Markets recalibrate amid rate cut speculations and tech sell-off

Nasdaq (think Tech) got punched in the face yesterday -1.95%….this after powering the bull market in stocks for more than 2 yrs.….Recall Nasdaq rose by 45% in 2023 and was up 23.7% thru yesterday morning…and now the street is  taking some money off that table….- talk of a correction is now the concern hitting that sector hard…..(and maybe rightly so – I mean it has been a monster).   

The street is now betting that the FED IS cutting rates in September – no questions….as of last night – they are betting that there is a 91% chance of a rate cut in September, a 58% chance of another cut in November and an 87% chance of a cut in December. Remember -  that is the street’s call, the FED has not specifically said it, but JJ was a bit more dovish at his Humphrey Hawkins testimony this week and in addition yesterday’s CPI report did come in a bit softer than the estimates predicted – giving more fuel to the fire that inflation is easing  – Housing costs the reason for the softer read (while insurance costs continue to surge)…..and that sent a  strong message to investors, traders and algos that something is changing….. The WSJ giving their blessing – saying that it gives the FED a ‘path to cut rates by the end of the summer (summer officially ends on September 21st and the FED meeting is on September 17th & 18th. - Capisce?) 

And this ‘new’ narrative should have super charged the growth sector – yet it sent growth stocks lower – Why?  Well, because some are wondering if the party is ending, Is the FED cutting rates because JJ and the team are now more concerned that they left rates higher for too long?  Are they cutting rates because they are now concerned that the economy is going over the edge? (because that is more of a negative story) - because going over the edge is not good for stocks, but also not good for stocks that have so ‘outperformed’.  So, investors seem to be ‘taking some money off the table’ in that sector and reallocating it to other parts of the market – as expected bonds – surged higher (on lower rates) as fixed income investors are wanting to ‘lock in 5% returns before they become 4% or even 3% returns!

By the end of the day – the Dow gained 33 pts – the tech names in the index all getting slammed……MSFT -2.5%, INTC -4% & AAPL -2.3%, CRM – 0.5%, AMZN -2.4% is also in the Dow –  and  while many consider it kind of like ‘tech’ it is officially  categorized as an ‘online marketplace’ – but it is also ‘growth’ name. So, it is what it is. What carried the Dow?  HD +2.7%, MCD + 1.7%, UNH + 0.7%, AMGN +1%, CAT + 0.75%, TRV +0.9%, MRK .25%.... These names represent large pharma, insurances, construction & heavy machinery, bio-tech, managed care, restaurants, & home products.   

In any event – at the closing bell it was NOT a disaster by any stretch – the Dow gained 32 pts, the S&P lost 49 pts, the Nasdaq (clearly the loser on the day) gave back 365 pts, the Russell – representing small and mid-caps (the clear winner on the day) added a whopping 74 pts or 3.6%, the Transports up 331 pts or 2.2% left the Equal Weighted S&P up 78 pts or 1.2%. 

What is good to note here is that the EW S&P gives all the members an ‘equal weight – making the index ‘less sensitive’ to the bullies in the group, allowing none of them to dominate the action – so the fact that it jumped by 1+% also suggests that money is moving out of Tech & Communications (also a great performer up 20% on the year) and into those other sectors that I highlighted above.   

Of the 11 S&P sectors – Tech lost 2.5%, Communication lost 1.4%, Consumer Discretionary lost 1.3%, and Consumer Staples lost 0.4% (something I think is a mistake, it should have rallied a bit more – as that sector represents NEEDS vs. WANTS and you always need things like toothpaste, soaps, diapers, food, etc.).

The winners were everyone else…with Real Estate taking center stage – up 2.6% leaving it almost unchanged on the year (it has been and still is the worst performing sector in the group – but lower rates and lower housing costs (if that is true) will be a boon for that sector.  Utilities – also a boring group came in in second place – up 1.8% taking that sector up 11.7% ytd…not so bad for a boring group. Industrials + 1.3%, Basic Materials + 1.4%, Energy +1%, Healthcare +0.7%, and Financials + 0.8%.

Bonds – enjoyed this news as well…. lower future yields means that current higher yields are a lock – and so we saw lots of action in the bond market…the TLT & TLH both rising by nearly 1%, while the AGG rose by 0.5%.  Recall that the bond market has been under pressure all year on higher rates down - the TLT is down 5.5%, the TLH down 3.6% and the AGG down 1.1% - so if the talk is now that rates are easing (multiple times) then expect these sectors to rebound.

You can also expect that if some investors are thinking we are about to ‘circle the drain’ (ok – that’s a bit dramatic – but you get the picture right?) then locking in 4.5% yields for 2 yrs. may be advisable for a larger part of the portfolio…the 2 yr. ended the day yielding 4.52%, while the 10 yr. is now at 4.22%.  You can still lock in 5.19% on a 3 month (annualized) as long as you roll it over and rates don’t move significantly lower. But again – talk to your advisor.  

Oil rose and is up again today…. trading at $83.60 – leaving us in the $80.50/$84.25 range.  The idea that inflation is cooling gives that sector a push higher. 

Gold also up on the news of lower rates – surging up $41 at $2422 – slicing thru $2400 like a ‘hot knife thru butta’ on the idea that lower rates will send the dollar lower and that is good for gold….The dollar index lost 0.6% yesterday and this morning it is down another 0.1% at $104.35….gold is up 5% since late June while the dollar is down 1.7% during that time frame. Recall the dollar/commodity relationship…dollar down, commodities up, and dollar up, commodities down.

This morning – US futures are trying to push higher….as we await today’s PPI report which is expected to be a bit hotter…but you know how this goes…if they want to push the new narrative then the PPI has to be at least flat if not lower…a hotter PPI will throw cold water on that narrative and the future path of inflation… Dow futures up 50 pts, S&P’s up 5, Nasdaq down 10 and the Russell is ahead by 15 pts. 

Top line m/m PPI is expected to be +0.1% vs. last month’s -0.2%, Ex food and energy +0.2% vs. last month’s 0%.  Y/y is expected to be up 2.3% and 2.5% respectively – both higher than last month’s read.

Today is also the official start of earnings season with the big banks kicking it off….JPM is the first Dow stock to report – thus it is the ‘official start’…but yesterday we heard from PEP and DAL both disappointed…PEP sold off but ended the day just on the north side while DAL got slammed – down nearly 10% on the opening but down only 3.9% at 4 pm.  Look for earnings from JPM, WFC, C & BK….GS reports on Monday while MS and BAC walk the runway on Tuesday. Just fyi – bank earnings are expected to be strong this quarter – so get ready…. remember they have been great performers this year… JPM +22% ytd, GS + 24% ytd, MS +12%, C +27%, BAC +24% ytd.

JPM reports and double beats…. Love Jamie…. $4.40 vs. $4.19.  Revenue beat and had an $8 billion acct gain with an exchange deal with Visa. They expect inflation and interest rates to remain higher for longer and they are adding to their loan loss provisions. AUM up 15%.   But as usual traders are selling it – down 1% in the pre-mkt – but my guess is that they will buy it during the regular day….…. Nothing there says to the long-term investor that they should ‘bail on Jamie’.

European markets are up – although tech stocks are under a bit of pressure – taking its cue from what happened here yesterday… In any event – they too are waiting for today’s PPI and the start of the earnings season. Ericsson – a telecom stock – rose 8% after reporting a ‘smaller revenue decline’ than was anticipated.  Tech stocks down about 0.3% as European investors also take some money off the table as the season begins.

The S&P closed at 5584 down 50 pts yesterday….the pullback that I referred to in yesterday’s note is real and should not surprise anyone if and when it comes…but knowing what you own and why you own it will help keep you calm….during any volatility…but remember – do not make emotional decisions….. Revisit your original investment thesis…has it changed enough to cause you to hit the sell button?  If not – then don’t worry…use any pullback as an opportunity if you are a long-term investor.  If you are a day trader then none of these matters, because you don’t care about the long game -you are playing the short game – which is ok, but that is not the same as a long-term strategy….  Remember – you can have both – just keep them in separate accounts. You can own JPM, Apple, NVDA, AMZN or IBM in both accounts…if you want to take advantage and trade the daily moves as well as invest in them for the longer term.            

New England clam chowdah

Now in addition to the lobsters…here’s the chowdah. 

Or this you need:

Bacon, Celery, Onion, Garlic, potatoes, water, clam juice, s&p, flour, 1/2 & 1/2, chopped clams.

In a large pot, cook the bacon (cut in small pieces) until crisp.  Remove and set aside.  Now sauté the celery and onions until soft.  Add in 1 clove of chopped garlic - cook for a couple of min.  Now add in the cubed potatoes, 2 c of water, 2 bottles of clam juice and s&p.    Bring to a boil and then reduce until the potatoes are cooked.

In a separate bowl - mix 1/3 c of flour and 1 c of 1/2 & 1/2....smooth not lumpy.  Now add to the pot of chowder. Stir until thickened.    Stir in the chopped clams, some more 1/2 & 1/2 if necessary and the crumbled bacon.  Serve in warmed bowls with oyster crackers.