Published May 26, 2023
Below are excerpts from Blaine Rollins’ latest collection of market and economic observations and data. There continues to be an extraordinary lack of consensus around any market narrative. Thus, we keep chopping around mostly sideways in the broad market while the heavy-hitters of the market are perceived as the safest bet to make in the stock market. Stocks have strong competition also as short-term debt instruments offer 5%+ returns for little to no risk. At some point, this all breaks down. But that breakdown could well be a surge of money into the rest of the stock market which one of Blaine’s sources below shows is rather cheap these days. Given that such an outcome is talked about relatively little, perhaps it’s the most likely destination for stocks?
Here’s what Blaine sees:
“Summer begins this weekend as we observe Memorial Day to honor our fallen soldiers. For many, it will be a time to visit family and friends, attend a graduation and start up the grill for the first time in 2023. But there will not be any hot dogs or soda pop for the elected officials in Washington this weekend as they push the debt limit talks down to the final clock tick. There are two big days of check writing and electronic payments on June 1st and 2nd. After that, it is uncertain if the U.S. government will have any money in the bank to make any future payments which would pay for Social Security, Medicare, Medicaid and wages to all Military and Federal employees. We can’t imagine any member of Congress allowing these non-payments to occur which is why the debt ceiling crisis should all be settled up and decided over the long weekend.
While the markets remain mesmerized by the debt ceiling drama, they also made 2023 highs last week. The credit markets also priced an extreme amount of new paper which tends to happen in good markets, not bad. The Fed speakers continue to tap the “inflation is not over” button causing the markets to consider a June rate hike, but who are they kidding? The consumer economy remains extremely healthy even as credit trends normalize from the super healthy COVID era stimulus window. We know that the cost to borrow has moved higher while the ability and appetite to borrow has declined. This is going to turn the screws on the U.S. economy in the second half of the year. But will it sink the ship? Nope. The U.S. banking and financial system is too healthy. Banks are well reserved, private buckets of capital are ready to buy assets, corporate balance sheets are in fine shape and investors are sitting on a lot of cash. Excluding some major geo-political event, do you think the S&P 500 will first hit its 2022 high of 4,800 or its October low of 3,600? I think that you know what my answer is.
The markets had a good string of economic data last week. The Philly Fed reversed higher from April’s woes. Housing data did well as the NAHB builder survey popped 5 points while April’s housing starts lifted 2%. Applied Materials crushed their earnings and announced big new plans for a multi-billion-dollar research center in the Bay Area. Treasury yields rose due to all the economic strength, while stocks also rose even with some cautionary comments out of the largest retailers.
The sharp rise in interest rates has pulled money into short-term debt instruments (e.g. money market funds, CDs, T-bills) and made dividend stocks less attractive.
When we hear that the stock market is expensive, we need to remember that the top handful of stocks (the FAANG group) have a big influence on that perception. AND, last year, money flowed into defensive areas of the market leaving those areas also rather expensive. Remove those two expensive market chunks and we have a stock market that is actually priced pretty normally (still not super cheap though).
For now, those FAANG stocks keep ripping higher regardless of those “expensive” valuations.
Market Update
The ongoing debt ceiling negotiations took center stage this week, at least until Wednesday night when a market bombshell went off. Monday brought investors a flat trading day though the Nasdaq managed a positive +0.5% move despite news from China blocking chipmaker Micron from selling products in the country. Interest rates continued their recent move upward as investors have fled Treasury bonds in favor of corporate bonds. Investors are viewing corporate bonds as a refuge until the federal government debt ceiling issues are resolved. The volatility around the debt negotiations was on display Tuesday as stocks tumbled -1% while short-term interest rates pushed higher yet again. The yield on one-month June treasury bills hit 6%. That same June note yield spiked above 7% Wednesday (a full percentage point in ONE DAY!) as investors continued to flee short-term treasury bonds. The flight out of T-bills is a defensive move driven by outside concerns the debt negotiations won’t reach a settlement in time for the U.S. to pay its June debt obligations. Stocks reflected the concerns sliding another -0.7% Wednesday. But the market dramatically shifted its focus Wednesday night. Chipmaker Nvidia presented their quarterly earnings with solid results. But it was their words that sent investors into a complete tizzy. The chipmaker said that it has been ramping supply to deal with surging order backlogs as AI-driven demand looks to be pushing revenue from $7B per quarter to $11B per quarter (an almost +50% increase in revenue!). The massive leap in revenue sent the company’s stock soaring to rival the largest one-day boost in ANY company’s stock value in history (up $184B in market value on a 24% gain in the stock price). The news sparked a rush for shares of semiconductor firms of all stripes to send the S&P 500 higher by +0.9%; the Dow Industrials fell slightly in its fifth straight losing session. The Dow Industrial Average doesn’t contain Nvidia and has little weighting in semiconductors. Friday brought a continuation of AI-induced market joy sending the Nasdaq up another +2.5% and bringing the S&P 500 all the way back to where it began the week, reversing all of the debt ceiling angst.
The first three days of the week made last week’s pop higher look like another flash in the pan until Nvidia’s blockbuster announcement completely changed the market’s tone. The S&P 500 rallied to a +0.33% weekly move while the Nasdaq 100 (QQQ) put in a second straight week of hefty gains rising +3.53%. Smallcap stocks continue to reflect the widespread caution in the broader stock market. This week the index was unchanged (-0.01%) while the equal-weight S&P fell -1.24% as an indication of how few stocks are actually showing strength.
Warm wishes and until next week.