16 Sep 16th September 2024

Weekly Index Movement

S&P500	+4.0%
Nasdaq	+5.9%
Aussie All Ords	+1.3%

We are back to good news being good news again.

Phew. That makes things easier.

Two weeks ago week employment numbers indicated a slowing economy and stocks dropped 4%. Last week moderate inflation numbers showed a healthy economy with inflation heading back to target and stocks rallied 4%.

When that inflation number came out on Wednesday, it showed core inflation held steady at +3.2%. Stocks initial reaction was a 1.6% fall. The story would have ended there, except Jensen Huang, the NVidia CEO spoke at a Technology Conference and said:

“This generative AI is not just a tool. This is a skill … this is why a new industry has been created.”

Huang said he sees data centers as a $1 trillion opportunity at minimum, with growth that will be accelerated thanks to generative artificial intelligence.

NVidia stock jumped 8% on the news as traders decided he sees growth for the next 1-3 years and the rest of the market went along for the ride.

It’s just ridiculous. What do you expect the CEO of a company that makes chips for data centres to say? “Nah mate, this AI thing is all rubbish. There won’t be any growth from here”?????????

Which just goes to show how silly the market is in the short-term and why we should not pay any attention to it.

Let’s put things in perspective…….

10,000 to 40,000 in the last 20 years.

All I can think when I look at this is “Buy the Dip”

I wonder if the last 2 years is any different?

Nope.

You definitely want to be buying dips and not selling them. Which is why the last six weeks or so has been great. Short-term selling is good. It doesn’t last long and gives you the opportunity to load up.

Remember that the next time the silly short-term traders decide to dump positions for no good reason.

Fed Preview

On Wednesday this week the Fed will hand down their first rate cut. Or so we expect.

Powell all but promised this at the last meeting and the markets have been arguing over whether they will do 25bps or 50bps.

Fed Funds Futures presently put the odds at exactly 50/50.

But I’m telling you there is no way Powell delivers 50bps.

The Fed has only cut by 50bps before in a recession. If they do so now, it would cause a significant stock sell-off as traders will read it as concern a recession is coming. Powell knows this so won’t do it.

He will have to tread a fine line. He needs to say that inflation is coming down but the economy is still strong.

I suspect he will do exactly this and add the obligatory – the future depends on the data.

It will be a non-event overall, but we could see some violent intra-day swings as he answers questions.

Recession Indicators

This recession talk just is not showing up where you would expect it to.

This is going to be a little technical, but bear with me. The bond market is bigger than the stock market. Roughly three times.

Investors use bonds, not really seeking a return like stocks, but more as a risk averse place to park funds.

Therefore, bond markets, especially the lower grade bonds, are particularly sensitive to recession risk. Bond investors do not get rewarded for taking on recession risk so any slightest hint of a recession and you can see it in the prices immediately.

As the market is 3 times as big and investors are highly risk averse, it tends to attract more advanced thinkers. Bond traders think stock traders are risk seeking cowboys who understand nothing.

Which is why I like to watch what bonds are doing.

This graph compares BBB (low) grade bonds to Investment (high) grade bonds.

If there was any sign of recession you would see a spike in this graph. Exactly as you can see happened during Covid.

The bond market is showing absolutely no signs of possible recession at present. In fact the levels are lower than in 2019, meaning bond traders think recession risk is lower than prior to Covid.

I’m going to listen to them and not worry about it at all

Giddyup stocks!

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.