After hotter CPI and PPI numbers last week, this week in the market is one of those wait and watch moments. When playing in the markets, we seek to execute the most optimal move with the information we have on hand at any given point in time. Sometimes, the best move is knowing that you have no edge in a particular scenario and elect to make no move. The beginning of this week is certainly one of those.
There are two big events that can move the markets this week. The first of course is Jerome Powell’s FOMC meeting and the Q&A presser. This is particularly important for the market at this juncture, because we have had an amazing 2-month stretch in the market across the board, tech, semis, biotech, smaller caps, etc. Much of the move has been driven by continued stronger earnings by the megas (see prior note on the impressive magnitude and quality of the cash flow generation) and the AI story driven by Nvidia and the broader semis sector (we will get back to this very shortly). This performance continued to progress despite long-term interest rates not budging (and has been stuck in the range for a majority of the year).
Now, as the market (both NASDAQ and S&P500 and SOXX) are all at all-time highs, it is only natural, there will be profit taking, especially after the repeated hotter inflation numbers. So, finally we have really hit a hugely critical crossroads to the soft landing thesis. Whereas the stance I have been taking for the past few months (since the November Fed meeting) was to be long and strong highest quality thematic names and some laggard industries that are rate sensitive (like biotech, etc.) we are approaching a tricky spot in the short term. There are two main sides that can play out (knowing that reality will be somewhere along the spectrum). Again power lies in the hands of Powell.
(1) Powell expresses though we had hotter inflation data in the short term, Fed understands the longer term trajectory is headed lower and reaffirms their desire to cut when timing is right. He might even reinforce his perspective that for a vibrant growing economy, 3% may be more appropriate goal post and inflation target. The Q&A presser is dovish and alludes to cuts later this year, etc. This will be very bullish cause the market and risk assets to rally!
(2) Powell expresses the Fed’s data dependent nature and sees the recent repeated hotter than expected inflation numbers concerning and would have to hold rates at these levels much longer to not risk the resurgence of inflation. (Tail risk is he nods at a hike, though that is less likely). Markets will reprice rate expectations yet again and the market will continue to sell off. It would be pretty bearish on rate sensitive and risk-on assets (e.g., the current crypto rally had a lot of extra rocket fuel ever since rates topped back in late October)
The other big event for this week is Nvidia’s GPU Technology Conference (GTC). Nvidia drives market not only through the sentiment of the most important thematic area in technology, but also through physically its sheer size as a 2.2Tn. It is one of the largest, yet most volatile companies in the world (so far the volatility has largely been in one direction for the past year). While the stock is already sky high, and many see these type of technical developer events as more hype and sell the news than a true catalyst, I wouldn’t count Jensen out to announce a value driver that would be highly strategic to the company that give bulls meat to chew on. The stock is clearly run up a ton, richly priced and have max long sentiment. I would never bet against this type of stock, but will cautiously observe for any profit taking if the event ends up being more of a developer-centric, industry level conference than some big value driver unveiling. This is hugely important since (whether we like it or not) Nvidia has become one of the central driving forces of the market behind the Fed (just see its recent earnings report literally shifting a market correction to a rally).
In summary, this week is one of those instances where it is quite simple. I remain more of an observer until we get through Fed’s FOMC meeting and Q&A presser to get a clear perspective where we are headed macro-wise after hitting a clear crossroads. Concurrently, one of the central market drivers will host its largest AI conference of the year in which investor’s excitement or lack thereof can add volatility to a very stretched market backdrop.