Happy Friday!
Summer is underway and stocks set new highs…but stock values remain elevated and market breadth is narrow. Cooling inflation seems to support a fall rate cut. Is Artificial Intelligence a bubble? The birth of a rare white buffalo.
Special note: DSG Advisors is fortunate to have grown significantly over the past few years. As a result, our expanding team has outgrown our current office space, and we will be moving to larger offices next week. We will be hosting an open house once we are fully settled and hope you will be able to join us to celebrate our beautiful new office.
#1 – Weekly Market Recap – Stocks climbed to all-time highs powered by positive ‘AI’ driven earnings reports, cooler inflation and a consistent Federal Reserve.
Through Thursday’s close, the NASDAQ rose +3%, the S&P 500 rose +1.6%, but the more value-oriented Dow Jones fell -0.4%. However, investors appeared to take a breather this morning as all 3 major stock indices traded down in early trading.
Investors cheered Wednesday’s CPI report which showed consumer prices remained flat in May, the first monthly reading at or below 0% since July 2022.
May’s inflation report appeared to be “good enough” for the “data dependent” Federal Reserve as it left rates unchanged for the seventh consecutive meeting. The Fed did appear to take on a slightly more hawkish tone as it now anticipates only one rate cut in 2024, down from the three cuts they expected in 2024.
At DSG Advisors, we have written on numerous occasions that it is important for investors to not only look at the headlines, but also to analyze the underlying characteristics of stock markets.
When doing so, a few items give us pause. One area of note is the elevated P/E ratios. While strong earnings growth can help justify higher valuation multiples, companies may need to deliver on elevated growth expectations to sustain current valuations.
Another area of note is market breadth. Even though stock indices continue to set all-time highs, fewer stocks are participating in the rally. As shown in the chart below, less than half of companies in the S&P 500 are trading above their 50-day moving average – a notably lower percentage than the 80%+ during the stock run rally in Q4 ’23 and Q1 ’24.
While we enjoy and appreciate the stock returns experienced so far in 2024, as a long-time investor, we are cautious of “erosion” signs we are seeing under the current market strength. In short, we are continuously evaluating “what’s next” for this market.
#2 – Inflation Insights – Wednesday’s Consumer Price Index (CPI) report revealed that inflation was flat in May, with no change in aggregate consumer prices from April.
The price stability was largely attributable to a balance between falling energy prices (particularly fuel prices, which dropped -3.5%), and rising shelter (rent) costs, which increased by +0.4%. These two “offset” each other because shelter accounts for roughly 36% of the CPI index, while fuel accounts for just 4%.
Over the past 12 months, Consumer inflation, as measured by CPI, is up +3.3%…still firmly above the Federal Reserve’s 2% inflation target. However, Producer inflation, as measured by (PPI), showed a promising -0.2% decline and is up just +2.2% over the last year.
The moderating inflation data appeared to be reassuring to investors that the Federal Reserve is on track to begin cutting interest rates later this year. At the central bank’s Wednesday meeting Federal Reserve president Jerome Powell was careful not to explicitly disclose when the Fed is planning to cut rates. However, Powell did indicate that current interest rate policy is having the desired effect on inflation:
“The question of whether it’s sufficiently restrictive is going to be one we know over time. “But I think for the reasons I talked about at the last press conference and other places, I think the evidence is pretty clear that policy is restrictive and is having, you know, the effects that we would hope for.”
Source: Federal Reserve
#3 – Is AI a Bubble? – Impressive returns from Artificial Intelligence stocks have some investors wondering if ‘AI’ is in “bubble” territory.
Bubbles, defined as a rapid, speculative rise in asset prices that run well beyond the asset’s intrinsic value, are common throughout history.
One of the oldest and most famous bubbles was the Dutch Tulips bubble in the 1600’s when tulip prices rose to the equivalent of $1 million dollars in today’s prices. More recent bubbles experienced by current investors include the 2008 housing bubble and the technology bubble in the late 1990s.
As shown in the chart below, bubbles historically take 250 – 500 trading days (i.e., 1-2 years) to form before they “deflate.” Note that for AI, the red line in the chart below, we started the “AI bubble clock” at Nvidia’s spectacular earnings report in May 2023.
Whether the current AI “revolution” is a “bubble” remains to be seen. According to the chart above, it appears that the AI theme may still have a ways to go before it reaches “bubble” territory.
At DSG Advisors, we think the current revenues being generated by companies during the infrastructure buildout phase of the AI revolution are real. Additionally, it appears that we are just in the early innings of reaching a global understanding of AI capabilities and how it could revolutionize the way companies operate and consumers behave.
While we certainly admit that there could be heightened volatility associated with specific AI stocks over the next several quarters, it does not appear to us that AI is currently in “bubble” territory.
Source: Investopedia
Source: CNBC
#4 – Rare White Buffalo – Last week, a rare white buffalo was born in Yellowstone National Park.
Many American Indian tribes revere a white buffalo. The birth of the white buffalo calf with a black nose and eyes could be fulfilling a Lakota prophecy of better times ahead. To some, however, the birth of a white calf is interpreted as a sign that more must be done to protect the earth and its animals.
“Many tribes have their own story of why the white buffalo is so important. All stories go back to them being very sacred,” said Troy Heinert, Executive Director of the South Dakota-based InterTribal Buffalo Council.
Lakota legend says about 2,000 years ago, times were very hard, food was in short supply, and bison were disappearing. According to the legend, a woman appeared before a tribal member and presented him with a pipe and bundle. The woman taught the tribal member how to pray and told him that the pipe could be used to bring buffalo for food. As the woman walked away, she turned into a white buffalo calf. This is the legend known as the White Buffalo Calf Woman.
“The birth of this calf is both a blessing and warning. We must do more,” said Chief Arvol Looking Horse, the spiritual leader of the Lakota, Dakota and Nakota Oyate in South Dakota and the 19th keeper of the sacred White Buffalo Calf Woman Pipe and Bundle. A similar white buffalo calf was born in Wisconsin in 1994 and named Miracle he said.
A ceremony celebrating the revered calf’s birth is set for June 26th at the Buffalo Field Campaign headquarters in West Yellowstone.
Source: NBC
Have a great weekend!
Denver & the DSGCA Team