All is not quiet enough on the inflation front, and that gave markets quite a scare this week. Subsequent weak retail sales seemed to aid in the healing process, as we continuously revisit good news as bad news and vice versa.
All eyes will be on Nvidia results next week – tech earnings have been mixed but mostly favorable. The AI story, which one could argue helped rescue equity markets out of the fall 2023 doldrums, is a key element to the longer-term economic growth story. Any faltering by the current poster child, would, we believe, be a problem for equity markets especially as investors start to push rate cuts further into 2024.
When the Federal reserve flipped from “inflation is our only focus” to “we see balanced risks in the economy” in December of last year investors took that to mean the rate hiking cycle was over and rates cuts could commence.
The idea of truly “normalizing” Fed policy has been brought up by Chair Powell, if not in so many words, as well as other members. What does that mean for interest rates as well as equity markets? The answer to that remains unclear as there are also arguments that other monetary measures have created easier monetary policy than rates alone would suggest. Rate hikes have been taken off the table by market participants but what if the benign inflation picture changes? And how much could that be influenced by the problems created by the ongoing conflicts in the middle east and Ukraine?
US economic data remains relatively good, especially in contrast to other OECD countries. The labor market also continues to look relatively good.
Earnings and cash flow will remain a focus in 2024 as we start to see some cracks in consumer spending on goods and some trading down in certain categories. Kraft results showcased what happens when volumes start to drop more than prices could rise. There are idiosyncratic issues as the company also blamed a reduction in SNAP benefits for lower sales, but there are earning headwinds in other areas as well. Deere cited lower commodity process and UPS rising labor costs. Can the market rely on tech earnings to save the day?
The relentless move higher by some of the technology stocks feels reminiscent of the big tech move in the late 1990’s. While the moves are extreme at least, in this case, earnings power seems to be there. The question is will that be that widespread enough and have we moved too far too fast?
The views expressed are those of the Alpine Saxon Woods, LLC management team as of the date indicated, and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Performance data quoted represents past performance and does not guarantee future results. All data referenced are from sources deemed to be reliable but cannot be guaranteed. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
