Hasta La Vista, Baby
The Nasdaq Composite fell for a sixth straight session on Friday, notching its longest losing streak in more than a year. The downtrend comes as Nvidia dived, adding to recent market woes tied to geopolitical conflicts and sticky inflation.
The tech-heavy Nasdaq pulled back 2.05% to 15,282.01, while the broad S&P 500 slipped 0.88% to 4,967.23 — below the 5,000 level. Both clinched their sixth straight negative days, streaks not seen for either since October 2022.
The Dow Jones Industrial Average rose 211.02 points, or 0.56%, to finish at 37,986.40. The 30-stock index was lifted by a rally of more than 6% in American Express following earnings.
Netflix retreated more than 9% even after quarterly earnings beat on the top and bottom lines. The streamer’s subscribers jumped 16% from the previous year, but it said it would no longer report paid memberships starting in 2025.
Chip stocks were also under increasing pressure in afternoon trading, a sign that investors were rotating heavily out of the sector that led the bull market. Nvidia slipped around 10%, registering its worst day since March 2020. Super Micro Computer plunged more than 23%.
While tech put downward pressure on the market, investor concerns over intensification of the Middle East conflict following Israel’s limited strike on Iran appeared largely shaken off by Friday’s open.
Oil prices briefly spiked more than 3%, but swung between more modest gains and losses in the hours since. Dow futures at one point fell more than 500 points overnight amid fears that the attack was enough to spark a broader war.
“There was a relief sigh” as investors realized Israel’s response was “muted” and designed to minimize escalation, said George Ball, chairman of Sanders Morris.
Still, “investors are very much on edge,” Ball said. “Investors are much more aware of geopolitical risks today in their decision-making than they have been for a long time.”
A tough week
Those moves come helped the S&P 500 post its worst weekly performance since March 2023 amid growing fears around the path of inflation and monetary policy.
With a loss of more than 3%, it was also the large-cap benchmark’s third straight negative week. A chunk of that downward pressure came from tech stocks, as the sector was the worst performing in the S&P 500 in both the day and week.
The S&P 500 is now more than 5% off its 52-week high, part of a market pullback that has been largely driven by tempered expectations for rate cuts amid sticky prices. Economists and strategists now see the Federal Reserve waiting until at least September to lower the cost of borrowing money.
“There are a number of cross-currents that the market is working to digest,” said Bill Northey, investment director at U.S. Bank Wealth Management. Inflation “has been a little bit more problematic than I believe the market expected, or even what the Federal Reserve expected.”
The Nasdaq Composite fell 5.5% this week. The tech-heavy index posted its fourth straight down week, its longest negative streak since January 2022. It also marked the Nasdaq’s worst weekly performance since November 2022.
With Friday’s advance, the Dow eked out a gain of 0.01% for the week. That was its first positive week of the last three.
The great market rally of 2024 looks dangerously close to unraveling as Wall Street’s once-invincible bull brigade begins to withdraw its winnings.
With Treasury yields breaking out, Federal Reserve hawks ascendant and Middle East strife flaring, money has just been pulled out of equities and junk bonds at the fastest rate in more than a year. Dip-buyers have been muzzled. The S&P 500 fell every day this week as the top seven tech behemoths closed nearly 8% lower, with equity volatility climbing.
Fueling the reversal is an uptick in tensions that bulls may be less inclined to brush off after ringing up trillions of dollars in trading profits since late October. First among them is evidence that inflation has supplanted recession as the chief nemesis of central bankers. With commodities surging and economic data stubbornly hot, speakers led by Chair Jerome Powell have poured water on hopes for a long-awaited pivot in monetary policy.
It adds up to a backdrop warranting defense, says Kathryn Rooney Vera, chief market strategist at StoneX Group.
“In a world of high geopolitical risk, upside risk to commodity prices, upside risk to inflation, I think we have to be more conservative in our allocation,” Rooney Vera said by phone. “I would rotate from high-flying equities at this point, and I would put that into really high-yielding short-term paper.”
The view suggests oft-ignored valuation imbalances across assets are starting to matter again. With government bonds selling off, the 10-year Treasury rate pushed back above 4.6%, about 40 basis points above the so-called earnings yield of the S&P 500. That gap, the rough basis for a valuation tool known as the Fed model, can be framed as the least favorable for equities since 2002, relatively speaking.
Down six days starting last Friday, the S&P 500 tallied its worst losing streak since 2022, extending its April loss to more than 5%. Two-year Treasuries saw their yield briefly push above 5% on Tuesday, part of a fixed-income rout that has erased gains in high yield- and investment-grade bonds for the month.
Traders this week sensed a deliberate effort by central bankers to restrain bets on imminent easing ahead. Powell said Tuesday that it will probably take “longer than expected” to gain the confidence needed to lower rates. A day later, Fed Governor Michelle Bowman warned progress on inflation may have stalled. On Thursday, asked if it would be appropriate to hold rates steady all year, Minneapolis Fed President Neel Kashkari answered: “potentially.”
Hawkish posturing fanned selling pressure that has been building across investor ranks. Redemptions from stock funds reached $21.1 billion in the two weeks through Wednesday, the most since December 2022, according to Bank of America citing data from EPFR Global. Investors pulled cash out of junk bonds at the fastest pace in 14 months, according to data from LSEG Lipper. Hedge funds ramped up short positions in US exchange-traded funds at the fastest pace since 2022, Goldman Sachs Group Inc.’s prime brokerage data show.
“There are weak hands selling, and will continue to sell, since they weren’t enthusiastic to buy in the first place,” said Peter Tchir, head of macro strategy at Academy Securities Inc. “People got sucked into chasing the rally, buying stocks at high valuations, now, a month or so later, the trades aren’t working.”
Market-implied expectations for monetary easing have collapsed in the past two weeks as traders price in less than two rate cuts this year. That’s down from as many as six earlier in 2024.
Tensions in the Middle East have reinforced the more cautious stance. Israel reportedly struck back at Iran on Friday morning and while the latest tensions were contained, worries remain about a wider war in a region already roiled by the Israel-Hamas conflict that could send oil prices above $100 a barrel.
Investors today face a pile of risks that they have shown themselves able to live with previously thanks to resilient corporate earnings and spirited economic growth. The S&P 500 is up 16% since Hamas attacked Israel, 17% since the 10-year Treasury yield’s 2023 peak, and about 20% since the Fed began raising rates two years ago.
Yet the sheer scale of market gains now threatens to work against risk assets, going forward.
Valuation worries are building within the equity ecosystem, particularly the Nasdaq 100, whose seven biggest members saw the worst weekly drop since November 2022. Cheaper-looking companies have been back to outperforming their often artificial-intelligence-enhanced growth counterparts. The Russell 1000 Value Index fell 0.7% on the week compared to a 5% drop in its growth counterpart.
“There has been a tremendous amount of faith-based investing into AI that pushed up valuations of many megacap tech firms,” said Max Gokhman, head of MosaiQ Investment Strategy at Franklin Templeton Investment Solutions. “A value overweight looks increasingly more attractive and it’s something we are actively discussing.”
It was a rough week for tech stocks as some of the big tech high flyers got slammed hard today:
Whenever you see shares of Nvidia, Super Micro Computer and Arm Holdings dropping by 10%, 23% and 17% respectively in one day, you know the AI bubble is over.
Can they bounce from these levels? You bet and they will bounce back but their downtrend is now firmly entrenched and it will take a miracle for these stocks to make a new 52-week high in this rising rate/ heightened geopolitical risks environment.
So all I have to say this Friday is "hasta la vista, baby", your time is up, stick a fork in these hyped up AI stocks.
Nobody rings a bell at the top of the bubble, it just quietly happens as elite hedge funds book their gains and exit.
That's what is going on here, the AI party is over, time to move to energy and other value stocks.
Of course, with the economy slowing, my fear is that cyclical stocks like banks which performed well today will also sell off.
To be determined, there are a lot of earnings coming out next week but so far, tech stocks are bearing the brunt of the selloff (as they should since they ran up the most).
Below,a selloff in the world’s largest technology companies hit stocks, with the industry that has powered the bull market getting ready to report earnings next week. Equities extended their slide from a record, with the S&P 500 breaking below 5,000 and the Nasdaq 100 falling over 2%. More than half of the “Magnificent Seven” cohort of tech megacaps will announce results in the next few days — leaving investors wondering whether those firms are going to live up to the high expectations set for artificial intelligence.
Next, Warren Pies, 3Fourteen Research co-founder, joins 'Closing Bell' to discuss whether he expects more downside for stocks. Listen carefully to his comments about buying the 5% since 2022 when rates backed up.
Third, Ed Yardeni, Yardeni Research president, joins 'Power Lunch' to discuss the markets, the Fed's next move, and sector moves.
Fourth, Jeremy Siegel, a Wharton School professor of finance, joins 'Squawk on the Street' to discuss whether recent equity performance is warranted, how Fed voters would explain the gap between PCE and CPI data, and more.
Lastly, the classic scene from Terminator 2. They certainly don't make action movies like this any longer!
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