Market Commentary

For the week ending 4/19/2024

 

The stock indices recorded their third consecutive week of losses, and, while most sectors were down, one noteworthy group that underperformed this week was the Mega-cap tech stocks, including what we’ve come to call the “Magnificent Seven.” Nvidia, the big outperformer all last year, fell 13% for the week, dragging the rest of the semi-conductor group down with it. Tesla was down 14.0%.  Meanwhile, financials, utilities and consumer staples stocks had small gains.

After a rush of publicity and promise, a consolidation period is setting in for companies at the forefront of AI.  Going from theory to practice always involves a grueling period of trial and error.  In the beginning, you throw resources at every promising lead, because you never know.  But there comes a point where it’s necessary to narrow down your choices and focus on the practicals. That’s usually when all those who bought the stock only to ride the wave of upward momentum, start to take their profits and get out.  That seems to be where we are right now.

This is normal give-and-take in an evolving industry.  What’s important to keep in mind is that there’s plenty of opportunity left for the long-term investor.  Nvidia is down 20%, or $190 per share since the high it just posted in March.  But it started its bull run at $112/share in October 2022 and topped out at $953/share – a 750% increase.  After this 3-week slide, it’s still up 580% at $762/share.  Nvidia is an extreme example of what’s happening within the entire sector and makes the coming earnings reports that much more important.  Nvidia doesn’t report until May 22, but Google, Microsoft and Facebook will report this week.

The trading week started off on a strong note, which analysts attributed to relief that Iran’s retaliatory strike on Israel was calibrated to do as little damage as possible while still making a show of force.  On Friday, stocks headed lower again, after Israel conducted strikes on air defense facilities within Iran.  But Israel’s “response to the response” (This all started with an Israeli strike on an Iranian embassy in Syria) was also calibrated to minimize the risk of escalation, and Wall Street went into the weekend confident that the worst is over.

In economic news, the Commerce Department reported that retail sales rose 0.7% in March, well above consensus expectations of around 0.3%.  Rising gas prices played a part, but the strength was broad-based and included gains in discretionary categories such as restaurants, bars and online retailers.  On the downside, housing starts and permits in March came in below expectations and declined from February, with starts falling to the lowest level in seven months. Existing home sales also declined, although largely in line with expectations, as the average 30-year mortgage rate climbed above 7% for the first time since December.

Recent inflation trends are upward again and, although housing sales and permits are down, this reflects more the problem of under-supply than low demand, and housing prices continue to rise.  Strong retail sales are inflationary as well, and this has Fed officials hedging somewhat their previous assurances that rate cuts are coming by the end of the year.

On Tuesday, Fed Chair Jerome Powell stated at an economic conference that “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” On Thursday, New York Fed President John Williams warned that a rate hike is not the baseline, but that one is possible if the data warrants. Atlanta Fed President Raphael Bostic said that policymakers would not be in a position to cut rates until the very end of the year.

All this talk of higher-for-longer pushed the yield on the benchmark 10-year U.S. Treasury note to its highest level since early November.

For the week, the Dow Jones was unchanged at 37,986 (0.0%), the NASDAQ was down 893 points to 15,282 (-5.5%), and the S&P 500 declined 156 points to 4,967 (-3.0%)

Oil fell $2.00 to $83.50/bbl. Gold rose another $29 to $2,403/oz. and the yield on the 10 yr. Treasury ticked up 0.1% to 4.6%.

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