Switzer on Saturday

Will tech save stocks?

Founder and Publisher of the Switzer Report
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No one should ever be totally sure what issues really rattle Wall Street, such as the current biggest concern, namely, the US debt ceiling wrangling in Washington. Overnight, the signs were positive. As a consequence, from Europe to London to the Big Apple, it was green on the market screens.

This is how CNBC reported the debt talks: “Congressional and Biden administration negotiators were zeroing in on a deal that would increase the U.S. debt limit for two years”.

According to House Speaker Kevin McCarthy, it’s not a done deal and more progress was required, but all US stock market indexes were strongly positive, with the combined tail winds of better debt news and Nvidia’s great reporting that sent tech stocks soaring overseas and even locally on Friday.

In case you missed it, two of my favourite tech stocks — Megaport and Next DC — starred with big rises yesterday. The latter was up 6.77% but the former surged over 24%, which follows a 41% jump a month ago.

Of course, this is good news, but don’t think those pests, who are influencers of what stock markets do, will get on board and believe it will be clearer sailing for stocks.

Ed Moya, a senior market analyst at Oanda, wrote this in a note when the good debt talk news gained increasing credibility. “Once a debt deal is done, markets will have to deal with the harsh reality that the Fed is going to kill this economy,” he speculated. “The end of tightening might not occur until the end of summer and that means we will probably get bigger rate cuts next year.”

This is a fair question to pose until there’s unquestioning evidence that US inflation is on the way down. The signs have been good from CPI (Consumer Price Index) to PPI (Producer Price Index) but the Personal Consumption Expenditure index (PCE) reading this week was a little higher than expected. (See in my What I didn’t like section below.)

Clearly, once one headwind dissipates, people like Ed will look for another but the question optimists like me are asking now is: will tech’s potential outweigh the negatives from the Fed?

Tech is helping but it’s the mega tech companies at the moment with big commitments to AI that’s driving the market. That’s why Nvidia surged 24% on Thursday and led other tech stocks higher, but the overall rally is based on a narrow group of leaders.

Nvidia is up 235% since its two-year low, while the next best rebounder is Meta — up 97% since its two-year low. Companies with AI-enhanced potential will get the tick from the market but other tech stocks might need rate cuts to end or to see rate falls before they get some real tailwinds.

Interestingly, Citi analysts in the US are now more positive on stocks going forward. “With a recession not imminent yet, and the Fed in the very last innings of its hiking cycle, we think that U.S. equities may well do better once the Fed actually does go on hold — in line with the pattern of the last 30+ years,” their strategy team concluded.

So, will tech stocks come back from their 2022 smashing, leading stocks higher over the rest of this year, rolling into 2024 — the fourth year of a US President and the second-best year for the stock market behind the third year?

It’s a good chance if the run of economic data makes it easier for the Fed to pause on rate rises next month and then in July, which would then be seen as the probable top of the US rate rising cycle. And if that’s then seen as being likely to happen, without a serious recession threat, then stocks will zoom in the latter months of 2023 and roll into an even better one for share players in 2024.

Going forward, we will stop watching debt talks and drool over upcoming data drops. In the week ahead, US consumer confidence and, more importantly, the jobs report on Friday will be a big watch for the interest rate voting team on the Federal Open Market Committee (FOMC), headed up by one of the world’s most influential men — Fed boss Jerome Powell.

If you’re wanting to know crucial dates for stocks, they are June 15-16, when the Fed next meets on interest rates. The meeting after that is on July 27-28 and if data permits two pauses, then stocks could soar!

Let’s not contemplate an alternative scenario.

To the local scene and the tech story from the US helped the local quality players in the space on Friday. The overall S&P/ASX 200 Index was up 16.6 points to 7154.8, but for the week the Index was off 1.7% with US debt ceiling and bad inflation numbers in the UK unnerving the market.

Here were the winners and losers of the week:

What we’re seeing is the Nvidia/AI story helping tech stocks, while the Chinese slower growth data hasn’t helped resource stocks. However, this resources concern is more a short-term worry, while the future of tech is more of a long-term bet that AI will be a huge issue for the bottom lines of companies going forward.

What I liked

  1. Retail is slowing, showing rate rises are working: The value of retail trade was unchanged in April 2023. The flat print was substantially softer than the 0.3% expected.
  2. Australian business conditions PMIs for May fell but Shane Oliver of AMP says they are still at OK levels and, as is the case globally, are seeing solid services numbers but soft manufacturing.
  3. PMI data showed that price pressures are generally continuing to improve with input prices down again, output prices up but well down from their highs, and order backlogs continuing to improve.
  4. Minutes from the Fed Policy Committee’s May meeting show that members were divided on whether further rate hikes would be needed to lower inflation. The Minutes recorded that “several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”
  5. The second estimate of GDP for the first quarter was revised up to an annualised pace of 1.3%, from the first estimate of 1.1%. Firmer consumer spending led to the revision higher. It would be good if the US cops a slowdown and no recession.

What I didn’t like

  1. The core GDP personal consumption expenditure (PCE) deflator was increased to 5% per annum, from the initial reading of 4.9%, indicating inflationary pressures were stronger than previously reported.
  2. Fitch’s decision to put the US and its AAA rating on negative outlook adds pressure to the US debt ceiling bad vibes for stocks. Hopefully it might help politicians in Washington grow up!
  3. A new covid wave in China
  4. UK inflation fell less than expected in April to 8.7% year-on-year, with core inflation rising to 6.8% year-on-year.
  5. Germany went into recession with growth down 0.5% in the December quarter and 0.3% in the March quarter.
  6. The RBNZ hiked rates again by another 0.25% taking its key policy rate to 5.5% — a case of crazy Kiwis!
  7. Victoria’s Dan Andrews and his big hits on big business and property investors in his Budget this week.

One last take on US debt talks

AMP’s Shane Oliver explained what probably lies ahead: “Assuming a deal is agreed soon, the questions will then be whether it gets enough Congressional support and whether it can be passed in time ahead of 1 June. Objections on the left and right will be high but there will probably be enough moderate Republican and Democrat House and Senate members to pass it. “However, getting it all wrapped up by 1 June may be a bit difficult unless the House waives the 72-hour review rule. If not, a short-term debt ceiling increase is possible to allow time for the deal to pass through Congress or Treasury may have to delay some spending for a few days (as it did in debt ceiling episodes in the 1980s and 1990).”

Bottom line? Expect more debt dramas over the next week!

Switzer Week in Review

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MACKERRAS

Switzer Report

 

Top Stocks — how they fared

 

The Week Ahead

Stocks shorted

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the Week

Rate rises are working on retail: “The value of retail trade was unchanged in April 2023. The flat print was substantially softer than expected. The consensus was looking for a 0.3%/month increase (CBA a touch above consensus forecasting a 0.4% lift).

 

Quote of the Week

After Nvidia stocks spiked 24% powered by gains from AI, this has to be the big take out for the week: “Innovation in technology can outweigh the headwinds of a slowing economy. Growth stocks are not dead.” (Dylan Kremer, co-chief investment officer of Certuity, a US wealth management firm.)

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