A Day for the Rate-Cut Crowd
More volatility... Inflation data is on deck... Argentina's Javier Milei visits Silicon Valley... A marketing tour... Beware of chasing this AI trend right now... A quote of the week...
It was a day for the rate-cut crowd...
This morning, the U.S. Department of Commerce reported its "revised" GDP number for the first quarter.
The U.S. economy grew by 1.3% instead of the 1.6% estimated a month ago. That's down from the 3.4% pace in the fourth quarter of 2023.
As we explained earlier this week, the government publishes two estimates and then a final number for quarterly GDP, each about a month apart. This was the second estimate, and as global news service Reuters reported...
Details of the GDP report showed that consumer spending growth, revised down by half a percentage point to a 2.0% annualized rate, mostly reflected a larger-than-earlier-reported drop in household spending on goods.
Bond yields slid and prices rose on the market's knee-jerk reaction. Three of the four major U.S. stock indexes were also down. The Nasdaq Composite Index closed off 1%, but the small-cap Russell 2000 Index was actually up roughly 1%. Bitcoin and gold were also up.
Meanwhile, fed-funds futures traders slightly strengthened their bets on the Federal Reserve cutting rates in the second half of the year, at the central bank's September meeting at the earliest.
Also today, New York Fed President John Williams signaled rate cuts to come. He said during an event at the Economic Club of New York...
I do think that monetary policy is restrictive and is bringing the economy a better balance. So I think at some point, interest rates within the U.S. will, based on data analysis, eventually need to come down.
Asked about a potential rate hike ahead rather than cuts, he said, "I don't see that as the likely case." And he also added, "I expect inflation to resume moderating in the second half of this year."
Tomorrow morning brings another widely followed report, an April update for the Fed's preferred inflation measure, the personal consumption expenditures ("PCE") index.
More "hot" data could push the market's expectation for rate cuts further into the future, or lower-than-expected numbers could fuel the idea of an easier monetary environment arriving sooner than later. Stay tuned.
The 'chainsaw' president goes to Silicon Valley...
Regular readers are familiar with new Argentine President Javier "Chainsaw" Milei.
Milei seeks to end years of hyperinflation in Argentina by cutting government spending and trying to restore some value to the country's currency. During his campaign, he brandished a chainsaw to make his point.
You can find our past reports on Meili's recent policies here and here, and many of you have shared your thoughts in our mailbag. But to get everyone up to speed: The "shock therapy" Milei plans to use to fix the country is still more "shock" than "therapy" at this point.
Milei has faced protests in the streets and boycotts from large labor unions in Argentina after cutting tens of thousands of government jobs (and announcing plans for more).
Meanwhile, inflation continues to rise.
Argentina's consumer price index for April (reported two weeks ago) rose nearly 290% year over year. That's up from the 142% annual number when Milei was elected in November and before he devalued the Argentine peso against the U.S. dollar, raising the exchange rate from 366.5 pesos to 800 pesos.
A major reform bill Milei pitched is also still hung up in Argentina's congress, and Milei just accepted his cabinet chief's resignation on Monday.
Milei's facing trouble... and he's looking for opportunities abroad.
This week, Milei spent the past few days in the U.S. meeting with Big Tech leaders in Silicon Valley, like Apple CEO Tim Cook, OpenAI CEO Sam Altman, and Alphabet CEO Sundar Pichai, whom he's pictured with here...
The trip appears to be a marketing effort to pitch Argentina as an investment destination.
Among other things, the country has the world's third-largest lithium reserves and untapped copper deposits, which are both used in various technologies that are growing in demand – like AI data centers.
We haven't seen any announcements from these companies suggesting investments in Argentina, but it's worth keeping an eye on – for the companies and, more so, for the possible outcome of Milei's shock-therapy efforts at home.
This also serves as a reminder of U.S. corporate strength (and tech companies in particular) relative to the rest of the world. When an obvious pro-business leader like Milei seeks new business, one of his first stops is Silicon Valley.
One thing about those AI data centers...
The buzz around AI and the growing recognition of the energy and infrastructure needed to power the technology has led to a boom in stocks like Nvidia (NVDA) and other semiconductor businesses, along with "boring" utility companies...
In yesterday's "Review of Market Extremes" for True Wealth Systems subscribers, Stansberry Research senior analyst Brett Eversole wrote...
Why are boring utility stocks suddenly joining the AI mania? It's all about power...
The new AI data centers coming on line will need a lot of electricity. And as the AI industry develops, folks believe we'll see a huge, long-term increase in demand for utilities.
This story makes sense... But we shouldn't expect utility stocks to soar hundreds of percent as a result. For one thing, these are still highly regulated, boring businesses.
What's more, these stocks have already soared much further – and faster – than we typically see. Just look at how utility stocks have performed in the past few months, based on the Utilities Select Sector SPDR Fund (XLU)...
Stocks have been a darn good investment during this period... But utilities have crushed the overall market over the past three months. The sector returned 16% over that time – more than triple the return of the S&P 500.
Normally, this would be a sign of a powerful uptrend. We'd expect these strong returns to continue in most cases. But utilities aren't like most other stocks...
As Brett explained, spikes in utility stocks like we've seen recently haven't happened often. And after they have, the sector has tended to underperform its average returns and the market. After similar extremes since 2003, utilities have lost roughly 1%, on average, over six months and were up only 1.7% after a year. As Brett wrote...
Even with a tie to the AI boom, utilities can only soar so much. And when you think about it, that makes sense...
These stocks can't rise to the moon. Investors buy them for consistent dividends – not capital gains. Higher returns will push their dividend yields too low for folks to stay interested.
We're at that point right now. The sector pays just a 3% dividend yield, thanks to its big run-up. That's low compared with history... And it's even worse when you can earn 5%-plus in money-market funds with no risk.
The bottom line is don't chase this trend right now. The biggest gains have probably already happened.
Remember Dr. Copper?...
On a related note, kudos to Brett for his recent call about copper hitting a bullish extreme after a roughly 30% run higher since last October to around $4.90 per pound. We shared Brett's analysis on "Dr. Copper" in our May 15 edition, saying...
Consider your timeline... The long-term bullish case for copper and other "real" commodities is strong. High(er) inflation could stick around longer than many people might want to think... And all the stuff that deals with AI needs a lot of electricity to work...
But, right now, as Brett showed in his Review of Market Extremes, futures traders have gotten "overly optimistic," with copper's price hitting a multiyear high. And this typically means that prices are due to reverse.
This happened in 2018 and again in late 2020. The situation today is similar.
Since then, copper has traded slightly higher to around $5.10 per pound. But it has since dropped almost 10% in a week and nearly 3% today. And futures trader sentiment is still at a bullish extreme, meaning there are better trades to make right now.
Finally, a quote of the week...
We often see many pearls of investing wisdom in various publications, interviews, research, and social media posts from financial analysts and thinkers. But they don't always fit with what we're writing about in the Digest that day.
However, that doesn't mean they're not useful. So to close things out today, I'm sharing a timeless investing quote I've been thinking about.
It's from Morgan Housel, the author of the popular book The Psychology of Money and a speaker at our annual Stansberry Research conference last October. He said...
A lot of financial debates are just people with different time horizons talking over each other.
In short, a lot of financial "talk" about a stock or theme often never includes a discussion about the timeline for success (or failure), which is critical to consider if you're putting money to work.
For example, making a three-month trade is entirely different from making a three-year investment.
This is why our editors and analysts always define a timeline with their recommendations. A timeline allows you to determine if a trade or investment is working (or not), based on a price or growth target.
To me, this approach beats listening to television personalities mindlessly debate whether a stock is "good" or "bad" and deciding to buy or sell based on what you might hear.
That's it from me... If you like the concept of a quote of the week (or if you want to see something different instead), e-mail us at feedback@stansberryresearch.com.
New 52-week highs (as of 5/29/24): Arhaus (ARHS), Cameco (CCJ), Dell Technologies (DELL), Denison Mines (DNN), and Eli Lilly (LLY).
In today's mailbag, a question about the yield curve, which remains "inverted" and has been for nearly two years now. As regular Digest readers likely know, this behavior has historically been a reliable signal of a recession ahead, but we haven't seen it yet... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Stansberry, one of the main topics for the last year or so is the inverted yield curve (both the six-month and two-year [Treasury] having higher interest rates than the 10-year). In your opinion what is it going to take to reverse this trend? Higher yields seem to show a lack of buying pressure. Just seems to me there should be lots of liquidity in the short-term rates for short term money loans." – Subscriber Jeff J.
Corey McLaughlin comment: Jeff, thanks for the question.
The short answer is the yield curve will probably start to un-invert if or when the Federal Reserve starts to cut its benchmark bank-lending-rate range, which is currently 5.25% to 5.50%.
We could discuss reasons for when or why that might or might not happen (considering economic growth, inflation, and the labor market), but the primary point is simply that the curve will get back to "normal" when the Fed cuts rates.
And the central bank is waiting to see more economic weakness and easing inflation before doing that.
I shared your question with our team of editors and analysts, and Stansberry's Investment Advisory lead analyst Alan Gula shared another insight that you might find interesting.
As Alan said, the Fed effectively sets money-market rates (T-bill rates) with its monetary policy. Meanwhile, the "belly" of the Treasury curve (two-year to five-year) reflects market expectations of future short-term rates.
But the market is often wrong, Alan pointed out. For example, at the beginning of the year, the curve priced in rapid cuts (which obviously haven't happened). Now, it's more of a "higher for longer" outlook. In a few months, things may change.
All the best,
Corey McLaughlin
Baltimore, Maryland
May 30, 2024