For those of you who would prefer to listen:
This was another one of those eventful weeks. The Market absorbed so many news items and priced them in on the fly, as it does. The Market is a discounting mechanism. It anticipates outcomes and instantly prices them in. As probabilities move, the Market adjusts. It has the wisdom of crowds. There was a lot of movement this week. Here’s another rapid rundown of what went down:
There was no interest rate cut in January. One wasn’t expected. There will likely be no rate cuts in March either. Heading into January, the Market was assigning a roughly 75% probability of a cut in March. No more. This news coming out of the first Fed meeting of the year sent stocks cascading lower. Wednesday was the biggest decline for the Stock Market since September.
The year-end rally and subsequent strength in the new year indicates the Market may be ahead of itself. At least as it pertains to the Fed. Inflation is being tamed. The rate of price increases has come down substantially. But prices are still high. And there are too many risks out there which could reverse the trend. The Fed was unwilling to say mission accomplished. It was the right call.
The Fed Chair did set expectations for 3 cuts this year, with the first one likely coming in May or June. The Economy has proven to be quite resilient. Consumers keep spending. The Fed still has a tough decision ahead. Cutting rates too soon runs the risk of stoking inflation again. Cutting rates too late runs the risk of sending the US into recession.
The fact is, the American Economy is still strong. 353K jobs were created in January. That crushed the estimate. This was the highest job increase in a year. I heard it called a “whopper”. The unemployment rate stuck at 3.7%, near 50-year lows. Average hourly earnings were up twice as much as expected. What’s more, both November and December were revised up substantially too. The tight labor market has provided the support for strong consumer spending. It’s the driver for America’s Economy. There’s no sign of recession yet. Although digging a little deeper in the Job Report shows that all of the new jobs created the last year are considered part-time. So, there’s that.
The robust employment situation sort of cements the Fed’s decision Wednesday. There is no need to cut rates anytime soon. It’s looking more and more like a rate cut won’t come until Summer at the earliest. Stocks were volatile all week, with big moves both up and down. They ended the week higher. It’s been a rollercoaster ride throughout these 2020s. Expect that to continue.
Earnings season made a big splash with the Tech Titans turn at bat. They are the companies driving the AI revolution. The Tech Titans are now referred to as the “Magnificent 7.” In all, 40% of the S&P 500 by market cap reported this week. Expectations were high as these mega cap stocks have been bid up substantially over the year. Microsoft and Google’s Alphabet were up first.
Both Microsoft and Alphabet have seen their stocks jump over 20% in just the last 3 months. Microsoft soared nearly 70% in a year, while Alphabet was up close to 60%. Both stocks reached all-time highs. Microsoft joined Apple at the $3 Trillion level. That was the set-up heading into earnings.
Both Alphabet and Microsoft reported strong quarters with double beats on revenues and earnings. Revenues grew double digits, driven by the cloud. Google Cloud revenues jumped 25%. Microsoft’s cloud business, called Azure, accelerated to 30% growth. AI is the magnet for the spending. Both companies are benefitting. It seemed like the good news was already priced in. It was a sell-the-news event for both.
Apple reported a double beat, and perhaps most importantly, a return to revenue growth. It’s been a while. The iPhone led that sales charge. It brought in $70 Billion from September to December. That beat expectations. The iPhone 15 is popular. But China continues to be a challenge. Revenues declined 13% in China, which is Apple’s third largest market, behind the United States and Europe.
Apple had its first major new product release since the Apple Watch came to market in 2015. It’s the Vision Pro, Apple’s mixed reality headset. It debuted this week. The augmented reality device has 12 cameras, 5 sensors and 6 microphones. Prices start at a cool $3,499. This is no small deal for Apple. The company has been pulling levers to boost its revenue growth, which had previously declined for 4 straight quarters. 2024 looks slightly better. But it’s not clear how many people will spend over $3 Grand on a headset yet.
The global headset market is expected to hit roughly $12.5 Billion this year before reaching $57 Billion by the end of the decade. That’s a big jump. Apple announced it has a record 2.2 Billion devices in circulation. The iPhone has 53% of the US smartphone market. It has captured over a third of the watch market. The company wants to replicate that type of market share success in other products. According to Dan Ives, the high-profile Wall Street analyst: “Two years from now we see this being a $1,500 device that will resemble sunglasses. This is just the first version of a broader strategy.” It’s very early days.
Introducing Rufus. This is Amazon’s new AI expert shopping assistant. It is trained on Amazon’s product offering. It can also pull information from across the web to answer customer questions on shopping needs, products, and comparisons. It can make recommendations based on customer interest and shopping history. For example, you could ask Rufus what might make a good Valentine’s Day gift. It would not only answer the question, but help you purchase it. Amazon is really good at helping us spend money…
Rufus was announced as part of Amazon’s earnings release. The company blew away estimates for both revenue and profits. Amazon also raised guidance for 2024. Amazon Web Services, the company’s cloud business, experienced sales acceleration. AI is the big driver there as companies around the globe increase their spend on this very early innovative theme. This is a trend that keeps gaining momentum. Amazon’s stock responded favorably as it continues to demonstrate its leadership in Artificial Intelligence.
Back to the Market:
The S&P hit a fresh, all-time high on Friday. There’s nothing bearish about that. Investors have been enjoying the ride. You take it while you can. But risks are definitely on the rise and stocks impressively keep climbing that “wall of worry.” Is the Stock Market ignoring the risks and overly celebrating the narrow success in Tech? Perhaps. It wouldn’t be the first time. I see breaking news just hitting that the US has responded with airstrikes in the Middle East Friday afternoon. The retaliation comes after we lost 3 of our own by a drone tied to an Iranian-backed terror organization. We will follow developments closely over the weekend and into next week. The Market has largely ignored geopolitics. At some point, it won’t. There’s so much going on. We’re ready.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
