Stagflation fears rise, tech titans soar, and investors brace for volatility

• Are we Lost in Space?

• Stagflation – becomes more of a reality.

• Bond yields push higher – the 2 yr. pierces 5%.

• GOOG and MSFT ‘crush’ it – Investors are in love again.

• Eco data is all about inflation.

• Try the Calamarata Pasta.

It was a ‘Danger Will Robinson, Danger, That does NOT compute’ moment in the markets yesterday (think Lost in Space – 1965)…..Stocks fell hard, but did end the day OFF of the lows (silver lining?)….….. The Dow lost 375 pts or 1%, the S&P down 24 pts or 0.5%, The Nasdaq down 100 pts or 0.6%, the Russell down 14 pts or 0.7%, the Transports GAINED 220 pts or 1.4% (remember how the Transports got crushed on Wednesday – down 390 pts or nearly 2.2% while the rest of the market ended mixed) – and the Equal Weighted S&P gave up 18 pts. 

Why you ask?  Think Stagflation…….

You see - Stagflation is persistent high inflation coupled with high unemployment and stagnant demand – and in yesterday’s eco data – we got 2 out of 3 data points that suggest we are potentially headed for a bout of stagflation….You see while unemployment remains low at  3.7%, 1st Q GDP fell to +1.6% - down from the 4th Q read of +3.4% and well below the street estimate of +2.5%. (think potential ‘stagnant’ demand) and then the (quarterly) Core PCE ‘Price’ Index came in at +3.7% - well above both last month’s read of +2% and ahead of the estimate of +3.4%.... (think inflation or rising prices).  That news sent a Will Robinson alert to the smart logic algo’s - and boom – the bottom felt like it was about to fall out!

Now understand that a weaker GDP report would typically raise hopes that the FED is about to CUT rates (think stimulate economy) but the ongoing ‘sticky inflation’ just complicates that basic premise….And so – the weaker GDP read coupled with the rising price pressures -  did NOT lend itself to a ‘go get ‘em’ mentality and it did not support the ‘sexy, hi growth’ stock names that have helped to drive the markets higher – but I will say that while I think the move was a bit ‘dramatic’ I was not surprised – as the market was (is) looking for a reason to shake the branches a bit and when the data veers from the expectation in a ‘nervous, jumpy’ environment – we get that amplified response which is exacerbated by the algo’s – algo’s that are programmed on mathematical formulas that do not lend themselves to ‘finer tuned’ human interpretation.   And so, it was what it was…. stocks suffered until we got an end of day push up led by 2 of the Mag 7 stalwarts…NVDA + 3.7% and TSLA + 5% in what I would say was bargain hunting…. NVDA lost 19% and TSLA having lost 45%.

In the meantime – Treasuries sold off…. the TLT and TLH down 0.7% and 0.5% respectively on the back of the 7 yr. bond auction as well as the stagflation narrative that now adds a new layer of uncertainty to the FED Think.  Remember – yesterday I said that swap traders were expecting a September rate cut? (rather than that June/July cut) Well, after yesterday’s data – those traders pushed that idea out to DECEMBER! Wow, I mean talk about a nervous group of ‘guys’ – The issue is that they never wanted to believe me – when I said rate cuts are not happening…they kept telling themselves that the FED would not only cut once but cut multiple times during the year…something that made NO sense to me and a host of others….and that narrative pushed stocks higher, so now, it’s time to fix that narrative and reprice ‘risk’ – which is exactly what is happening.

 As the sun moved across the sky – we saw 2 yr. treasury yields kiss and then pierce 5% - trading as high as 5.02% before ending the day at 4.99%. The 10 yr. teased 4.73% (up 10 bps) in early trade before ending the day yielding 4.70% - and herein lies the problem…. What will investors do if yields continue to climb and the 10 yr. kisses 5%?  All you have to do is go back to October – when the 10 yr. did KISS 5% - to reveal that answer…. Investors, traders and algo’s became even more nervous, money moved into safe haven, no risk treasuries, stocks backed off as investors considered what’s next.   

Ok – and then what happened?  Well – as expected – we got some KEY tech earnings after the bell rang and the market closed….INTC, GOOG and MSFT all pulled back the sheets and gave us a look at what’s been going on….INTC has been an ‘underperformer’ – while they ‘beat’ on earnings – they offered a less than robust forecast for the current quarter and so traders/algo’s took the stock down 7.6% in the afterhours.  This morning the stock is quoted at $32.50/$32.65 – down from $35.11 at yesterday’s close.

Now GOOG and MSFT – they must be taking that little blue pill…. because their performance caused them to react like a 20 yr. old…. The headlines using words like ‘stellar’, ‘crushed’, ‘blowout’, ‘outstanding’, ‘grand’ to describe what was going on under their sheets…… Yes, they both beat the EPS estimates, GOOG ‘crushed sales estimates and announced a dividend, while MSFT beat the forecasts due to demand for their cloud and AI offerings. And this is what investors wanted and needed to hear……and while investors are excited about how AI is changing the world, they still want what they want and that is revenue growth and rising profits. 

In the end – GOOG like AMZN, MSFT and a host of others are plowing money into AI and that is what the markets remain focused on.  MSFT – thanks to their partnership with OpenAI – has been ‘infusing their entire product line with AI tech’ and that bet is paying off in spades… Customers are using AI to do a range of things, like create documents, summarize documents, generate content, create and condense scripts, etc.…. In the end- both of those points suggest that tech worries just might be a bit overdone and that they are benefitting from higher capex spending and a strong consumer.  This morning both of those names are quoted UP - GOOG +11% at $176.30 and MSFT + 4% at $415.  In fact, Triple Q’s (QQQ is the Invesco ETF that tracks the Nasdaq 100) is up 1% as well.  Top 4 holdings?  MSFT, AAPL, NVDA, AMZN – make up more than 25% of the index.

This morning – it is a new day…US futures are UP- Dow futures + 65 pts, the S&P’s up 36 pts, the Nasdaq up 165 pts and the Russell is flat. Last night’s exciting earnings reports creating all the action - Those blockbuster earnings reports are driving the gains this morning in TECH and in the broader market suggesting that the AI boom is alive and well.  The question now is – can the reports of a few big companies carry the day and sustain a broader market rally?  80% of the companies that have reported have beaten the estimates…. yet the stock action has been underwhelming at best – beats are seeing below avg upside while the misses are being punished more harshly….and we still have 250 companies to hear from.  Today we will hear from TROW, CNC, CVX & LYB (all reported and all beat), Look for more from XOM (eps miss, but revenues UP), ROP, ABBV, HCA, all before the bell….

Eco data is all about the monthly PCE report vs. yesterday’s quarterly report.  M/m PCE (inflation) is expected to be +0.3%, y/y +2.6% while Core m/m is +0.3% and y/y of +2.7%.  Personal Income of +0.5%, Personal Spending of +0.6% - again I would argue that spending is up because it costs more…. But let’s see how they position it. 

Oil continues to inch a bit higher…. up 30 cts at $83.90 while Gold is up $17 at $2360/oz. The dollar index is down a bit and that is helping to support gold and oil.  We have seen the dollar retreat by 1% over the past week but remain elevated vs. the year…. +5% ytd…...Gold will reman sensitive to the geo-political environment as well as the FED ‘rate cut or not’ environment.  For now – Gold remains in the $2300/$2400 trading range while oil remains in the $80/$90 range.

European markets are up – Spain +1% while France is up 0.3%.  Earnings are the focus….

The S&P closed at 5048 – down 24 pts. Yesterday I was on with Charles Payne, and we discussed the ‘technical levels of the markets and what to be aware of…. I repeated my analysis - 5120 is trendline resistance while 4950 is trendline support….and we remain entrenched within those bands.  I argued that we will test trendline support at 4950 before we test resistance at 5120 – I remain in that camp….4950 before 5120!  Remember – while GOOG and MSFT are boosting sentiment today – they are more than likely not enough to boost broader sentiment for a sustained move up.  Investors need to see ongoing better earnings and better guidance continue.   If we test support at 4950 – we must hold support in order to stop the bleed – any failure to hold will see the ‘smart logic algo’s’ light up to the sell side – cancelling in line bids – leaving a void in prices that could easily take us to 4800…..which would be a 5% move lower from here and a 9% move off the all-time high….Uncomfortable – yes, out of the norm, no.  

Keep your powder dry for now…. Let this volatility settle down…. stay the course with the names you own, unless the fundamental story has changed – your cash is earning 5+% - as long as you have it in an interest-bearing account.  

As a long-term investor – you need to eliminate the noise and focus on the plan.  As a short-term trader – all you want is the noise – you need to decide who you are.  Call me to discuss.

Calamarata (pasta) with shallots, mushrooms, white wine and cream

Simple and easy to make.

For this you need: Calamarata pasta – this is pasta shaped like calamari rings, a mix of your favorite mushrooms (chopped), I used white button, baby Bellas and shitake, chopped shallots, crushed garlic, olive oil, white wine (Pinot Grigio Santa Margherita), s&p, and heavy cream and of course – Fresh grated parmegiana/romano mix.  

Bring a pot of salted water to a rolling boil so that it’s ready when you need it.

In a large sauté pan that will accommodate the pasta – add a splash of olive oil – and then add the shallots and garlic.  Sauté for 5 mins or so…. Next add in the chopped mushrooms, season with s&p…. sauté for 5 more mins….

Now add in a ½ c of the white wine (you can use chicken stock if you prefer) – mix and let it evaporate.  Now add in ½ pint of heavy cream – turn heat down to simmer. 

Add pasta to the water and cook for 8 mins or until aldente.  When done, use a slotted spoon – add the pasta to the sauté pan and mix well.  Now add in 1 ladle of the pasta water (tears of the Gods) and a handful of cheese and mix.   

Serve immediately – always having extra cheese on the table.