Day: September 19, 2024

(Bloomberg) — Jerome Powell delivered exactly what traders up and down Wall Street had long hoped for: A big interest-rate cut that would justify this year’s steep rally in stocks and bonds as the era of tight monetary policy finally began to reverse.

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Equities, especially those of economically sensitive companies, briefly surged, driving the S&P 500 up as much as 1%. Ditto for bonds, while the prospect of easy money ahead initially pushed up speculative assets like crypto.

Yet by the time the trading day ended, the gains fizzled as a more sobering economic and market reality sunk in. Even with the half-point rate cut — the kind of aggressive move usually reserved for a recession or crisis — and more on the way, the investment backdrop was no more clear cut than it was before.

Stock prices are already near record highs. The economy is losing a little steam. And it’s no sure thing that the rock-bottom rates swept away by post-pandemic inflation will come back anytime soon.

While equities gained some momentum on Thursday, and Treasuries inched higher, every major asset was down Wednesday. While the scale of the declines were minor, a concerted pullback like that hadn’t followed a Fed policy decision since June 2021.

Of particular concern to traders were comments from Powell that coincided with the reversal in the stock and bond markets: that nobody should expect the Fed to make a habit of half-point reductions in the future, and that the neutral level of interest rates is likely higher than it was before the pandemic.

“The important point here is that there’s the action, in the 50 basis points, and the expectation in what was priced in,” said Jeffrey Rosenberg, a portfolio manager at BlackRock Inc., on Bloomberg Television. “This is a little bit disappointing relative to what’s been built up in bond expectations.”

In the aftermath, economists and traders moved to adjust their forecasts and wagers to account for the Fed’s new narrative. Goldman Sachs Group Inc. projected a longer string of consecutive cuts, while JPMorgan Chase & Co.’s economists reiterated their call for another half-point reduction in November even as they pointed to jobs data as key to their view.

Powell was upbeat about the economy and waved off recession fears, tempering the market’s expectations for where it’s heading. During his press conference, he said the central bank is confident “strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%.” At the same time, he cautioned against assuming the half-point move set a pace that policymakers would continue — underscoring that everything would hinge on how the data come in.

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The bond market had already been baking in a series of rate cuts and bets on Wednesday’s move had piled up so heavily that it was effectively already accounted for. The two-year Treasury yield, for example, had already tumbled from more than 5% in late April, enough to reflect several rate cuts.

“It was always going to be difficult for Powell to ‘out dove’ the bond market given how much it had moved in the last six weeks or so,” said Michael de Pass, global head of rates trading at Citadel Securities.

While the economy doesn’t seem in obvious need of stimulus, there are signs of a weakening trend. The three-month average gain in non-farm payrolls stands at the lowest since 2020 and gauges of factory output have slipped.

At the same time, the unemployment rate is just 4.2%, gross domestic product in 2024 is forecast to expand at the same rate as last year, and analysts currently peg 2025 earnings growth in the S&P 500 at an especially robust 14%. That sanguine backdrop had led investors to bid up stocks to nearly unprecedented valuations at the time of a first rate cut: more than 25 times earnings over the last four quarters.

That may reflect another anomaly of the current moment: the Fed has pushed rates so high — around 5.3% before Wednesday’s move — that it has made traders confident it has plenty of room to cut if the economy sputters.

“While we all can debate the warranted speed of rate cuts out of the gate, the reality is the direction of travel for policy rates is lower,” said Charlie Ripley, senior investment strategist for Allianz Investment Management. “The track record from this Fed has shown they haven’t historically been the fastest out of the gate, but they have exhibited the ability to dial up the pace when deemed necessary.”

Traders however have struggled to predict the Fed’s path since inflation surged in the wake of the pandemic, and Powell’s dependence on incoming data means that it will be no easier even now that it’s changed course.

Policymakers penciled in an additional percentage point of cuts in 2025, according to their median forecast. Bond traders, however, are still counting on a more aggressive pace.

“A more prolonged and predictable easing cycle is at hand,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “It now will be a battle between market expectations and the Fed, with employment data — not inflation data —determining which side is right.”

–With assistance from Vildana Hajric, Liz Capo McCormick, Emily Graffeo, Aline Oyamada and Cecile Gutscher.

(Updates pricing in fifth paragraph and adds bank forecast changes in eighth paragraph)

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NEW YORK (Reuters) — Investors who anticipated furious market swings following the Federal Reserve’s bumper rate cut saw more of a muted reaction. That may be fleeting.

Traders had been facing high uncertainty as they awaited the expected rate cut on Wednesday, with a split between those expecting 50 basis points and 25 basis points. The Fed cut rates by an unusually large half-percentage-point.

But while market reaction was muted, with stocks and the dollar reversing positions to mostly come full circle, there could be another wave of action. Some referred specifically to bond yields being at risk of spiking higher after rising on Wednesday.

“The calm, I think is not going to last,” said Brian Jacobsen, chief economist at Annex Wealth Management, which oversees $5.5 billion in assets. He pointed to a reversal in equities late in the day that could set the market up for weakness in stocks “unless and until we get some data giving us a clear sense of direction.”

Jacobsen said the market will be focused on upcoming data such as Thursday’s initial jobless claims.

“The Fed clearly is in catch-up mode and trying to make up for lost time with the cut it’s just made,” Jacobsen said.

There may also be a knock-on effect as the Fed decision ripples through other markets.

“The coming hours could prove dangerous … with traders exposed to sudden riptides as rate expectations are reinforced in other economies,” said Karl Schamotta, chief market strategist at payments company Corpay, about foreign-exchange markets.

“Aftershocks are likely to continue as positioning-related adjustments play out.”

Muted reaction

Stock options had priced in a roughly 1.1% swing, up or down, for the S&P 500 (^GSPC), according to options analytics service ORATS. But by the close of trading, the index had snapped a seven-day winning streak to finish down 0.29%, reversing earlier gains.

One reason for the muted market reaction on a close-to-close basis has to do with how asset prices moved in the days leading up to the Fed decision, said Sonu Varghese, global macro strategist at Carson Group. Through Tuesday, the Russell 2000 (^RUT) was up 5% over the previous five sessions and the dollar (^NYICDX) had slipped 0.7%, on expectations for the start of the Fed’s long-awaited rate-cutting cycle.

“It’s a very silly cliche, ‘buy the rumor, sell the news’, but that’s kind of what happened,” said Matt Diczok, head of fixed income strategy at Merrill and Bank of America Private Bank.

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On Wednesday, the dollar index initially fell, but recovered to trade up 0.1% at 100.981.

“Since this policy move was mostly telegraphed, there is no outsized move in financial markets,” said Jack McIntyre, portfolio manager at Brandywine Global.

Bonds did register a significant move, however, with the 10-year yield spiking by seven basis points on the day, while the 2/10 U.S. Treasury yield curve reached its steepest level since July 2022, after the rate cut, signaling long-term expectations of higher inflation and growth.

Treasury yields, which move inversely to prices, had tumbled to their lowest levels since mid-2023 in the days ahead of the decision.

In a research note, Julian Emanuel, senior managing director at Evercore ISI, recommended positioning for a bounce in yields, and that progress by the Fed on inflation may slow or stall.

Small caps, which initially bounced, ended flat. Traders’ initial reaction was to lift the small-caps-focused Russell 2000 index by nearly 1% in the minute immediately after the Fed decision, making for the index’s largest one-minute percentage gain in at least three months, according to LSEG data.

Smaller companies typically rely more on borrowing, and lower interest rates cut their financing costs, bolstering their profitability and growth.

“To see the jump in small caps specifically, that’s the market buying what the Fed is saying, that they will continue to cut rates next year and that’s a potential tailwind to small caps,” said Ryan Detrick, chief market strategist at Carson Group.

But the Russell index finished up only 0.04% on the day.

Fed chair Jerome Powell said in the meeting that the rate cut marked a “strong start” to protecting strength in the economy.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Still, the outsized rate cut could be read more alarmingly.

“I do think that there will be a lot of profit-taking for investors that came into the day long equity to play this event and we may very well trade lower as the market continues to wonder what is scaring the Fed that we cannot see,” said Matthew Rowe, head of portfolio management and cross-asset strategies at Nomura Capital Management.

(Reporting by Saqib Iqbal Ahmed, Suzanne McGee and Carolina Mandl, additional reporting by Davide Barbuscia and Michelle Price, editing by Megan Davies and Rod Nickel)

• Fundstrat’s Tom Lee expects the S&P 500 to top 15,000 by 2030.

• Demographic trends, millennial spending habits, and technology advancements will be key drivers.

• Here are the four charts that show why Lee is so bullish on the stock market.

Fundstrat’s Tom Lee raised eyebrows last month when he made an extremely bullish prediction: the S&P 500 will nearly triple by 2030.

In an interview with Bloomberg’s Odd Lots, Lee said he expects the S&P 500 to top 15,000 by the end of the decade. The index traded around 5,635 as of mid-September.

“If this is a normal S&P cycle following demographics…S&P should be potentially 15,000 by the end of the decade. To me, as you move into a longer timeframe that’s probably where I think we’re moving towards,” Lee said.

In the interview, Lee said he was looking at a handful of charts that back up his bullish long-term prediction.

Here are the four charts Lee shared with Business Insider that show why the already upbeat forecaster is so bullish on the stock market.

1. Thank you, millennials

Lee put the chart above together several years ago, but his thesis remains the same. The average age of millennials is now around 31 years old, and the global cohort of 2.5 billion people is starting to enter its prime age years of 30-50 years old.

“This would be the third time that stocks entered a cycle where annual returns compound at high teens. You had the roaring 20’s, and then you had the 50’s through the late 60’s, and this is a third cycle,” Lee told CNBC last month.

“They all coincided with a surge in the number of people aged 30-50, so in other words the number of prime age adults, and this time it’s powered by millennials and Gen Z.”

“It’s a demand story. When you get to your prime years, 30-50, Urban Institute shows you start to borrow more money, you’re making big life decisions, this is what powers the economy.”

2. Stock market peaks and demographics

The stock market has a history of peaking right around the same time a population hits its peak prime age of around 50 years old, as they are closer to retirement and often spend less money.

For example, when the greatest generation peaked in 1930, that coincided with a multi-year bear market in stocks.

Fast-forward to 1974, when the silent generation saw its prime age peak. This occurred around the same time as a painful stock market correction of about 35% that lasted years.

And the peak in the baby boomer population’s prime age was in 1999, just a year before a multi-year bear market hit stocks.

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The average millennial is not set to hit their peak prime age until 2038, suggesting plenty of upside ahead for the stock market between now and then, according to Lee.

3. Tech will address a global labor shortage

According to Lee, spending on technology will boom in the coming years as the world grapples with a growing labor shortage.

“We have a really big opportunity for US technology companies because of AI, which is supplying the global digital labor, because there’s a global labor shortage. So these two forces are combining to I think power almost a decade of extraordinarily good stock returns,” Lee said.

“I think that there’s going to be a lot of dollars spent on US technology product because the world is short 80 million workers by the end of this decade, that’s roughly $3 trillion of labor salary that’s turning into silicon, so that means US suppliers of silicon and AI are going to have a $3 trillion revenue run rate.”

4. Money will flow into US tech stocks

As more companies spend trillions of dollars on technology to address a global labor shortage, that will catapult the technology sector to make up 50% of the S&P 500.

The information technology sector currently makes up about 30% of the index.

“If US companies are growing earnings at this speed, the P/E multiple of the US should go up. There’s going to be capital flows into the US. Where else in the world do you find the best and most important technology companies, they’re all basically in America,” Lee said.

This story was originally published in July 2024.

Read the original article on Business Insider

Artificial intelligence (AI) is probably one of the biggest trends that will change our daily lives in the coming decades. While AI is still in its early development stage, companies like Nvidia and Palantir have already seen an impact on their business growth in recent quarters.

Still, some winners have yet to make money from selling AI-related services and products but are well-positioned to do so in the future. Tesla (NASDAQ: TSLA), one of the leading technology companies of our generation, is among those companies.

From EV to autonomous driving

Tesla, arguably, has contributed more to the automotive industry than any incumbent car maker since Ford Motor Company introduced its Model T in the early 1900s. The EV maker almost single-handedly drove the mass adoption of electric cars in the U.S. when most of the incumbents were skeptical of the potential of EV cars.

And while the EV transition will probably take decades to complete, the tech company is now riding on an even more significant trend of autonomous driving. According to McKinsey & Company, passenger car advanced driver-assistance and autonomous driving systems could generate $300 to $400 billion in revenue by 2035. And that’s just revenue from selling these systems. The rise of autonomous driving systems could also open up other business opportunities for Tesla, such as launching a robotaxi service.

There are good reasons to believe that Tesla is a front-runner well-positioned to grab a decent, if not substantial, market share in this emerging industry. For instance, Tesla has a huge fleet of vehicles (in the millions) that are constantly generating real-world driving data. This massive (and ever-growing) data set helps train Tesla’s models used to develop autonomous driving software, allowing the tech company to maintain its leadership in the autonomous driving race.

Besides, Tesla’s vertical integration from manufacturing cars to designing its software and chips gives it the speed and flexibility to optimize and improve its AI systems rather than rely on external parties for critical software or components. To this end, Tesla’s custom-built Dojo supercomputershelp train complex AI models with vast amounts of driving data, giving the company an edge in large-scale, low-cost computing.

While it’s too early to declare victory, Tesla’s early-mover advantage and its massive investment in AI positions the company well to maintain its leadership in the emerging autonomous driving industry. If it can sustain its current leadership, it’s likely just a matter of time before it starts making billions from this venture.

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AI and robotics

Another area in which Tesla has huge ambitions is to build and sell humanoid robots. Known as Optimus, these Tesla bots could help solve problems in almost every sector, from manufacturing to healthcare, domestic care, education, etc.

According to Tesla CEO Elon Musk, the company could make trillions in profits from selling these robots to perform such tasks as teaching kids, babysitting, working in factories, and more. The idea is that, eventually, every human being will own one (or more) of these robots, and if Tesla grabs a substantial market share of, say, 10% and makes $10,000 profit from each robot, it would translate into trillions of dollars on the bottom line.

While these predictions are probably too rosy — Musk is never shy of giving huge targets — the opportunity is still massive even if the company could reach just 5% of that target.

As a leading AI and auto manufacturing player, Tesla can leverage its technology know-how and massive resources to develop and grow this business. In fact, the company expects to start using Optimus robots in its factory by next year and hopefully start selling them to external customers by 2026. While these dates may change (or be postponed), announcing them publicly indicates that Tesla is on its way to making Optimus a reality.

Suppose the company can continue to improve its AI software systems and integrate them with hardware via its advanced engineering capabilities. In that case, there is a decent chance that we could get our hands on these robots in the next few years. This venture could be worth more than Tesla’s automotive business at some point.

What it means for investors?

Tesla has been an early proponent and a heavy user of AI for many years even though it may not seem evident to many investors. This will change, especially as the autonomous driving starts to pick up and humanoid robots become a reality. While this will not happen overnight, the impact should be massive for Tesla and its shareholders.

Investors should start keeping an eye on the company.

Should you invest $1,000 in Tesla right now?

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Lawrence Nga has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.

1 Solid AI Stock That’s Not Nvidia or Palantir to Focus On in the Next Few Years was originally published by The Motley Fool