The past two days have shaped up to be wild ones. Yesterday was all about Microsoft (MSFT) reaffirming their ongoing expenditures on artificial intelligence, giving a huge lift to Nvidia (NVDA) and other tech names, if not MSFT itself, and ratified the hordes of small investors who had been buying during the stock’s recent decline. Then Chair Powell, if not the FOMC statement, assuaged investors that their hopes for a widely anticipated rate cut in September. Throw in what I considered to be month-end factors – institutional investors deciding that they might not want to report that they had lightened up on tech quite so much – and we were off to the races.
The bounce brought to mind my most recent IBKR Podcast, where the Cboe’s Mandy Xu noted that we have had more high volatility results to the upside rather than the downside recently. That was taped before last week’s -2.3% decline in the S&P 500 (SPX), but a robust 1.6% jump fit in neatly with that theme. But now we’re down about -1%, around midday, with bigger moves in both directions (+3%, -1.5%) from the Nasdaq 100 (NDX).
3 Day Chart, SPX (1 minute red/green candles), NDX (blue line)
Source: Interactive Brokers
As we stand now, both indices are looking at outside reversal days, thanks to a robust start this morning. Meta Platforms (META) rose on solid earnings and Mark Zuckerberg’s avoiding the comments about the slow profitability of AI that hurt his stock last quarter and Alphabet’s (GOOG, GOOGL) last week. Unfortunately for tech investors, post-close rallies in key semiconductor stocks like ARM Holdings (ARM) and Qualcomm (QCOM) turned into significant selloffs this morning. Their moves fit with the all-too-common theme of major tech stocks reporting good results versus expectations but getting punished nonetheless because their guidance and/or commentary was not robust enough to satisfy overeager investors.
But the real blow this morning came from the ISM data. While we were all focused on tomorrow’s jobs report, a decline in July ISM Manufacturing (46.8 from 48.5 and a 48.6 consensus) and an increase in prices paid (52.9 from 52.1 and a 51.8 consensus), along with higher than expected initial jobless claims (249k), reminded investors that while they had been hoping for rate cuts at each of the remaining three FOMC meetings this year, they might not get them unless a weaker economy dictated them. OK, the CME FedWatch tool is indicating almost certainty for ongoing cuts,
Today’s reaction is the flip side of wishing for aggressive rate cuts — they typically need to be justified by economic weakness. That's favorable for bond holders, who see the 10-year Treasury yield below 4% today, but much less so for stock investors who, Fed policy aside, remain tethered to things like revenues, earnings, and cash flows that are usually impeded by a weaker economy. A weaker economy is usually NOT good for stocks. In other words, be careful what you wish for.
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Originally Posted August 1, 2024
Disclosure: Interactive Brokers
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