Market Brief - August 27, 2023
Welcome to The Predictive Investor Market Brief for August 27th, 2023!
While it was a relatively lackluster week for most of the market, the mega cap stocks outperformed, with the Nasdaq up 2.3% for the week, followed by a 0.8% weekly gain for the S&P 500. Nvidia’s earnings beat did boost tech, but the index failed to break above its 50-day moving average.
Fed Chair Powell’s speech on Friday reiterated his hawkish posture but included more balanced language, with an acknowledgement that inflation has come down and highlighting the need to keep options open. The market interpreted this as follows: rates will remain higher for longer, but the Fed is unlikely to hike again in the near term.
Weekend Reads
Should We Expect Valuations to Mean-Revert Over Time? Obviously, multiples can't go to infinity, and equally obviously, paying a higher price for a given set of cash flows means lower expected returns. So it makes sense to assume that multiples mean-revert. And over long periods, they do: stocks traded at high single-digit multiples in the late 40s and early 50s, high teens multiples in the 60s and early 70s, back to high single digits in the early 80s, straight up to a record of 40+ during the great large cap growth bull market of the late 90s, then down to the mid-teens during the early-2010s recovery. But it's equally true that timing these reversions is hard. (The Diff)
Is the AI boom already over? Generative AI tools are generating less interest than just a few months ago. Recent reports suggest that consumers are starting to lose interest: The new AI-powered Bing search hasn’t made a dent in Google’s market share, ChatGPT is losing users for the first time, and the bots are still prone to basic errors that make them impossible to trust. In some cases, they may be even less accurate now than they were before. Is the party over for this party trick? (Vox)
As we said 2 weeks ago, companies are going to have to offer a sustained competitive advantage to capitalize on AI over the long term. Recent market weakness provides an opportunity to look at Palantir (PLTR), one of our favorite AI plays.
China learns the D-word: JPMorgan points out that headline CPI, PPI and the GDP deflator have all now turned negative in China, and warn that the danger of deflation is going to hang around for the rest of the year. (Financial Times)
The Great and Awful Thing About These Interest Rates: The era of low interest rates is over. In the blink of an eye, the Fed went from punishing savers to punishing borrowers. If you’re depending on income to fund your retirement, 5% rates are a blessing. But if you’re in need of credit, current rates are a curse. (The Irrelevant Investor)
Huawei Building Secret Network for Chips, Trade Group Warns: The leading association of global chip companies is warning that Huawei Technologies Co. is building a collection of secret semiconductor-fabrication facilities across China, a shadow manufacturing network that would let the blacklisted company skirt US sanctions and further the nation’s technology ambitions. (Bloomberg)
The chip wars are just getting started and one way to speculate on the sector is through the Direxion Daily Semiconductor 3X Bull Shares (SOXL), which seeks to deliver 300% of the daily performance of the ICE Semiconductor Index. Due to the high volatility, timing is important with leveraged ETFs. SOXL currently trades just north of its 10-week moving average.
Market Technical Analysis
S&P 500 (SPY)
Updated chart from last week is below. We said last week we’d be looking for price and momentum indicators to stabilize, and that appears to be happening. RSI has turned around and price remained above last week’s low. That said, the rebound in price did fail at the 50-day moving average. Until that changes the short-term trend is down.
Market Sentiment
Bearish sentiment in the AAII Investor Sentiment Survey is above average for the first time in 3 months, and the VIX has decisively broken above its 50-day moving average. However, it’s very possible we won’t see an extreme reading in bearish sentiment before the correction is over. The current selloff has been relatively orderly, with very little panic. We continue to believe this represents a modest pullback amid an intermediate uptrend.
The bottom line: We still expect an uptick in volatility over the next few months, but so far none of the indexes appear to be at risk of breaking major support. We will continue to buy strength.