What, me worry? That is a likely response of many investors, even as the
lost some steam at the end of the past week.
The broad index slipped on Friday, but closed higher the four previous days, racking up its 29th record of 2024.
Meanwhile, the
turned higher in the final minutes of trading Friday to notch its 18th record close of the year. Both indexes are up double digits year to date.
Given the market’s resiliency and ongoing enthusiasm for artificial intelligence, it might seem silly to snatch defeat from the jaws of victory. Certainly there are plenty of reasons for bulls to feel confident, as lackluster data and high yields haven’t dented the rally yet.
Nonetheless, it never pays to be complacent, and scratching beneath the surface reveals legitimate concerns.
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Once again the rally is suffering from bad breadth. Unlike earlier this year, when more stocks were joining the party, megacap tech stocks are firmly back in the driver’s seat.
And although 2023 was the year of the Magnificent Seven big tech stocks—namely
Alphabet
,
Apple
,
Nvidia
,
and
—we are now down to the Magnificent One.
Nvidia’s ascendancy has been an integral part of the market’s new highs. Apple’s strength has helped pick up the slack when Nvidia has had an off day, showing market concentration isn’t as risky as some fear, but it is getting hard to make that argument as the winner’s circle shrinks.
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Furthermore, the idea that bad news is good news—because downbeat economic data could give the Federal Reserve more impetus to lower interest rates—could at some point shift. Bad news could become more damaging to the market.
In fact, investors might be getting a little more nervous around growth, wrote Sevens Report President Tom Essaye on Friday.
“To be clear, I’m not saying a slowdown is upon us and I’m not saying that the economic expansion is ending. Growth is still solid. What I am saying is that the market calculus…may be changing a bit at the margin,” Essaye wrote.
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Rosenberg Research President Dave Rosenberg thinks the situation is more concerning, following the recent jobs report, which beat expectations but nonetheless showed unemployment tick up to 4% and a decline in full-time employment.
Those are both “bona fide 100% recession metrics,” he argued. “The history books back over the past seven decades show that the recession begins when [unemployment] moves +50 basis points, or higher, from the cycle trough.”
A recession is likely far from investor minds at this point, but there could be a problem if any cooling sends a chill through Nvidia, warned Pento Portfolio Strategies President Michael Pento.
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“The stock is predicated on spurious and ephemeral demand for its chips, which will collapse in the economic downturn ahead,” Pento wrote.
Of course, the rally has defied critics in the past, and given what a hot streak markets have been on, a pause wouldn’t look out of place without signaling something worse ahead.
By the same token, investors shouldn’t necessarily get used to double-digit gains for the S&P 500, as history tells a more modest story.
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Essaye tries to find the middle road, saying he isn’t playing down the S&P 500’s fantastic performance this year, but still has concerns.
“I’m just saying that twice before I’ve seen investors root for bad economic data to cause the Fed to cut, and both times it hasn’t ended well over a medium-term basis. I hope this time is different, but so far it appears much the same (at least through this point),” Essaye wrote.
The jury is still out as to whether the third time will be a charm.
Write to Teresa Rivas at teresa.rivas@barrons.com
