Rocky Mountain Highs

By Crest Capital Advisors on March 1, 2024

Dow: (0.11%) to 39,087.38
S&P 500: 0.95% to 5,137.08
Nasdaq: 1.74% to 16,274.94
Russell 2000: 2.96% to 2,076.39
10 Year Yield: 4.18%
Outperformers: Technology 2.51%, Real Estate 2.11%
Underperformers: Healthcare (1.05%), Utilities (0.63%)

Both the S&P 500 and Nasdaq Composite indices managed to close at new all-time highs this week, powered in part by Nvidia pushing higher and closing above the $2 Trillion market capitalization threshold.

In addition to these records, this week saw a number of moving pieces, though the main event was Friday’s January Core PCE which was in line with expectations, removing an overhang of the Fed’s preferred inflation measure coming in hotter than expected. Some strategists also noted the market is now in line with the Fed’s December dot plot for three 2024 cuts, which could suggest risk is now back toward a steeper path of cuts, a favorable condition for stocks. The short end of the curve also got a boost Friday after Fed Governor Waller’s balance sheet comments, including that he wants to shift balance sheet holdings more toward shorter-dated Treasury securities.

Tech momentum remains a tailwind amid more AI proliferation optimism, reflected in tech inflows pacing for a record annualized $98.8 billion, according to BofA analysts.

What Are We Waiting For?

The Fed has said repeatedly they need more evidence to confirm that inflation is moving lower, sustainably, to their 2% target. This week, we received news that the headline January PCE (The PCE stands for Personal Consumption Expenditure and is the Fed’s favored measure of inflation…not CPI) rose 0.3% month-over-month, in-line with the consensus of 0.32%. The annualized PCE of 2.4% year-over-year was also in line AND down from December’s 2.6% level! The Core PCE rose 0.4%, in line with consensus, while the annualized core of 2.8% was also in line with consensus, down from last month’s 2.9% level.

So despite some dubious data on housing/rent inflation that is skewing the data higher, not to mention seasonal adjustments that had the same effect this past month, inflation continues to fall…and both figures (headline and core) begin with a 2 handle! (e.g. 2.x%) So, again we would ask, what exactly are we waiting for? Just because the Fed may cut interest rates does not somehow lock them into a path of more cuts. They can perfectly well recalibrate if the data warrants it. Isn’t that the point of policy? Why are we risking the broader economy in the name of “certainty”, an elusive term that is actually not really possible to achieve in the first place!? Yes, the broader economy is strong, but smaller and mid-sized businesses continue to struggle under the weight of high financing costs. Interest rate sectors are in outright decline and remain challenged at best. The economy is performing well for the haves, but not so much for the have nots. Crushing growth in the name of price stability could prove to be as bad of a policy stance as transitory was in 2021.

Putting all this further in perspective, the Fed’s preferred measure of inflation (Core PCE) moved down to 2.8% in January, which is the lowest since March 2021. (People, that’s 3 years ago!!!) The Fed Funds Rate is now a whopping 2.4% above Core PCE (see chart below), the most restrictive monetary policy we’ve seen since September 2007!

Source: YCharts (March 2024)

Tax Relief for Californians…Again

This week, the Internal Revenue Service announced tax relief for individuals and businesses in parts of California affected by severe storms and flooding that began on January 21st. Taxpayers in these area codes, which is most of the entire state, now have until June 17th, 2024, to file various federal individual and business tax returns and make tax payments.

The tax relief postpones various tax filing and payment deadlines that occurred from January 21st, 2024, through June 17th, 2024 (the postponement period). As a result, affected individuals and businesses will have until June 17th, 2024, to file returns and pay any taxes that were originally due during this period.

This means, for example, that the June 17th, 2024, deadline will now apply to:

Individual income tax returns and payments normally due on April 15th, 2024.
2023 contributions to IRAs and health savings accounts for eligible taxpayers.
2024 estimated tax payments normally due on April 15th, 2024.
Quarterly payroll and excise tax returns normally due on January 31st and April 30th, 2024.
Calendar-year partnership and S corporation returns normally due on March 15th, 2024.
Calendar-year corporation and fiduciary returns and payments normally due on April 15th, 2024.
Calendar-year tax-exempt organization returns normally due on May 15, 2024.

Investing in Communism…Not So Great

For the past 30+ years, full year GDP growth in China has averaged a whopping 8.92% from 1992 until 2023, according to the National Bureau of Statistics of China. Going back exactly 30 years, to 1994, we find that GDP output in China was $564.3 billion in 1994.

Source: World Bank, Google (March 2024)

Now, fast forward to today and let’s take a look at the top 10 largest economies/ richest countries in the world in 2024, as sourced from IMF data (as of February 07, 2024). We find that China has leaped ahead of all others and sits in the 2nd position overall at a whopping $18.56 Trillion!

So of course, with that kind of economic growth, the stock markets in domestic China must have gone on a tear, right? Well, not exactly. In fact, over the last 30-years, the MSCI China index has posted a total return of 0%! That’s right…a 0.0 Mr. Blutarski. And, adding insult to injury, this lack of return has been accompanied by 22 intra-year corrections of -20% (vs. just 6 for the S&P 500 over the same period) and an average annual correction of -30% (Only twice for the S&P 500 over the same period). China ETFs are also one of the few categories where there’s been more inflows than current assets under management (AUM). Put simply, long China can have its short-term rewards, but the toll is an immense amount of volatility and a requirement to hit the exits before you wear out your welcome. There will be timeframes when China meaningfully outperforms global markets – if you can get the entry and exit correctly… but the broader numbers speak for themselves here.

Source: Strategas Research Partners (March 2024)

Earnings Season Report Card

With the reporting season now 90% complete for large caps, earnings growth for the quarter is looking like it will come in at about 10%, more than 2x what analysts had anticipated as of January 1st. Growth-oriented sectors still lead the index with Communications, Discretionary, and Technology seeing the strongest growth. Revenue growth is running at 3.4%, up from 2.6% which was expected as of January 1st, and once again growth sectors are leading the way.

Source: Strategas Research Partners (March 2024)

Square This Circle

Consider for a moment the amount of energy that Artificial Intelligence (AI) data centers will require to operate.

“You have data center chips doubling year-on-year, but the efficiency needs are the things that are really eye-catching. The New York Times ran an article that AI could soon need as much electricity as an entire country. So I’m sure you’re curious like which countries? Sweden, the Netherlands, and Argentina. If you were to run all of the AI servers that market estimates have on DGX to DX-100, those kinds of devices, you would take 85 to 134 terawatt hours, terawatt hours. By the way, the great state of California, its entire power generation capability today is 30 terawatt hours for the entire state.” – Intel GM Stuart C. Pann

“Data centers and power storage and data centers and the efficiency of power in the data center is going to be a huge deal. There have been some estimates that 10% of energy in the world will go to AI data centers in the next 5 years. So the opportunity for us to be able to work with customers who are designing components and equipment for those places is really high” – Fortive Corporation CEO James A. Lico

And yet, the Bloomberg Commodities index (where energy represents a 30%+ weighting) has fallen to the lowest since 2021! It may be time to look into commodities again as a tech-adjacent way to play the artificial intelligence theme.

Source: Piper Sandler Research (March 2024)

Are You a 1%’er?

Breaking into the top 1% of wealth in the US is getting harder. You now need at least $5.8 million to join the richest echelon, almost 15% more than about 12 months ago, according to Knight Frank (a data research firm focusing on property trends). The richest of the rich are in Monaco, where the threshold for entering the wealthiest 1% is a hefty $12.8 million!

Economic Funnies

Congrats to the HODLRs (Hold on for Dear Life) in Bitcoin, those who bought the top in late 2021. You’re almost back to break even! What a ride.

Crazy Stat(s) of the Week

Here are this week(s) crazy stats!

An unusually warm winter and roaring US output have pushed natural-gas prices to some of the lowest levels of the shale era. That is good news for American consumers, who can look forward to lower utility bills.

Source: FactSet, Wall Street Journal (March 2024)

According to FundStrat Research, over 60% of the S&P 500’s year-over-year net income growth is due to just two companies, Nvidia and Amazon.
The S&P 500 added ~$35 billion in net income in Q4 2023 vs Q4 20222, which is ~7% earnings (EPS) growth overall. The contributions from Nvidia and Amazon are staggering:
- Nvidia (NVDA) added $10.7B of net income in Q4 2023 vs Q4 2022
- Amazon (AMZN) added $10.3B over the same period.
- This means, Nvidia is 31% of EPS growth and AMZN is 30%! The two together accounted for 61% of all added net income to the S&P 500!!
When the S&P 500 is higher in November, December, January, and February (A condition that just happened as of this week), the next 12 months of market return has never been lower. Since 1950, we’ve had 14 other occasions where this occurred and every time the market was higher 12 months later by an average of 17.45%!

Quote of the Week:

“Nobody goes there anymore. It’s too crowded.”

Yogi Berra

Calendar of Events to Watch for the Week of March 4th

Next week we’re tracking notable earnings prints next week with a heavy lean in consumer discretionary names including big box retailers Target and Costco to name a few. As we move past the peak of the earnings flow, we note a pick-up in the volume of Brokerage Conference events which may provide additional news flow and a stronger peak into Q1 earnings trends heading into the final month of the quarter. We’re also expecting a busier week in US Economic Reports with data readings expected on Durable/Factory Orders, ISM Non-Manufacturing Index, JOLTS job openings, and the main event on Friday with the Nonfarm Payrolls, Unemployment Rate, and Average Hours/Earnings. Keep in mind, with so much emphasis on interest rates and the Fed, we may still be in the bizarro world of good news is bad, and bad news is good when it comes to the economy. This means a weaker than expected payrolls report would probably be a good thing for stocks as it would reinforce the need for the Fed to cut rates sooner rather than later. We look forward to the time when “higher for longer” is retired and takes its rightful place alongside “transitory” as bad takes by the Fed.

Monday 3/4 – The BEA Domestic Auto and Truck Sales figures for February are expected to show 15.4m v. last month’s 15m.

Tuesday 3/5 – The ISM Services PMI for February is expected to remain in expansion at 52.5, though off a bit from the prior month’s level of 53.4. This may get a bit more attention than usual since the Manufacturing PMI came in much lower on Friday of this week. Looking abroad, the Eurozone will report January PPI data which is expected to remain in outright contraction.

Wednesday 3/6 – The JOLTS Job Openings report for January is expected to show 8.95m v. last month’s reported 9.026m. The Fed has noted this report in the past and wants to see a decrease in openings without a commensurate pick up in unemployment. So far that has been the case. The risk to markets is the Fed mis-interprets a high JOLTS figure as somehow inflationary and keeps rates too high for too long.

Thursday 3/7 – Q4 Unit Labor Costs are expected to show a final reading of 1.8% and Productivity is expected to remain elevated at 2.3%. The weekly jobless claims data will continue to get a look on Thursday as well but so far this data-set has been behaving.

Friday 3/8 – The highlight of the week will be the monthly Nonfarm Payrolls report where economists are projecting a net 195k new jobs, down from last month’s very hot 353k pace. The unemployment rate is expected to remain unchanged at 3.7% and Hourly Earnings are expected to remain contained at just 0.2% month-over-month.

Source: FactSet