Nvidia gives markets a spark
Markets were floating around early last week looking for direction. After being closed on Monday for Presidents Day, the mood was mostly sour with a negative bias. It seemed like we were looking for — and seeing — negativity everywhere. It probably comes down to “market top jitters,” when markets tend to start worrying about going higher and, in the absence of good news, look for reasons to take our gains and go home because surely the next step will be a market downturn.
Not so fast. It only took blowout earnings from Nvidia, the artificial intelligence (AI) industry’s leading chip maker, to blow away all those fears and rocket us to new highs. Thursday was one of those days that goes toward the tally of “if you missed the top 10 days” over some period, your returns would be significantly less.
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The end of last week was a classic example of being rewarded for time in the markets and not caving in to emotions or market timing. Are there still concerns? Sure. Are markets being pushed higher by a small group of stocks? Yes. Is the 10-year treasury well above 4%? It is. Whether these things are reason for concern, optimism or alarm depends on your mindset.
People whose mindset is “all I want is upside with no volatility” might want to buy a 10-year U.S. Treasury at 4% and call it a day. A 4% return for an investment you don’t have to worry about is pretty good, and it’s much better than anything that’s been available in recent years.
If you’re optimistic, you may see this as an opportunity because we are at all-time highs despite inflation, Federal Reserve tightening and economic malaise. Once people feel better about the economy, interest rates begin to decline and inflation drops to normal levels, the rest of the market might catch up to the high-flying narrow group of stocks because the conditions have become more favorable and earnings prospects have improved.
The mindset is the difference between pessimism and optimism. You need to be honest with yourself, pick a direction and stick to your plan. The cost of playing it safe (by forgoing larger gains for potential safety and security) is almost certainly lower returns. On the flip side, the cost of optimism is living with uncertainty and volatility with the potential of achieving much higher returns. Our recommendation is to commit to who and where you are, then commit to a plan and execute.
Meeting minutes confirm Fed’s posture
The Fed released the minutes from its late January meeting last Wednesday, and they really didn’t offer anything new. We were most likely at the end of rate hikes, and the Fed was going to be very careful as it processed economic data before committing to cutting rates later this year. The minutes showed most Fed officials were concerned about the risk that cutting rates too quickly could allow inflation to rise again after declining significantly in the past year. Only a few policymakers worried about a different risk: keeping rates too high for too long, slowing the economy and potentially triggering a recession.
Regardless of what side of the debate you land on, an important thing to remember is the Fed was too late to the inflation game and played a little too much politics by going along with the “inflation is transitory” narrative. The Fed is not some sort of intergalactic council of financial wisdom and isn’t always correct. Fed Chair Jerome Powell wants to restore his credibility and has drawn the line at 2% inflation. It’s also an election year, so he wants to avoid looking political.
The Fed’s most predictable course is to stay put, letting the economic data continue to deteriorate and waiting for inflation to creep closer to 2% before changing its posture. That sets the stage for a maximum of three cuts in 2024. Cutting too much too soon will reignite inflation and the Fed will be viewed as having failed in its attempt to tame inflation, likely destroying any credibility it has left. In addition, higher inflation in an election year would be unkind to incumbents and would be viewed as political, so the Fed will likely sit and do nothing for as long as it can.
Coming this week
Fed officials are on the speaking circuit this week. Their comments will be carefully scrutinized for further clues into what the Fed is thinking.
The first revision of fourth-quarter 2023 gross domestic product (GDP) will be released on Wednesday. We’ll also see MBA mortgage applications and a lot of inventory data.
On Thursday, we’ll have some inflation data for the Fed to ruminate on. We’ll also see personal income and spending, followed by personal consumer expenditures (PCE). If these numbers show improvement, markets will be pleased.
Earnings continue to trickle in. So far, 79% of S&P 500 companies have reported their earnings. Three-quarters of those have shared positive earnings per share (EPS), while 65% have reported positive revenues. The blended year-over-year earnings growth rate for the S&P 500 is 3.2%; if that holds, it will mark the second consecutive quarter of earnings growth.
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