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Stock bulls push the S&P 500 and Nasdaq to new record highs as US Treasury yields continue to slide. Bond yields are under new pressure in part thanks to Canada’s central bank, which cut its benchmark interest rate by 25 basis points yesterday, making it the first G7 country to cut rates.
The European Central Bank (ECB) is expected to make a similar move today, followed by the Bank of England later this month. While the US Federal Reserve doesn’t necessarily move in lock-step with other major global central banks, many bulls believe it ups the pressure on the Fed to follow suit.
Traders have now increased the odds of a September Fed rate cut to nearly 59%. Most are also now penciling two -25 basis point rate cuts this year. Bulls are also pointing to the ISM Services Index that yesterday showed an uptick in activity and employment, alongside a decline in services wholesale prices. Meaning services sector activity is improving while prices are cooling, adding further support to the outlook for Fed rate cuts later this year.
Stock indexes are also getting a boost from the tech sector where AI enthusiasm has returned following very surprising and sizable earnings beat by Hewlett Packard after the market close Tuesday. Hewlett Packard’s gains were led by demand for AI systems in its server division. AI systems revenue more than doubled to $900 million and reported cumulative AI systems orders of $4.6 billion since the start of fiscal 2023.
It’s also worth noting that HP doubled its free cash flow. The news was not only surprising but also a relief for tech investors after tech companies mostly failed to deliver any major upside surprises earlier in the Q1 2024 earnings season.
For what its worth, Apple and Nvidia’s market caps both passed the $3 trillion mark yesterday, putting them alongside only Microsoft to achieve the mind-boggling valuation.
Earnings highlights today include Autodesk, J.M. Smucker, NIO, Toro, and Vail Resorts.
On the economic data front, Q1 Productivity and Costs and the Trade Balance are the key reports. Wall Street may also be keeping a closer eye on weekly jobless claims, released every Thursday morning, amid the renewed fears that a serious economic slowdown is in the works. The bigger test will be the May jobs report, due out tomorrow (Friday).
Americans Have More Investment Income Than Ever Before: Growing investment income and household wealth have joined near-full employment and rising wages to keep millions of Americans spending their way through price hikes. The economy’s charge through higher interest rates is putting unprecedented sums into consumers’ pockets, pushing U.S. asset values to records and helping many high earners avoid the withering effects of inflation. Americans in the first quarter earned +$3.7 trillion from interest and dividends at a seasonally adjusted annual rate, according to the Commerce Department. In the last quarter of 2023, wealth held in stocks, real estate and other assets such as pensions reached the highest level ever observed by the Federal Reserve. The historic gains aren’t without a potential downside. Americans’ resulting ability to shell out more for goods and services is going to make it harder for the Federal Reserve to reach their inflation target, said James Marple, a senior economist at TD Bank. Federal data suggest Americans’ wage and wealth growth in recent years spanned every income bracket. In sheer dollar terms, white people, the rich, the college-educated and baby boomers have bagged disproportionate wealth gains through ownership of assets such as homes, often locked in with low-rate mortgages and stocks. Source WSJ
Investors Pulling More Cash from ESG Funds: Clients have withdrawn a net $40bn from environmental, social and governance (ESG) equity funds this year, according to research from Barclays, the first year that flows have trended negative. Redemptions, which include a record monthly net outflow of about $14bn in April, have been widespread across all main regions. The outflows mark a significant reversal for a sector that investors have flocked to in recent years, attracted by the claim that such funds could help change the world for the better while also making as much — or even more — money as traditional stock portfolios. Source Financial Times
Goldman Sees ‘Wall of Money’ Fueling Stock Market’s Summer Party: A flood of cash from passive equity allocations will pour into the stock market in early July, setting up a continuing rally through the early summer, according to Goldman Sachs Group Inc.’s trading desk. In addition, share prices should benefit from strong seasonal trends and rising engagement from retail investors. “I am seeing a re-emergence in retail traders during the summer, they tend to come around in July,” Scott Rubner, Goldman’s global markets division managing director and tactical specialist, wrote in a note to clients Wednesday. Since 1928, the first 15 days of July have been the best two-week trading period of the year for equities, and they tend to fade after July 17, according to Rubner. The S&P 500 Index has been positive for nine straight Julys, posting an average return of 3.7%. The Nasdaq 100 Index has an even better record, posting gains in 16 straight Julys, with an average return of 4.6%, he noted. By Rubner’s calculations, roughly nine basis points of new capital gets put to work every July. For this year, that would be $26 billion based on $29 trillion in passive assets available for investment. Source Bloomberg
The $3 Trillion Club— Microsoft, Apple, and Nvidia—Make Up 20% of the S&P 500: Microsoft, Apple, and Nvidia are each worth a little more than $3 trillion. Nvidia’s market capitalization edged past that milestone on Thursday afternoon for the first time. As a result, this trio now makes up more than 20% of the entire $44.4 trillion market value of the S&P 500. Nvidia rose +5% Wednesday and is now up more than +150% this year. It trades at about 45 times the per-share earnings it is expected to produce over the next year. The Nvidia rally has picked up steam in recent weeks because the company’s stock is set to split 10 for one at the end of this week. Although splits doesn’t change companies’ market value, they can make a stock more accessible to retail investors by reducing the price. In Nvidia’s case, the stock trades at a whopping $1,225. The split will reduce the price to a tenth of its pre-split price, or just over $122 based on yesterday’s close. Source Barrons
Gas Prices Already Below $3 in Some States, Could Fall Further: Good news for summer road-trippers: Despite headlines about oil production cuts, recent drops in gas prices are expected to persist over the next few months, experts say, bringing a little less pain at the pump for the average American driver. The national average regular gas price in the U.S. is $3.503 per gallon as of June 5, according to AAA. That’s a slight drop from a week ago, when gas stood at $3.559 per gallon, and even more so from earlier in the year when average prices peaked around $3.67. Still, prices are much higher than they were at the beginning of the year, an increase that is typical each year as summer arrives. Both AAA and GasBuddy, which track prices, predict the mid-$3-per-gallon range will stick for the season, with some stations lowering prices to $2.99 per gallon or less. That puts costs in line with last summer and lower than in 2022, when demand surged as a result of several factors, including Russia’s invasion of Ukraine. Andrew Gross, AAA spokesperson, also predicts “a slow, steady decline” in prices over the next few months—assuming current conditions sustain, never a sure thing in the summertime, and especially not this summer, when experts are warning of a potentially disastrous hurricane season. Source Forbes
How Denmark’s Housing Market Avoided the “Lock-In” Effect: Most US homeowners have loans that guarantee they'll pay the same amount each month for decades, regardless of inflation or the shifting winds of the economy. These are called 30-year fixed-rate mortgages, and they offer rare bright spots of certainty in the housing market's endless cycle of booms and busts. Lock in a favorable rate, and you're on the steady track to prosperity. But these sweetheart deals can cause big problems. When mortgage rates shoot up, as they did over the past two years, many would-be sellers decide they don't want to move after all. This is called the lock-in effect — and it could linger for decades. One estimate suggests the lock-in effect prevented more than 1 million people from selling their homes in the span of just a year and a half. Many homeowners in Denmark, like their American counterparts, enjoy 30-year fixed-rate mortgages. But thanks to a quirk of their housing-finance system, Danish sellers are able to earn a profit when they trade in their low mortgage rates for more-expensive ones, making it easier to move even when rates rise. As a result, the Danes dodge the lock-in effect entirely. Source Business Insider
Even Hardened Convicts Are No Match for These Guard Geese: A prison in southern Brazil has come up with a novel way to bolster security: replacing guard dogs with geese. A squadron of nine silky-feathered birds—the “geese agents,” as guards call them—now patrol the grassy strip of land between the inner fence and the outer wall at the high-security prison here in São Pedro de Alcântara, a small town some 400 miles north of the border with Uruguay. Fiercely territorial, the fiendish nine-pounders can be surprisingly intimidating, charging at anyone who dares enter their enclosure and unleashing a deafening cacophony of honks and shrieks that serves to alert guards if one of the prison’s 1,300 inmates tries to escape. Their canine predecessors napped all the time and proved too expensive, says the prison’s director, Marcos Souza. Prison officers first got the idea a few years ago when they were cornered by a gaggle of angry geese during a barbecue. But it turns out that geese offer another big advantage for Brazil’s prisons: They can’t be bribed. .While dogs may be won over with a juicy steak and prison guards with a wad of cash, it’s impossible to befriend a goose. “They hate everyone,” says Souza Source WSJ
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Private Equity Says It’s Got the Data to Back a Push Into Sports: Dallas, Texas-based Arctos Partners LP, which runs about $7 billion in funds with stakes in teams including the Los Angeles Dodgers and the Golden State Warriors, on Tuesday unveiled a new financial benchmark for North American sports franchises. The “Ross-Arctos Sports Franchise Index” is based on the sales of team stakes across Major League Baseball, the National Basketball Association, the National Football League and the National Hockey League. Compiled in partnership with the University of Michigan’s Ross School of Business, it samples more than 400 transactions since 1960. The index delivered an annualized return of +12% over the past two decades. That compares with +10% for the S&P 500 and nearly +15% for private equity. But more importantly, Arctos says it shows sports investing has been less sensitive to the swings of bonds and stocks. “We’re pitching this new end-market for institutional investors,” said Zach Baran, a director at Arctos, who said he hopes participants in the sector will use it to assess performance. Source Bloomberg
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