Lower still

Well, I didn't get the dead-cat bounce I thought we might get during Monday's trading action.  Quite the opposite: stocks tanked.  Volatility spiked.  Almost everything was in the red.

It's starting to feel like 2008 again.  Except with more wars and civil unrest.

On the other hand, we're only talking about the last couple of months worth of gains being wiped out, so we haven't actually seen much carnage yet.  During the 2020 Covid crash, the S&P 500 lost about a third of its value.  So far during this correction, the S&P hasn't even declined ten percent from its recent high.  Not time to panic yet, nor is it time to buy.

This calendar year started out slow and dull, but it's shaping up to be a wild one down the stretch.  Steel yourself accordingly.

What Monday might bring...

It definitely looks as if the shine is coming off the AI bubble.  Intel got quite the haircut on Friday, shaving off 26% of its stock price.  Nvidia reports earnings at the end of August, and I'm sure the whole financial community will be holding its collective breath on that one.

It wasn't just AI-related stuff that took a cut on Friday, though.  Almost everything was down to some degree or other.  Japanese stocks were hit hard due to the Bank of Japan deciding to raise interest rates for the first time in what seems like forever.  Commodities pulled back, too.

So what fared best?  Well, in my own portfolio, it was bond funds and REITs.  That stuff was in the green while everything else was in the red.  What can we glean from that?  Well, I don't really know.  Bonds and real estate are both sectors that are highly sensitive to interest rates, so if those things are up, then that could be construed as a sign that investors think a rate cut is coming soon.  We've already seen all sorts of chatter about a rate cut in September, but the Fed talks and chatter walks, right?  At the end of the day, Jay Powell is driving this boat.  I personally think he's being a tease.  I think he has no intention of lowering rates soon, but he wants to dangle the possibility in front of everyone for reasons of his own.  He's Lucy with the football.  But I guess we'll see in due time.

I wouldn't be surprised to see a dead-cat bounce on Monday after Friday's sell-off.  That's the thing about big moves on a Friday: the traders have the whole weekend to second-guess their decisions, and by the time Monday morning rolls around, they're itching to hedge a bit.

But there's a good chance that this AI stuff will spark the long-awaited correction.  All the indicators say we're due for a pullback, and those indicators have been saying it for a long time now.  I actually thought this would start last fall.  I guess the AI bubble delayed everything a bit.  But it looks like now it might actually be here, and if it is, y'all had better hold on tight, because the bottom is a long way down.

Is the smart money bailing out?

The stock market action over the past few sessions has been interesting.  For almost all of 2024, the market's gains have been fueled by the Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla).  The rest of the market has basically just gone sideways.  If you include inflation--which is always more severe than the government says, regardless of which political party is doing the saying--then small caps have actually declined in real terms.

Now we're seeing something different.  The S&P 500 index doesn't seem to have changed much.  It's still a nice ramp upwards.

(I'm having trouble posting images right now.  Blogger is being difficult.  Sorry.)

When you look at the equal-weight version of the S&P 500 index, you see a dramatic spike upwards over the past five trading sessions.  It went nowhere all year, and now it's at an all-time high for 2024.

And the small cap index is even more pronounced.  Not only have the past four sessions all spiked up, but they've gapped up.  Volume for the iShares Russell 2000 is two to three times what it was just the week before.

This suggests to me that the smart money is taking profits from their Mag-7 holdings and putting that money into small caps.  Maybe the smart money knows something, or maybe they're just trying to read the tea leaves regarding Jay Powell's statements.  I don't know.  But something has definitely changed, and it's changed in a big way.

Gold has also risen lately, though not as dramatically as small caps.  I think gold is reacting to Powell/inflation only, whereas the smart money is reacting to both that and the fundamentals and technical indicators regarding the Mag-7 stocks.  But all that's just a guess on my part.

I don't have any Mag-7 shares, but if I did, I'd be tightening my stops.

Brutal heat wave

Hasn't rained for a few weeks now.  Additionally, temps have risen to late-July norms.  Highs in the mid-90s this week.

Flora are already starting to wilt, and grass is already turning brown.

The last major drought around here was in 1998-2000.  The 21st century has delivered rainier-than-expected summers.  Until now.

Chance of rain Wednesday, but that forecast is still several days away, so it's basically meaningless as far as accuracy goes.

I just hope we get at least one good drenching shower before July 4th, otherwise there's going to be an outbreak of fires when some fireworks inevitably land on dead grass.

On the petrodollar

There's a lot of discussion going on about the Petrodollar coming to an end a few days ago due to the expiration of a treaty.  There are sites debunking this, claiming that no such treaty formalized the Petrodollar and that it's all just fake news.  The truth, as usual, is somewhere in the middle.

Yes, there was a Petrodollar agreement.  But it was an informal one, not part of a treaty.  And the relationship has been slowly but steadily unwinding.  Saudi Arabia joined the BRICS this year, and that's a move that, in geopolitical terms, aligns them against the West.  I'm not sure if the BRICS founders intended for it to become a proxy for a new anti-Western political bloc, but that's sort of what it is now whether anyone likes it or not.  Any country that joins BRICS is going to be seen as an enemy by the West, or at least not a friend, even if the country's motives are purely economic and otherwise friendly.

In the past, the U.S. government could enforce its monetary policy using military force and the threat thereof.  (Mostly implicitly, of course, not explicitly, because explicit threats are way too gauche for most career diplomats.)  That paradigm, though, is not so much the case anymore.  A series of failures and humiliations has eroded the rest of the world's fear of the U.S. military.  Other countries are no longer cowed into using the dollar, so they feel safe in exploring other options.  They're looking to Russia and China as examples, and perhaps even military protectors, and they're gradually lining up to hitch their wagons to the BRICS horse.

The dollar's inflationary chickens have slowly but steadily been coming home to roost, and there are a lot more chickens out there that haven't moved yet.  Where does money go to die?  Well, we might just find out the hard way.

The upcoming election, by the way, won't have any effect on any of this stuff.  No one in Washington is ready for what could possibly come.  They wouldn't even believe you if you warned them.  Intellectual and educational deficiencies aside, it's simply too far outside their normalcy bias.

Fukuyama's infamous slogan notwithstanding, history has not ended.  And I fear that within the next decade or so it will get way more exciting than any of us would ever want.

Mexican bloodbath

Not a literal bloodbath.  A figurative one.  I'm talking about Mexican stocks.

The country has elected a new President, and traders are not optimistic about her.  Mexican stocks got a bit of a haircut on Monday.

Here are the top losers from Monday's trading session.  Notice all the Mexican companies:

 

 

Mexico has enough problems already, and now this presumably disastrous new leader will... well, we don't know what she'll do.  Latin America can be a pretty wild place, politically speaking.  Anything is possible.  But if the financial experts are pessimistic, and they obviously are, then I'm inclined to be pessimistic too, at least until mitigating evidence appears.

I own some Latin American stocks, but no Mexican ones, and it looks like I won't be picking any up any time soon.

The A.I. Boom... or Bust?

It's no secret that the recent gains in the stock market have been concentrated in the A.I. sector.  It's been something like the Dotcom Bubble, though not anywhere to that extent.  Lots of enthusiasm and hype, high valuations, and mixed results when it comes to actual earnings.

The S&P 500 is top-heavy with A.I. stocks, hence its performance this year:

When we equally weigh the components, removing a little bit of the A.I. bias, we get results that, while still bullish, are a little more modest:

When we look only at small-cap stocks, completely removing heavy-hitting companies like Nvidia, Microsoft, Amazon, Google, and so on and so forth, we get results that are a bit more concerning:

The Russell 2000 index is about where it was at in late December.  It's gone sideways for this calendar year so far.  Whatever "bullishness" exists in the stock market, it seems to be a phenomenon of the large caps, not the small ones.  The A.I. boom has not trickled down to the little guys.  When you factor in inflation, the small caps are actually down slightly.

I've made this comparison between these three indexes in previous blog posts, but it's always good to revisit it every now and then to see if the prevailing patterns are still holding.  And that seems to be the case.  The "bull market" is an A.I. bandwagon ride, nothing more.

Now, Memorial Day weekend has just passed us by, so summer has now officially begun, which means travel season is here.  Maybe we'll see something interesting in the vacation-related economy.  I don't know.

There's a Federal Reserve board meeting in the middle of June.  Lots of people have been expecting an interest rate cut at that meeting.  I'm a bit more skeptical.  I'm not sure if a rate cut is priced into the market or not, though.  The Fed might remain hawkish on inflation, but the market might not be bothered by it much at all.  We'll just have to see.

Oil and gold have risen in recent months, but not as much as I would have expected given the geopolitical realities.  My portfolio is still oil-heavy, though.  As long as there's a "war on oil" in this country, I expect non-American oil companies to benefit.  The modern world runs on oil whether people like it or not.

What does the summer hold?  Well, I don't know.  Summer is usually a dead season for stocks, though there has been the occasional bull-market summer before.  I'm inclined to say the action will be mostly sideways until evidence to the contrary presents itself.

BRICS summit in October in Russia.  If there's going to be any major global economic news, I expect it to happen then.  That at least gives us the whole summer to chill out, though, so that's what I intend to do.  I recommend everyone else to stay cool, too.  There will be plenty of things to panic about in the fall.