Jim’s Notes – Rate Cut Hopes Sparks Rally

Moving the Market – June 5th

The markets rallied on Wednesday led by technology stocks. The catalyst for the upside move is the growing belief the Fed would now cut rates sooner as the economic data eroded. This is and has been the focus of the markets since the bottom in October 2023. The start of the move higher on Friday was data pointing to the weakening economic picture. Leading the move higher the last four days is interest rates dipping to 4.28% sparking a rally in bonds and offer hope to stock buyers. Technology stocks have been the clear leader in the move as semiconductors have led the charts. The SOXX was up 4.3% on the day. CRWD and HPE led the upside move with strong earnings, while ASML led the chip stocks along with NVDA. The NASDAQ and the SP500 both closed at new highs. Seven of the eleven sectors closed higher showing a lack of breadth in the move up. The dollar was higher, oil higher, precious metals higher, bonds higher, and Dow closed lower. Bonds were the key driver with the yield on the ten-year bond moving down to 4.33%. The lagging sectors were XLP, IYR, and XLU. The ISM Services data moved up in May hitting 53.8% versus the forecast of 50.7% and well ahead of the 49.4% prior. ADP Jobs report showed new hiring slowed to 152k in May… is this a sign the labor market is slowing? If you want interest rate cuts it is. The whisper on the street is the data looks favorable for the Fed to cut rates. Wednesday that became the headline on every financial station. There are headline rumors of the European Central Bank talking about rate cuts happening soon. All these cut talks are pushing prices higher. For me this raises the question, with all this energy, effort, and hope put into rate cuts, what happens when they cut rates? Does everything magically become good again? It is a question to ponder and be aware of the markets getting what they want. Will the goodwill already be priced into the markets? The anticipation in this case may be better than the event itself. It is also important to note the Fed is building money supply. It rose $25.8 billion in April the highest in the last 12 months. The trading day was built on extrapolating data to say what you want to get what you believe. We continue to focus on the trend and manage the data for what it is relative to growth.

The major indexes closed the day higher as the broad markets expanded the bounce off the lows on Friday. The leadership remains narrow with technology and mega caps leading the move higher. The laggards continue with IYZ, IYR, and XLE leading the downside. The economic data and interest rates ruled the day. The parts are better than the whole relative to the market upside. The NASDAQ closed up 1.9%, DIA was up 0.2%, and the SP500 was up 1.1%. The major indexes closed higher on the day. The SOXX was up 4.3%. Small Caps (Russell 2000) were up 1.5%. The ten-year treasury yield was 4.28% down 5 bps for the day. Crude Oil (USO) was up 1.1%. (UGA) was up 0.4%. Natural gas (UNG) was up 5.1%. The dollar was up 0.01%. Plenty to deal with moving forward as we manage our money and emotions relative to the current environment.

Thursday Outlook: How do investors respond to the move higher on Wednesday? The markets moved higher on hope and speculation. It is a case of making data say what you believe should happen. I would like to say the bounce higher continues, but we will have to see how things unfold. With the FOMC meeting June 11-12, we will get clarity on where the Fed stands relative to cuts. Throw in the CPI data on June 12th as well and there will be plenty of clarity for investors. Buy on the rumor, sell on the news… may well apply next week. The VIX rose fell to 12.6 on Wednesday following three days of increased intraday movement. The focus is clearly on the Fed and interest rates. Growth is still a big question mark overall. Economic data continue to confirm that. The key is to follow the trends up or down. 1) Watching the dollar, does it bounce back from recent selling? It has leveled off. 2) Interest rates, dipped back to 4.28% on Wednesday. 3) Crude oil fell on OPEC leaving production cuts into 2025. Moved up 1% on Wednesday. 4) Natural gas is trying to move higher again with volatile swings. 5) DBA climbing higher on wheat and coffee… inflation. 6) The answers are unfolding… we have to take what is offered up or down.

Headlines Worthy of Note:

Nvidia passes Apple in market cap as the second-most valuable public US company. The company hit $3 trillion in market cap with shares up 5% on Wednesday.

Putin says America is “burning from the inside” and US courts are being used by Trump rivals. That is an interesting headline coming from a socialist country…

Lululemon shares were up 10% following a beat in earnings and revenue. Their guidance however was cautious about the Americas.

The FTC prepares to sue the largest US alcohol distributor, alleging “secret kickbacks”. The case will be difficult to prove, but it offers some interesting insight into price structure and how it impacts the consumer.

Quote of the Day: “There are always two people in every picture: the photographer and the viewer.” — Ansel Adams.

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