VOLATILITY SHOULD CONTINUE THIS WEEK

DJIA: 52-wk: +12.15% YTD: +1.46% Wkly: +0.67%

S&P 500: 52-wk: +22.32% + YTD: +6.92% Wkly: +2.67%

NASDAQ Comp.: 52-wk: 30.27% YTD: +6.11% Wkly: +4.23%

IShares 20+Year Treasury Bond ETF: 52-wk: -17.11% YTD: -10.76% Wkly: -1.02%

INVESTORS ARE GIVING UP ON DREAMS OF IMMINENT RATE CUTS: As inflation remains stubborn, a problem that could prod Federal Reserve policymakers to keep borrowing costs high for a longer period. The latest reading of the Fed’s most closely watched inflation measure, released on Friday, showed that price increases remain notably faster than the Fed’s 2% goal.

IS THE U.S. ECONOMY HEADING FOR A TOXIC MIX OF STAGFLATION GROWTH AND HIGH INFLATION? The Federal Reserve doesn’t have great tools to fix. Still, the higher-than-expected inflation readings will likely keep the Fed on hold at its next policy meeting on Wednesday. Its main interest rate has been sitting at the highest level since 2001 in hopes of undercutting inflation by putting downward pressure on the economy and financial markets.

MIXED SIGNALS IN THE U.S. HOUSING MARKET:

In early April, Zacks Investment Management wrote that a housing rebound could be underway in the U.S. For the first time in over two years, home sales increased month-over- month for two consecutive months (January and February), with sales of existing homes jumping 9.5% in February to a seasonally adjusted annual rate of 4.38 million. Economists had expected a 1.3% decline. Things were looking up. But then March happened. Mortgage rates started to creep higher in February as the Federal Reserve dialed back expectations for rate cuts, and by last week had crossed back over 7% – its highest level since late 2023. Existing and prospective homebuyers also appear to be confused by rules that determine how agents get paid, which underwent a historic shakeup earlier this year following a lawsuit filed against the National Association of Realtors. This confluence of forces, combined of course with near-record home prices, caused existing home sales to decline 4.3% month- over-month in March, the largest percentage drop since November 2022.

U.S. RETAIL SALES STRONGER THAN EXPECTED: Despite inflation pressures and many fears from pundits about the U.S. consumer losing steam, Americans keep spending. In March, retail sales rose by 0.7%, more than double economists’ expectations and largely in line with February’s spending data. These data are not adjusted for inflation, which according to the CPI measure rose by 0.4% in March. The takeaway here is that consumer spending outpaced inflation for the month, which is a good overall sign that economic growth continues apace so far in 2024.

THE CLOUDS ARE THICKENING: Almost all of what Eric J. Savitz is about to tell you ties back to this single development: The cloud titans are spending gargantuan sums to build out AI data centers, and it seems to be paying off. MSFT reported 31% growth in its Azure Cloud business in the March quarter, about three percentage points higher than the Street had expected, with seven points of growth coming from AI-related workloads.

A SMALL INSIGHT ON APRIL’S STOCK MARKET VOLATILITY:

Since the bottom of the pandemic bear market in March 2020 through the end of Q1 2024, for instance, small-cap growth stocks are up 101.2%, while large-cap growth stocks are up 165.8%.

This performance gap seems to be persisting more recently. The Russell 2000 Index (small caps) rose 5.2% in the first quarter compared to the S&P 500’s 10.6% gain, and small caps have also fallen more during April’s pullback. As Mitch Zacks wrote, the Russell 2000 Index is down around -8% for the month, compared to the S&P 500’s -5% decline. One might expect outperforming stocks to shed more on the downside, but that hasn’t been the case with small caps vs. large caps.

Does this mean the outlook for small-cap stocks is decisively negative for 2024? Mitch Zacks thinks not. In my view, the Fed’s recent shift doesn’t change the notion that this interest rate cycle has peaked. With fed funds currently in a range between 5.25% and 5.5% and CPI at 3.8% (and the Fed’s preferred PCE price index at 2.5%) policy is already quite restrictive. Even a slight bump higher in inflation from here would not necessarily mean rate hikes and cuts are very much still on the table. If the U.S. economy is strong and the outlook is that rates will be lower in the future than they are today, that’s a constructive setup for small-cap stocks.

Investors Cheer AI Spending Boom in Big Tech—Just Not at Meta

Meta had its worst trading day in 18 months after warning of years of AI investment; shares of Microsoft and Alphabet rallied By Tom Dotan (click here for article)

VOLITILITY SHOULD CONTINUE THIS WEEK:

It’s the busiest week of first-quarter earnings season, as more than 150 S&P 500 index companies are scheduled to publish their results. ADM, AMZN, LLY and Super Micro Computer will be Tuesday’s highlights. Apple reports on Thursday.

THIS WEEKS INTERESTING SECTOR PIECE. THE STOCK MARKET: The market took a bruising on Thursday, only to have tech swoop in after hours to save the day.

The S&P 500 index finished the week up 2.7%, and the Nasdaq Composite jumped 4.2%. Two earnings reports can’t undo inflation, however. The market still has to work through legitimate worries.

The stock market will try and figure out its near term direction this week.

– Richie

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