Huzzah! After the Nasdaq 100 (NDX) set a record earlier this week, the S&P 500 (SPX) closed just below its own peak yesterday. Did anyone truly doubt that the broader index would set a new mark today?
Indeed, there were a few economic items this morning that could have impeded the market’s recent enthusiasm. “Meh” was all we needed to continue the rally, and that’s what we got.
The eagerly awaited Core PCE, the Federal Reserve’s preferred inflation measure, rose by +0.2% on a month-over-month basis. It was more than the expected +0.1%, but certainly not enough to perturb the Fed too much. Personal Income fell sharply in May, coming in at -0.4%, well below both the +0.3% consensus and last month’s +0.7% (which was revised down from +0.8%). Personal Spending fell by smaller amounts on both nominal and real bases (-0.1% vs +0.1% exp for nominal; -0.3% vs. 0% for real). This jibes with the recent slew of negative consumer sentiment readings that have emerged over recent months, but today’s report from the University of Michigan was decent enough. Sentiment rose slightly to 60.7 from 60.5, and 1-Year Inflation Expectations dipped to 5.0% from 5.1%.
The question now is how far? Financial assets are a funny thing – the more expensive they get, the more demand they get. This of course runs counter to standard economics, where demand for goods is inversely, not directly, related to their price. But this is a hallmark of momentum-driven trading. Rising prices are not just a sufficient reason to continue buying, they are THE reason to continue buying. The trend is your friend, and these trends have been especially friendly.
This morning, I was asked whether there seemed to be a disconnect between stock prices, which could certainly be getting overheated, and fundamentals. I answered, only semi-facetiously, that I don’t think the traders who are buying Nvidia (NVDA) and other market leaders at continual all-time highs are doing an analysis of the companies’ discounted future cash flows. We’ve noted before that at its root, momentum trading strategies imply that fundamentals don’t matter. Ultimately, fundamentals DO matter, but that reconciliation can come months, or years later. And to be fair, the fundamentals underlying many current market-leading stocks are quite good – the question is instead whether investors are paying too much for them. For now, few care about that possibility.
So, investors are enjoying the ride right now. Thanks to the ebbing of hostilities in Iran and the ensuing drop in oil prices, stocks have put on a stellar performance this week. And as we noted yesterday, few investors seem particularly concerned about potential clouds on the horizon. I guess we’ll worry about that later. Why spoil the party today?
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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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We have all heard “The trend is your friend” and “Trees don’t grow to the sky”. They are both true, but they obviously are not in accord. What is for certain is that every trend be it up or down will someday turn; “when” is always somewhat uncertain, until it actually happens. Only a “genius” knows in advance, and one mark of a genius is that they never have to tell you that they are one. I am no genius, so when the party gets hot, I will take some off the table. For sure this guarantees that I will be somewhat wrong, either leaving possible future gains, or holding on too long, but it leaves me enough to get by.
We have all heard “The trend is your friend” and “Trees don’t grow to the sky”. They are both true, but they obviously are not in accord. What is for certain is that every trend be it up or down will someday turn; “when” is always somewhat uncertain, until it actually happens. Only a “genius” knows in advance, and one mark of a genius is that they never have to tell you that they are one. I am no genius, so when the party gets hot, I will take some off the table. For sure this guarantees that I will be somewhat wrong, either leaving possible future gains, or holding on too long, but it leaves me enough to get by.