Some say when it comes to understanding market returns, “bonds are math” while “stocks are stories.” This past week provided some confirmation of those notions. First, it should be noted that while the financial media headlines have been dominated of late about the debt deal and its potential resolution this past weekend, the markets really haven’t been all that bothered about it, particularly knowing how politics and markets typically play out during the third year of the Presidential Election Cycle.
A bigger story for the stock market, however, was the continuing investor interest in artificial intelligence (AI). For example, an already large-cap growth stock NVIDIA’s (which builds hardware for AI), stock price exploded higher last Thursday on better-than-expected earnings. That one-day gain in NVDA’s market cap was bigger than the entire market caps of companies like Disney, Nike, and Netflix! The economic promise of AI is exciting, but is this a bubble in the making? Investors should consider that NVDA valuations are now higher than they were for well-known (and still surviving) stocks back in the dot.com era. Some of those stocks are still below their late ‘90s price highs.
In other news, inflation just won’t go away. Last week one measure from the Dallas Fed even hit a new cycle high. It looks more and more like inflation might be stuck at 4-6% for the time being instead of the 2%+ many were hoping/expecting. Higher inflation means higher interest rates. And note that the CME FedWatch Tool had been expecting just a few weeks ago an 80% chance the Fed would indeed pause on short-term interest rates at their next meeting on June 14th. Given the latest inflation data though, those odds shifted last week to a now 60%+ chance of a 25-basis increase in the Fed Funds rates to 5.50%.
Bottom line, the stock market is off to a nice start this year and there are reasons for that to continue. There are also headwinds such as high valuations and rising interest rates to be mindful of.
Stay invested. Stay diversified. Stay disciplined.