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Nvidia accounts for 8% of the S&P 500 and will report earnings later this week. (Photo by Patrick T. Fallon / AFP) (Photo by PATRICK T. FALLON/AFP via Getty Images)
AFP via Getty Images
Key Takeaways
- Tech weakness weighed, but small caps and Dow outperformed strongly
- Powell’s Jackson Hole speech spotlighted jobs, AI impacts hiring
- Rate cut odds remain high, markets await key data
It was a mixed week for stocks with tech shares weighing heavily on the market. The Nasdaq Composite dropped 0.6%. The S&P 500 gained 0.3%. Meantime the Dow Jones Industrial Average added 1.5% and small cap stocks turned in the best performance, adding 3.3%.
Last week’s highlight event was Federal Reserve Chairman Jerome’s Powell’s speech from Jackson Hole on Friday. I found his remarks very interesting. While addressing what specifics the Fed will be focusing on with respect to interest rates, Powell emphasized the job market. We’ve seen a weakening job market of late, and I think it’s fair to ask what the source of the weakness is. I believe there could be two answers, and they aren’t mutually exclusive. One answer is the trade policy changes we’ve seen this year have made forecasting and as an extension, hiring needs, challenging. At the same time, we could be seeing something similar to what we saw in the late 90s during the infancy of commercial use of the internet.
At that point in time, companies slowed down hiring, though they didn’t necessarily let people go. No one really understood what the internet might mean for commerce and while they sorted through that, hiring slowed. We’re seeing something similar at the moment and perhaps it’s being driven by Artificial Intelligence (AI). Through July, the unemployment number hasn’t ticked up by much; however, we’re seeing less new jobs created and a lot of entry level jobs eliminated. Recent college grads are facing an inherently more difficult market. Near term, that could ultimately weaken the economy if less people are able to find work. But also, the longer-term consequences will be interesting because a number of studies have shown not being able to get a job quickly out of college can lead to longer term lower wages. Therefore, while AI is going to change a lot, the fear over how it impacts jobs may already be coming to fruition.
Speaking of AI, jobs and the Fed. Following Chairman Powell’s speech last week, the probabilities of a quarter-point rate cut in September jumped back over 90%. However, as of the premarket today, that number has fallen back down to 83%, according to the CME Fed Watch Tool. While a rate cut still seems very likely, it’s what Powell says following that meeting that I think the market will be most interested in hearing. Having said all that, we do still have a lot of economic data coming between now and that next Fed meeting.
Tomorrow morning is the monthly report on Durable Goods orders. This number shocked the market last month when it came in at -9.4%. According to Bloomberg, forecasts are calling for monthly orders to be down 4%. The other big report this week will be the Personal Consumption Expenditures (PCE) Index. That report will come out on Friday, and I’ll have more on that later this week.
Some other interesting developments taking place include China discontinuing the purchase of Nvidia H20 chips. China cited security concerns as the reason for not making additional purchases. This may be something we hear from other countries as the Trump administration is becoming more active in the chip sector, such as its 10% stake in Intel and discussions about taking similar positions in other companies. The question for our geopolitical adversaries is, can they create their own chips that work as effectively fast enough to keep pace with the U.S. or will they be forced to buy U.S. chips.
We also had some tariff news over the weekend. Canadian Prime Minister Mark Carney said Canada will drop its 25% tariff on $21B of U.S. imports. That is set to take effect on September 1st. While the move is significant, Canada will continue to tariff imports on U.S. steel, aluminum and autos.
Turning to earnings this week, we have a few more retailers, including Kohl’s, Best Buy and Dollar General. Then we also have some big tech names such as CrowdStrike, Nvidia and Dell. I’ll have more on those later this week, however, the highlight will be Nvidia which currently accounts for 8% of the S&P 500. One non-earnings announcement that came out this weekend was Keurig Dr. Pepper Inc. is buying coffee maker JDP Peet’s in a deal valued at $18B.
A couple of other items of note includes Bitcoin. The crypto asset which recently traded as high as nearly $124K, traded down to just over $110K over the weekend. At the same time, Ethereum traded as high as $5K before pulling back some to around $4600 in premarket trading. Also, The CME and FanDuel announced they will be teaming up to offer event-based contracts for sports. Event contracts are binary outcome trades. For example, as we saw in the last election, these contracts were used to bet on who would win. This is a very interesting development and lot of work will still need to be completed, especially on the regulatory side, but it’s a development I’m keeping on my radar.
For today, I’m looking for some follow-through from Friday’s action. Markets were up as was volume. We saw volatility contract significantly with the VIX falling below 15. I’d like to see markets continue that momentum. At the same time, with Nvidia earnings and PCE later this week, I wouldn’t be surprised if we see some choppy trading. As always, I would stick with your investing plan and long-term objectives.
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