Tech Heavy: Politics, inflation and a new season of Wall Street earnings

In New York on Friday, Wall Street stocks ended like a shaken can of Coke Zero.

Mixed, but flat. And badly in need of a sugar hit.

Of the three major averages, the S&P 500 claimed best on field with a thrilling 0.08% gain.

The Dow Jones lost 0.31% and the tech heavy Nasdaq Composite stuck its head above the producer price (PPI) parapets by 0.02%.

Those glamour numbers followed Wall Street’s first batch of big bank Q4 corporate earnings reports and the aforementioned PPI data which dropped with a surprise to the softer side.

Bank of America (-1%), Wells Fargo (-3.3%) and JPMorgan (-0.7%) declined after reporting quarterly results, while Citigroup gained 1% after announcing plans to cut its workforce by 10%.

One day, when I am a big blue chip company facing an unwelcome earnings season, I’m going to fire every last one of you.

UnitedHealth also fell 3.5% even after its results came above estimates, while Delta Airlines sank 9% as the airline slashed its 2024 earnings forecast. Elsewhere, House of Elon #1 (Tesla) lost 3.6% due to supply chain disruptions in the Red Sea and the associated shifts in transport routes.

Still, the major averages finished the week with wins, led by the tech heavy, heavy with the The Magnificent Seven.

They keep rising.

Take a knee for second and consider, the seven companies alone delivered without apparent connivance circa 60% of last year’s circa 25% total return for the S&P 500.

Tesla doubled in value, gaining 105%, while Meta enjoyed a remarkable return of 193%.

Then there’s last year’s AI darlings Microsoft and Nvidia.

In 2023 Nvidia produced a a breathtaking return of 243%. Investors will want to know if both Nvidia and Microsoft can continue driving the AI-related resurgence the market has enjoyed over the past year.

Microsoft by the way, just eclipsed Apple again as the world’s biggest company.

All this rising is, momentarily at least, promoting the question: When do they start falling?

With traders betting on a soft landing and Federal Reserve interest rate cuts, riskier small-cap and unprofitable firms are seen as more attractive. That’s after a year in which Apple, Microsoft, Amazon, Alphabet, Nvidia, Meta and Tesla were a go-to trade: regardless of market conditions, they offered both offensive and defensive characteristics.

Last year, “if you didn’t own the top seven or eight stocks, you weren’t able to participate in most of the returns. Investors should be cautious about assuming that’s the way it will be in 2024 as well,” said James Demmert, founder and chief investment officer at Main Street Research.

On the broader economy, what was big in ’23 is big in ’24

Inflation vs Growth.

The US (and Mates) vs Everyone (sans Mates).

China vs Itself.

US inflation accelerated a little faster than expected in December, which reduced the likelihood of a first rate cut from the Fed as early as March. But producer prices for the same period, revealed on Friday, in some way canceled out the first statistic, since they fell.

The market has therefore returned more or less to its initial bet: an 80% probability of a rate cut in March. By the middle of the week, this percentage was approaching 50%, a level which would have jeopardized the sweet euphoria in which investors are bathed.

Note that in Europe, the markets are counting on a first easing in April.

On the political front, there may be ripples from the parliamentary and presidential elections in Taiwan on Saturday, in which the ruling, pro-independence Democratic Progressive Party won a third term.

The presidential election in Taiwan offered a third consecutive mandate to the pro-independence Democratic Progressive Party (DPP), an outcome which was not very favourable to Beijing, which will be cranky and cantankerous over it for a while.

Of course, the Communist Party of China had already promised to “smash” any independence plots, calling the election a “choice between war and peace” before getting up early to damn any foreign governments loopy enough to congratulate Taiwan’s president-elect Lai Ching-te on his victory.

But he backed down in parliament which was good thinking and gave the more China-friendly Kuomintang (KMT) party a stronger position.

Two words I’m seeing a lot of on Monday – compromise and caution.

Speaking of which, this is another reason investors will continue to be distinctly cautious on China where a property sector crisis and an economic recovery in stasis is being compounded by the apparent emergence of deflation.

Which brings us to Wednesday’s Q4 gross domestic product (GDP) drop in Beijing.

The Doves with skin in the game at Goldman Sachs are banking on growth at 5.6%.

The Hawks, and there are many, believe – as they do at Barclays – that 4.5% is a likelier figure.

The US Economic Calendar

Monday January 15 – Friday January 19

MONDAY
Eurozone Economic Sentiment (Dec)
Eurozone Retail Sales (Nov)
United States Consumer Inflation Expectations (Dec)
Global Metal Users and Electronics PMI* (Dec)

TUESDAY
Japan Household Spending (Nov)
Japan Tokyo CPI (Dec)
France Balance of Trade (Nov)
Taiwan Trade (Dec)
Mexico Inflation (Dec)
Canada Trade (Nov)
United States Trade (Nov)
S&P Global Investment Manager Index (Jan)

WEDNESDAY
South Korea Unemployment (Dec)
China (Mainland) M2, New Yuan Loans, Loan Growth (Dec)
Philippines Trade (Nov)
Turkey Industrial Production (Nov)
France Industrial Production (Nov)

THURSDAY
South Korea BoK Interest Rate Decision
United States CPI (Dec)
United States Initial Jobless Claims
United States Monthly Budget Statement (Dec)

FRIDAY
Japan Current Account (Nov)
China (Mainland) CPI, PPI (Dec)
United Kingdom monthly GDP, incl. Manufacturing, Services
and Construction Output (Nov)
France Inflation (Dec, final)
India Industrial Production (Nov)
United States PPI (Dec)