CWS Market Review – May 30, 2023

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

A Possible Debt-Ceiling Deal

We finally have an agreement on the debt ceiling. Or rather, some people have agreed to one, but we still don’t know if enough people will agree to it. We’ll find out soon.

Of course, any bill that gets through the Democratic-controlled Senate and the Republican-controlled House will be a masterwork of parliamentary contortion. Speaker McCarthy wants Congress to vote tomorrow.

As usual, I’ll steer clear of the politics, but I doubt we’re out of the woods just yet. The important news is that enough of the bigwigs were able to come together, and it looks like there’s not going to be any default. (This time.) Going by the rhetoric of a few days ago, this has to be counted as an accomplishment. Personally, I think the financial media was especially alarmist regarding the debt ceiling, but scary news sells.

We had been told that Wall Street was getting nervous about a potential default so any debt-ceiling measure would spark a big rally. That didn’t happen. The S&P 500 closed barely positive today (0.0029%).

I mean barely positive. To add some context, if the market put on today’s gain every day for an entire year, it would be a total gain of about 0.75%. Today was the smallest positive gain for the S&P 500 in four years.

To be fair, the S&P 500 had already chalked up some nice gains on Thursday and Friday, so maybe an agreement was already “priced in.” The old Wall Street adage says, “buy the rumor, sell the news.”

Looking at the agreement, the devil is in the details. In fact, there’s a tiny, oddball detail in the agreement that calls for speeding up “the creation of a stalled natural gas pipeline called the Mountain Valley Pipeline.” That news caused shares of Equitrans Midstream (ETRN) to jump 35% today. It’s nice to have powerful friends.

That’s not all. Shares of SoFi (SOFI), a player in student loan refinancing, also got an 11% bump today because the agreement “calls for borrowers to start paying back federal student loans at the end of the summer.”

Wall Street’s Latest Frenzy

The mood on Wall Street has changed markedly in recent weeks. For much of this spring, Wall Street had been, frankly, kind of boring. Not anymore. Now Wall Street is in the grips of a fervid artificial intelligence rally. Or possibly, an AI bubble, but nothing’s burst just yet.

It’s as if the stock market has been divided in two. The tech sector is on fire and nearly everyone else is fast asleep. The S&P 500 Tech Sector has outperformed the S&P 500 for 10 of the last 11 trading days, and the daily gaps are getting wider.

The problem with this rally is that there really aren’t many AI stocks. The one superstar is Nvidia (NVDA). Yesterday, Nvidia’s CEO said that the world is at “the tipping point of a new computing era.” Hearing that, I’m reminded of the famous Sir John Templeton quote, “The four most expensive words in the English language are ‘This time it’s different.’”

Still, you gotta give Nvidia credit. Last week, the company reported blow-out earnings. The company’s sales guidance was 50% higher than expectations. The results were so strong that it lifted nearly every semiconductor stock. Most prominently, Intel (INTC) was left out of the rally.

Nvidia got as high as $419 today. This has been an astounding run for the stock. In October, Nvidia was going for $108 per share. Today it joined the Four Comma Club, for having $1 trillion in market cap. The company is only 30 years old.

After Nvidia, the other two AI plays are Broadcom (AVGO) and AMD (AMD). Outside those three, there’s not much, but I shouldn’t be too dismissive. (The Economist has an interesting article on some of the other companies cashing in on AI.)

The big problem with Nvidia now is price. The stock is going for more than 100 times trailing earnings. Cathie Wood, the portfolio manager of the ARK Innovation ETF (ARKK), said that Nvidia is getting pricey at 25 times estimated sales. As a tech investor, she’s not known for being a stickler on valuation. Wood tweeted that Nvidia is “priced ahead of the curve.” Wood sold her Nvidia position earlier this year.

As impressively as Nvidia has performed, I’m also skittish about the rich valuation. Nvidia has a very strong business, but I don’t see the need to buy it at 100 times earnings in the middle of a frenetic rally. My advice is to stay away from these frothy tech stocks.

The Fed May Raise Interest Rates in June

Thanks to the AI stocks, the shift in the market’s sentiment has been recent and dramatic. Since May 12, the S&P 500 High Beta Index has gained 7.1% while the S&P 500 Low Vol Index has lost 4.9%. In other words, investors have shifted away from conservative and they’re embracing risky stocks. While that’s not unusual to see sector rotations, this one has been sudden and strong.

When the market shifts towards riskier stocks, that’s often when the Fed is lowering interest rates. We had thought that the Fed was finally looking to pause its rate hikes. Now, that theory might be out the window. Wall Street traders currently expect the Fed to hike rates again at its next meeting in two weeks.

What changed? Some Fed officials are sounding hawkish. Also, some of the inflation data is proving to be resilient. On Friday, the government released its numbers for personal consumption expenditures. This data is important because it’s the Fed’s preferred measure of inflation.

For April, PCE inflation hit 0.4%. That was 0.1% more than expected. The core PCE put up the same numbers: an increase of 0.4%, also 0.1% higher than expected. Over the last year, PCE inflation is running at 4.4% and core PCE is at 4.7%.

These numbers are certainly better than the kind of inflation we saw a few months ago, but the rate of improvement has crawled to a halt. It may be that inflation is stuck at 4.5% to 5%. I don’t know, but the Fed may be set to raise rates at least one more time. The Fed’s next meeting is on June 13-14.

One stock on our Buy List that continues to do very well for us is FICO (FICO). The stock hit another 52-week high today. We have a 32% gain this year on FICO.

This is an important week for the stock market. The job openings report comes out tomorrow. On Thursday, we’ll get a look at the ADP private payroll report. We’ll also get the ISM Manufacturing report. Then on Friday, we’ll get the May jobs report. The last report showed the lowest unemployment rate since the 1960s.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on May 30th, 2023 at 6:30 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.