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  • Writer's pictureRealFacts Editorial Team

All-Time Market Highs, Foreclosures, and Inflation

Updated: Apr 18

This Week's Topics

The Stock Market

The S&P 500 and Nasdaq Hit All-Time Highs but Begin Pullback

The recent surge in stock prices resulted in record highs for both the S&P 500 and Nasdaq indexes. These remarkable highs have been primarily attributed to a combination of factors, notably the ongoing influence of artificial intelligence (AI) and positive corporate earnings reports, particularly within the technology sector.

On Friday, the S&P 500 climbed 0.8% to close at an unprecedented level of 5,137, while the Nasdaq surged over 1% to reach a historic high of 16,275. These gains were bolstered by the robust performance of key technology stocks, with companies like Dell (DELL) and NetApp (NTAP) reporting strong earnings. Notably, NetApp's remarkable 18% surge on Friday propelled it to the top spot on the S&P index, highlighting the significance of infrastructure providers supporting the burgeoning AI industry.

Further contributing to the market's upward trajectory were semiconductor giants such as Advanced Micro Devices (AMD), Broadcom (AVGO), Nvidia (NVDA), and Qualcomm (QCOM), each experiencing gains exceeding 3%. This surge in chip stocks is exemplified by the Philadelphia Stock Exchange's Semiconductor index (SOX), which soared by over 4% on Friday, extending its impressive 12-month gain to approximately 62%.

However, amidst the overall market excitement, some prominent tech stalwarts like Apple (AAPL) and Alphabet (GOOG) experienced setbacks, with their stocks slipping on Friday. Apple, in particular, faced a 0.6% decline after being removed from Goldman Sachs' top stock pick list, while Alphabet's parent company, Google, saw its shares drop by 1.1%. Both companies have grappled with investor concerns regarding their positioning in the AI landscape, leading to recent underperformance relative to the broader market.

Despite these intermittent challenges, the overarching sentiment driving the market's bullish trajectory remains rooted in optimism surrounding corporate efficiency improvements and the transformative potential of AI technology.

Source: Forbes

The Stock Market Rally Is Broadening Beyond The Mag Seven

Gabriela Santos, Chief Market Strategist for the Americas at JPMorgan Asset Management, is seeing signs that the market is “broadening” beyond the Magnificent Seven. The phrase “Magnificent Seven,” refers to the seven most valuable companies in the entire stock market, i.e., Microsoft (MSFT), (AMZN), Meta Platforms Inc. (META), Apple Inc. (AAPL), Alphabet Inc. (GOOG, GOOGL), Nvidia Corp. (NVDA) and Tesla Inc. (TSLA). These seven companies have dominated the market over the past year, but now there are signs that we might be on the front end of a Bull market.

Santos thinks the earnings of several companies have found their sweet spot. February has seen several sector leaders: Discretionary is up 8%, Industrials is up 6.9%, Materials is up 6% and Technology is up 5.8%. She makes several salient points to prove her position: (1) interest rates may take longer to come down but we’re no longer questing how much higher they can go; (2) 2024 is expected to see 2% GDP, 0% recession, 2% inflation, and 4% or lower unemployment; and (3) interest rates are expected to start coming down by 75 basis points this year beginning mid-year.

Additionally, CNBC Business Analyst Scott Wapner highlights historical data indicating positive S&P performance following consecutive positive months, indicating a potentially promising year ahead for the stock market in 2024.

Source: CNBC Closing Bell

Has Nvidia Run Its Course And Are The Mag 7 Stocks Too Expensive?

Scott Wapner, host of CNBC’s Closing Bell, had an intriguing interview with Aswath Damodaran, Professor of Finance at NYU Stern School of Business, focusing on Nvidia's (NVDA) valuation amidst its remarkable performance driven by the AI wave.

For those unfamiliar with Nvidia, according to Yahoo!Finance, the stock has been “riding high on the artificial intelligence (AI) wave that boosted its shares by almost 240% in the last 12 months alone.” The company's fourth-quarter revenue skyrocketed by 265% year-over-year to $22.1 billion, attributed to the strong sales of its GPUs for AI applications. Additionally, Nvidia's share price has climbed by 63% year-to-date, propelled by its impressive gross margin of 76%, which is notably high for a hardware company.

In this interview, Damodaran acknowledges Nvidia's prominent position in the AI market but questions the sustainability of its valuation, cautioning that while it may be a lucrative short-term trade, it may not prove a sound long-term investment. He scrutinized the company's revenue growth prospects and expressed concerns about its current pricing, suggesting that the feverish momentum could lead to a correction. Damodaran states “momentum is everything [and] at some point in time the fever breaks and the question is, ‘when will that happen for Nvidia to still be a great company. I think the pricing is a little bit out of control for the company.”

When pressed about the possibility of a market bubble, Damodaran offers a nuanced perspective, indicating that while certain sectors might exhibit bubble-like characteristics, the overall equity market appears reasonably priced with an expected return around historical averages. He anticipates a broader market recovery when sidelined capital begins to venture into riskier investments, particularly in IPOs of young companies. Despite acknowledging Bitcoin's surge as indicative of speculative risk appetite, he views it more as a risky asset rather than a reliable indicator of market trends.

In summary, Damodaran's insights suggest cautious optimism regarding Nvidia's short-term prospects, skepticism towards long-term valuation sustainability, and a measured assessment of market conditions, rejecting the notion of a broad market bubble while anticipating a resurgence in risk capital driving market expansion. The interview offers valuable insights from the renowned "Dean of Valuation" into both specific stock valuation and broader market dynamics.

Source: CNBC Closing Bell

The Real Estate Market

Increase In Commercial Office Foreclosures

Recent data from ATTOM reveals a notable 17% increase in commercial real estate foreclosures in January compared to the previous month, marking a significant 97% rise from January 2023. While this uptick might raise eyebrows, it's important to view it within the broader context of market dynamics.

Since ATTOM began tracking this data in 2014, commercial foreclosures hit an all-time high in October 2014, followed by a low in May 2020, bolstered by government interventions. However, since then, foreclosures have been on the rise, reaching a peak this January. This chart shows the monthly commercial foreclosures in the U.S. since 2014.

Source: ATTOM

California leads in commercial foreclosures, with a staggering 174% year-over-year increase, followed by Texas, New Jersey, and Florida. Interestingly, despite New York witnessing a 12% decrease, it remains a significant player in the market.

ATTOM's CEO, Rob Barber, suggests that this surge indicates a return to pre-pandemic activity levels, highlighting the sector's adaptability to evolving business practices and consumer behaviors.

This data hints at a shifting economic landscape, with businesses adjusting to post-pandemic realities, influencing commercial real estate trends.

Commercial Real Estate Debt Looms Large

Moving forward, attention shifts to the looming commercial real estate debt crisis, particularly concerning smaller and regional banks. Uma Moriarity, a senior investment strategist, warns of over $1.2 trillion in commercial real estate debt maturing in the next two years, with regional banks facing the brunt.

Moriarity emphasizes the risk posed by these maturing debts, especially concerning office assets, where banks may struggle to avoid placing them on their balance sheets.

While the prospect of a global contagion seems unlikely, Moriarity predicts a gradual unfolding of the crisis over the coming years, potentially impacting various sectors.

Source: CNBC

The Economy

Inflation Still a Concern For Investors Based On CPI & PCE

As we delve into the economic landscape, it's crucial to understand the key indicators shaping investment decisions. This week we are highlighting the CPI and PCE to give you a better understanding of some of the best measures of inflation.

From an investor’s perspective, measuring inflation is a critical component used to estimate the total return of an investment or portfolio of investments. There are three key measures of U.S. inflation, the consumer price index (CPI), the personal consumption expenditures price index (PCEPI), and the producer price index (PPI).

Consumer Price Index (CPI)

The CPI measures the monthly change in prices paid by U.S. consumers. It is one of the most popular measures of inflation and deflation. Some consider the CPI a leading economic indicator while others have made the argument that it is a lagging economic indicator because it is based on about 80,000 price quotes collected monthly from some 23,000 retail and service establishments as well as 50,000 rental housing units. It is a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending as calculated by the Bureau of Labor Statistics (BLS).

The U.S. Bureau of Labor Statistics releases information on the CPI every month. Here is what the CPI looked like over a 10 year period.

Source: U.S. Bureau of Labor Statistics

According to the U.S. Bureau of Labor Statistics, the January CPI annual inflation figure was 3.1%. This means the cost of a basket of goods and services in the U.S. increased by an average of 3.1% from January 2023 to January 2024. This was lower than December’s figure before adjustment, which came in at 3.4%.

The January core CPI reading was 3.9%. This was the same as the December core CPI reading, which was 3.9% before seasonal adjustment as well. This is still well off the 40-year high from September 2022, which came in at 6.6% for the 12 months ending in September 2022.

With inflation running above the Federal Reserve's target rate, investors may consider reallocating towards assets like commodities, real estate, and inflation-protected securities. Fixed-income investors may seek alternatives like TIPS, while equity investors may favor companies with pricing power. Currency diversification and portfolio diversification across asset classes may also be prioritized to mitigate risk amid rising inflation and potential interest rate adjustments by central banks.

Source: Forbes

Personal Consumption Expenditures (PCE)

Personal consumption expenditures (PCE), also known as consumer spending, is a leading economic indicator that measures the spending of goods and services by people of the United States. Consumer spending is an important factor that drives the U.S. economy and is a key part of gross domestic product (GDP). In fact, PCE accounts for about two-thirds of domestic spending which makes it the most significant driver of GDP.

According to this table, the recent PCE data indicates a 2.4% rise in inflation over the 12 months through January, the smallest increase since February 2021. This follows a 2.6% advance in December, reflecting rises in consumer and producer prices attributed to increases at the start of the year.

Economists suggest that the government's model for adjusting seasonal fluctuations in the data may not fully account for these price hikes. Excluding volatile food and energy components, the PCE price index increased by 0.4% last month, the largest rise since February 2021. Services prices surged 0.6%, primarily due to increases in housing and utilities costs, as well as financial services and insurance. Core inflation, excluding food and energy, rose by 2.8% year-on-year in January, slightly lower than December's 2.9% increase.

The Federal Reserve monitors PCE price measures to gauge progress towards its 2% inflation target, with monthly inflation readings of 0.2% deemed necessary over time to reach this target. Investors may interpret these inflation figures to adjust their portfolios, considering potential impacts on purchasing power, interest rates, and asset allocation strategies.

Source: Reuters

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