Fresh All-Time Highs, Now What?
TERADAT SANTIVIVUT
Because the stock market moved sharply and registered fresh all-time highs in the S&P 500 and NASDAQ, many wonder if they have missed the boat. The issue is that we have three companies with $3 trillion (or very close to it) in market cap, and as such they will disproportionately move the market.
Again, we have a situation where the S&P 500 Equal Weight Index is lagging the S&P 500, as monstrous market caps don’t matter if all stocks are equally weighted in the index.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This means the market will be hostage to swings in three stocks. If they correct in synchrony, the market will likely correct, and it will likely rally if all three rally. For the broad market to catch up, we need a decline in Treasury yields without seeing a notably weaker U.S. economy.
That said, Jerome Powell will hold his FOMC press conference this week. It is hard to predict what he will say. Sometimes he rocks the markets, and sometimes he is as dovish as can be.
If it weren’t for “owner’s equivalent rent” – a concept that does not exist in Europe – our rate would already be cut – the same as the EU rate, as the ECB has already cut its interest rates last week.
The most bullish thing Powell can do is to cut the Fed fund rate this week and explain his view on declining inflation, but the chances of that happening are pretty small. The next most bullish thing he can do is to give us a firmer timetable on when such a Fed funds rate cut is coming.
We have seen some weakening of the labor market, where non-farm payrolls came in strong last week while the unemployment rate rose to 4%, up 0.5% from a low of 3.5% in July last year. This mixture of indicators is puzzling, but it does suggest some weakening of the labor market.
Jerome Powell has already indicated in previous FOMC minutes that if the labor market is weakening, they would be inclined to cut the Fed funds rate even before the inflation rate is near 2%.
If Jerome Powell remembers his own previous comments, he could channel Wayne Gretzky and “skate to where the puck is going to be,” and cut rates sooner rather than later.
Gold May Have Entered a Larger Consolidation
I don’t expect a huge downside in gold prices, but I do think that some type of consolidation is warranted, given the huge surge since March. I think the gold market is currently reacting to the surge in Treasury yields on the news of the strong jobs report, which under the surface is not as strong as it seemed originally.
The minute Treasury yields begin to trend lower, and we have a firmer timetable on the Fed rate cutting cycle, I think gold will resume its advance.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Keep in mind that the gold price tends to move in fits and starts. It tends to surge, then it consolidates for some time, and then it may surge again. I don’t see any preconditions for a bear market in gold, other than to say that corrections typically are a function of the preceding rally.
The bigger the rally, the bigger the correction will be sometimes, and it may lead to a larger consolidation, but I still view this is happening in a longer-term bull market for gold bullion.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
