeit still within a pretty tight range.

When CPI came out pre-market on Wednesday, we learned that the annualized headline inflation rate ticked slightly lower to +3.4%, the first time it has cooled this year. The important annual Core inflation rate (ex-food and energy) came in at +3.6%. All of this was very much in the same ZIP code as expectations.

Also released on Wednesday were the latest Retail Sales figures that were unexpectedly flat in April along with a slight downward revision to March, indicating that consumer spending was beginning to lose some momentum. This was viewed as a nice addition to the CPI-generated narrative of potentially cooling retail price increases and a possible acceleration of the timeline for interest rate cuts from the Fed.

Markets breathed a collective sigh of relief at the lack of an unpleasant inflation upside surprise and the welcome signs of still-intact disinflation, pushing stocks higher at the open and it only got better from there. We reached new all-time closing highs for the S&P 500 (for the 23rd time so far this year but the first time since March), the NASDAQ (for the eighth time so far this year) and even the stupid Dow Jones Industrial Average (DJIA) which got to within spitting distance of the 40,000 level for the first time and is now double what it was less than eight years ago, even without Nvidia, Meta/Facebook and Alphabet/Google being in the index.

Stock markets returned to snooze mode on Thursday, following a series of little twists and turns and closed slightly lower as traders digested the week’s gains. This was despite a very healthy earnings report driven by international and e-commerce strength from the bellwether stock, Walmart (WMT), pushing the stock price up to its highest level ever.

Another generally quiet one for stocks on Friday too, although by the closing bell, the S&P 500 index had closed above 5300 for the first time and we also saw the first-ever close above 40,000 for the DJIA, thanks to a very positive literally final minute of the session, which brought yet another solid Wall Street week to an end.

These new highs for most of the indexes have just eclipsed levels last seen in March as the 5.5% “correction” in stocks came to an end in the space of about a month, so what has happened since then?

* The first Fed rate cut is now not expected until September, not June (as it was in March). 

* The Fed is now only expected to cut once or twice, not four or five times (as it was in March). 

* The unemployment rate has now risen to 3.9%, tying the highest level in months. 

* CPI inflation for last month is now at 3.4% annualized, up from 3.1% in March’s reading for February. 

* Earnings expectations remain pretty much unchanged. 

Not one of these factors is “better” now than it was in March, indeed some of them are noticeably “worse”. So, why are stocks higher today than they were in late March?

The answer lies in all the happy talk. Investors have convinced themselves that we are in the midst of a near stock-perfect Goldilocks environment that’s still characterized by 1) stable growth and earnings, 2) falling inflation, 3) upcoming Fed rate cuts and 4) AI enthusiasm. While all four of those aspects of this market are probably in a worse state today than they were in March, they’re not “worse enough” to force these investors to think they aren’t still all happening. Put differently, the environment may not be as good as it was in March, but it’s still good enough to push stocks higher. 

The problem, as JP Morgan‘s Jamie Dimon pointed out last week, is what happens to markets when it becomes clear that one or more of those four factors is no longer in place, because Wall Street seems to have not really baked in that possibility in the course of an ongoing seven-month rally in stock prices.

OTHER NEWS .. MEME STOCK EDITION

Here We Go Again? .. Shares of GameStop (GME) skyrocketed over 100% in value in just the first 30 minutes of trading on Monday morning, ending the day on 30X its normal trading volume, after Keith Gill, the key driver of the meme stock craze of 2021, known by his online persona of “Roaring Kitty” and recently portrayed by Paul Dano in the enjoyable if somewhat factually incomplete movie, “Dumb Money”, apparently posted a cryptic tweet for the first time after basically having disappeared online almost three years ago. I say “apparently” because as the week wore on, doubts began to emerge out there as to whether it was actually him doing the tweeting, had he sold his account name or perhaps got hacked?

The tweet raised speculation that retail investors may again run up shares of GameStop and some of the other members of the old Meme Team like AMC Entertainment (AMC) and Hertz (HTZ), which also soared that day for no rational reason. The mania continued into Tuesday with more big price spikes - but reality suddenly set in on Wednesday when prices corrected back down and hard, wiping out a large portion of the gains in the first few minutes of trading.

The stock market continued to punch any meme stock day traders who had decided on Tuesday to hop on the bandwagon in the face on Thursday and Friday sending their stock prices cascading lower. GME ended Friday’s session more than 54% below where it had been just 72 hours earlier to a price representing just a 16% increase on the week, having been up as much as 180% at one point. There’s not a lot of “Diamond Hands” HODLing of the stock happening here.

These meme stock movements make for fun stories and amusing investor profiles for financial journalists but from an actual market standpoint, the price action just hints at a lingering complacency amongst investors. As was pointed out on many occasions last week, one wordless post on X/Twitter shouldn’t increase a company’s market capitalization by over $4 billion in a matter of minutes and, frankly, the outlook for GameStop’s business is particularly bleak right now (it has a $10 billion market cap and in the last year only reported $6.7 million in net income. It’s price to earnings multiple got to more than 1,000X last week, compared to the stock market’s 21X - obviously completely unsustainable).

This nonsense happens in frothy markets when there’s money sloshing around…

This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com