Out of the night that covers me,
Black as the pit from pole to pole,
I thank whatever gods may be
For my unconquerable soul.
Beyond this place of wrath and tears
Looms but the Horror of the shade,
And yet the menace of the years
Finds and shall find me unafraid.
It matter not how strait the gate,
How changed with punishment the scroll,
I am the master of my fate;
I am the captain of my soul.
– “Invictus” (excerpted) William Ernest Henley (1888)
Bullish Signal
U.S. equity markets, in general, sold off on Wednesday.
In response to a bevy of hawkish-sounding Fed speakers? Could be. Maybe if Treasury yields had not come in just a bit for the session?
In response to the AI (artificial intelligence) party over at Alphabet ( GOOGL) that did not appear to have gone anywhere close to as smoothly as had the show that Microsoft ( MSFT) had put on the day prior? That surely was part of it.
Profit-taking as the large indexes have sort of moved sideways now for about a week? Sure. Let’s go with that.
The major equity indexes all gave up some ground on Wednesday. The Philadelphia Semiconductor Index led the way lower, down 2.19%, despite Nvidia ( NVDA) having closed in the green. Perhaps that was because Texas Instruments ( TXN) , Applied Materials ( AMAT) , and Marvell Technology ( MRVL) all were hit on Wednesday by the “ugly stick.” This took the Nasdaq Composite 1.68% lower, while putting a 1.11% hurting on the S&P 500.
All 11 sector SPDR ETFs closed in the red as well, with defensive sectors performing the best for the day, and growth the worst. Losers beat winners at the NYSE by about two to one on Wednesday and by more than that at the Nasdaq. Advancing volume took a 32.1% share of composite NYSE-listed trade and a 42.9% of that metric for Nasdaq listings. The kicker is this. Trading volume was thin. On a day-over-day basis, trading volume dropped 7.5% for NYSE-domiciled names and by 11.7% for those names calling the Nasdaq Market Site home.
In fact, the trend has continued across the constituencies of both the S&P 500 and the Nasdaq Composite where aggregate trading volume seems depressed on “down” days and more “explosive” on “up” days. Regardless of what I might think from 10,000 feet, price and volume have both been signaling increased equity exposure for weeks now. This is not yet letting up.
They Do Try
Despite Fed Chair Jerome Powell’s insistence that the central bank will continue to tighten policy, and then leave it tight once restrictive, the markets keep calling that bluff, Wednesday’s profit-taking aside. Powell sent his minions out on Wednesday to reinforce the message.
New York Fed President John Williams, on wage growth, said, “That’s the area of the labor market and the economy where I think we still have this demand-supply imbalance. (We or The Fed) Need to focus on getting that consistent with 2% inflation.”
On policy, Williams stated, “To me, the important thing is we need a sufficiently restrictive stance and we need to attain a sufficiently restrictive stand of policy. We’re going to need to maintain that for a few years to make sure we get inflation to 2%, and then eventually over time we’ll get interest rates presumably back to more normal levels.”
Note, gang, as an economist, I am no fan of John Williams but he is as much a Fed insider as anyone. He said “a few years.” No way to sugarcoat that little cutie.
Speaking elsewhere, Fed Governor Lisa Cook chimed in. “We are not done yet with raising interest rates, and we will need to keep interest rates sufficiently restrictive. (Moving incrementally) will give us time to evaluate the effects of our fast actions on the economy.”
Perhaps the most damning, at least for the moment, or even day, was the appearance made by Fed Gov. Christopher Waller. Speaking from Arkansas State University, Waller said, “We are seeing that effort begin to pay off, but we have further to go, and it might be a long fight, with interest rates higher for longer than some are currently expecting. But, I will not hesitate to do what is needed to get my job done.”
My Thoughts on the Fed
The Fed is trying to reinforce the idea that it does, and we should, still work and plan with caution concerning consumer-level inflation, particularly services-focused inflation. Despite the fact the financial markets appear to be pricing in a terminal Fed Funds Rate of 5.1% or so (5% to 5.25%), while also pricing in the start of rate cuts in 2023, the FOMC, as a united group, are messaging that these are “best case” scenarios and probably not very likely. I may disagree.
That said, I am not a member of the FOMC. My opinion might be interesting, at least I think so, but that’s it. Adapting to what policymakers are thinking will end up being more profitable from a perspective of selfishness than trying to convince those in positions of power, who are not even listening, that my views might have merit.
Is this bull market correct? It is if Powell and company have been masterful in engineering anything from a soft landing for the U.S. economy to a near miss on even having a recession at all. Does the bear come roaring back? Oh, certainly, if the Fed has guessed wrong and is forced by resurgent inflation to once again increase the size or pace of short-term interest rate hikes, thus having to choose between prices that get away and a harder landing.
The important thing here is, and has always been, the quantitative tightening program. This program has been humming along, really in the background for quite a while now. The Fed’s balance sheet really is the enabling instrument through which both money supply and the monetary base have been expanded for decades now. This is the primary reason for the rampant inflation that we have seen and for the various bubbles that appear either here or there over time. Think housing. The entire developed world is in this same boat, which is why we have not seen excessive bubbling or relative cratering anywhere in reserve-level currency exchange rates.
Just an FYI, a week ago, the size of the Fed’s balance sheet stood at $8.434T after apexing just below $9T this past April. In February 2020, ahead of the pandemic, the Fed’s balance sheet stood at $4.15T. Ahead of the GFC (Great Financial Crisis), that balance usually ran below $900B. In other words, this program has to run for a long while before the FOMC could conceivably ever consider a return to forcing interest rates lower, presumably due to dire economic circumstances, through a new expansion program.
Uh Oh, Spaghetti O’s
On Tuesday, tech giant Microsoft ( MSFT) unveiled a new version of its Bing search engine and Edge browser that had incorporated technology provided by AI (artificial intelligence) start-up OpenAI. Microsoft, for those living under a rock, has already invested billions of dollars in OpenAI since the launch of that firm’s ChatGPT and the two firms are working in collaboration with a reliance upon Microsoft’s Azure cloud service.
On Wednesday, Alphabet’s ( GOOGL) Google unit tried to put on their own AI-focused clambake, revealing their AI chatbot known as “Bard.” Investors were not impressed. At one point during the demonstration, Bard appeared to answer a question incorrectly when asked specifically about the James Webb Telescope. The reaction was nearly immediate.
Alphabet sold off hard on Wednesday, with ( GOOG) (class C shares) giving up 7.44% for the session to close at $100 and ( GOOGL) (class A shares) surrendering 7.68% to finish the day at $99.37. Microsoft lost only 0.31% for the day, as the Technology sector SPDR ETF ( XLK) gave up 1.21%.
Just a thought. A small positive change in market share for search probably does not move the needle all that much for Microsoft and its multi-faceted approach to cash flow creation. However, a small negative change to market share for Search probably does impact Alphabet in a much more serious way. Food for thought.
Disney Springs
Shares of the Walt Disney Company ( DIS) are trading higher overnight after releasing its fiscal first-quarter earnings Wednesday evening.
I think Disney deserves a separate piece all its own, and will be back in a couple of hours with that analysis. Yes, I am still long the stock.
Economics (All Times Eastern)
08:30 – Initial Jobless Claims (Weekly): Expecting 192K, Last 183K.
08:30 – Continuing Claims (Weekly): Last 1.655M.
10:30 – Natural Gas Inventories (Weekly): Last -151B cf.
13:00 – Thirty Year Auction: $21B.
The Fed (All Times Eastern)
No public appearances scheduled.