Long Road To Nowhere.

Stocks took a long road to nowhere, ending the week right back where they started it - with a sharp fall and then a solid comeback rally with yet more new all-time highs reached at one point. In the end, however, the S&P 500 just missed out on achieving a 17th week of gains out of the last 19. Markets floated gently lower without real directional conviction on Monday, with a lack of any real catalysts ahead of (in order of appearance) Super Tuesday, Fed Chair Jerome Powell’s testimony to a House committee, Biden’s State of the Union address and the Jobs Report, all later in the week. Sentiment turned properly negative on Tuesday, due in large part to an intensification of the ongoing splintering of the so-called Magnificent Seven, with both Apple and Tesla tanking hard, primarily as a result of increasingly concerning negative trends in sales in China for both firms. Contagion spread to to other corners of the tech and tech-adjacent space and all the indexes, particularly the tech-heavy NASDAQ, took a significant dive. Super Tuesday also pretty much cemented the matchup that no-one wants; Trump/Biden II in November. It would be naïve to think that there is not going to be associated uncertainty and volatility in late summer and into the fall (or potentially even earlier) and most likely for weeks or even months afterward. Markets have not yet factored this in. Wednesday saw Powell show up in Congress, presenting us with the ludicrous spectacle of a highly intelligent chairman of the Federal Reserve being grilled by some of the financially illiterate law-makers that put the economy in peril every few weeks by risking government shutdowns through grandstanding and political posturing. Predictably, he stayed entirely on message; rates have peaked, they will be cut, but it’s not happening soon because the Fed needs more proof inflation is going to get to 2%. Which of course was saying absolutely nothing new and Wall Street took a kind of “nothing-to-see-here” attitude to his words and instead proceeded to try and repair the damage from the previous day’s selloff, with the S&P 500 clawing back about half of the week’s losses. On Thursday, the European Central Bank held interest rates steady at 4.0%. Markets now expect the first rate cut in the EuroZone will come in June. Jerome Powell Day Two in Washington DC saw him go a little further than on Day One, stating that the central bank is “not far” from being confident enough to cut rates and these rate reductions “can and will begin” this year. U.S. stocks responded positively, resuming their rally from the previous day and completing a full recovery from the losses of Monday and Tuesday to reach yet more new all-time highs. The Jobs Report on Friday proved ambiguous, showing an increase in payrolls of 275k in February, topping forecasts, but both the January and December numbers were revised downwards and the unemployment rate moved up to 3.9% (a two-year high). Average hourly earnings, watched closely as an inflation indicator, rose just 0.1% on the month and 4.3% from a year ago, lower than both estimates and January’s rate. Biden’s spikier-than-expected State of the Union speech from the previous evening gave Wall Street nothing to focus on one way or another. Traders eventually opted for the “glass is half empty” interpretation of the employment data, perhaps in combination with some profit-taking from recent gains. Momentum petered out, particularly in tech names and the S&P 500 shifted lower to finish the week almost unchanged. The market’s relentless rally, in which it embraces even the mostly slightly bullish news and ignores any bad news, is raising the question: can anything make the stock market decline? The answer, of course, is “yes,” but in order for this market to decline, something actually bad has to happen. Negative nuance is no longer enough. What kind of bad things are we are talking about here? Knowing this not only helps when looking for red flags pointing to a possible big decline but also when trying to differentiate between what is just a healthy pullback of a few percent which can help create a springboard for further advances and a true and sustained change of direction for stock prices. There are a few, but the four main categories are: * AI turns out not to represent a fundamental change in business productivity or profitability (so much of the rally is built on this premise). In the end, AI will have to make non-tech companies money and it’s not yet clear exactly how many end-user companies will be able to utilize AI to actually meaningfully increase revenue and/or produce substantial and sustainable cost savings. * Economic growth decelerates or even contracts to a level that threatens the earnings growth of major U.S. companies. That’s very different than the rather gentle easing that we are currently seeing. * The Fed explicitly or even implicitly rules out any interest rate cuts this year and in fact appears to be even entertaining the idea that the next move in rates may actually be higher again. If there is no negative impact from high rates on the labor market and inflation is in large part continuing to decline, then there’s simply no urgency to cut interest rates preemptively and take a risk with a bounce-back in inflation. * Consumer inflation reignites and begins a persistent move higher again. So far all we are really seeing is something of a flatlining of the rate at which inflation is decreasing. This is the stuff to watch out for. OTHER NEWS .. Elon’s Vengeance .. Poor old Elon Musk had yet another rough week. He fell below Jeff Bezos on the Global Rich List (mostly as a result of the diverging performance of their respective stock holdings), there was an embarrassing email dump from OpenAI with whom he is having a childish toxic spat, Tesla’s stock keeps on crapping out (not helped by arsonists successfully targeting a production plant near Berlin) and he is facing yet another big lawsuit, this time by four former top executives of Twitter, who are demanding $128 million in unpaid severance. The executives, former CEO Parag Agrawal, former CFO Ned Segal, former chief legal officer Vijaya Gadde and former general counsel Sean Edgett filed the lawsuit in California federal court on Monday. The lawsuit contends that, as his $44 billion takeover deal neared its completion in October 2022, Musk tried to back out but failed and then concocted a made-up reason to fire the four executives simply to get out of paying them the severance packages to which they were all legally entitled (he cited “gross negligence” and “willful misconduct” as reasons). The executives were running Twitter at the time when the company sued Musk to force him to close on the deal to which he had earlier contractually committed, but had then unsuccessfully tried to squirm out of and “for their efforts, Musk vowed a lifetime of revenge,” the lawsuit said. It added; “Under Musk’s control, Twitter has become a scofflaw, stiffing employees, landlords, vendors and others. Musk doesn’t pay his bills, believes the rules don’t apply to him and uses his wealth and power to run roughshod over anyone who disagrees with him.” Want A Job? ..There are some new positions available where work-from-home is unlikely to be an option. NASA is seeking new astronaut candidates for the first time in four years. Competition, unsurprisingly, is always fierce. In 2020, there were more than 12,000 applicants for 10 positions. This year is likely to be a crowded race as well, but America’s return to the moon is providing more opportunities for astronaut missions. Stay-at-home dad duties .. The share of fathers caring for their households were higher in western states than those in the South, according to the Burning Glass Institute. Alaska, Oregon and New Mexico topped the list of states with the highest ratio of men—age 18 to 59—who weren’t in the labor force, with a child under 14, had a working spouse and were the main caregiver… This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit simonbrady.substack.com