Is The Economy Too Strong For a December Rate Cut?
This November data will bring some answers to investors and the Fed
Early this morning, futures indicate we’re likely to see a modest retrenchment in the major market averages when equity markets begin trading later today. Both the S&P 500 and the Nasdaq Composite closed at fresh records after hitting intraday highs yesterday. While we suspect many are enjoying the continued strength in the market, the 6% move in the S&P 500 and the more than 7% climb in the Nasdaq Composite since the end of October have the market, depending on the indicator cited, once again approaching overbought levels. While relative strength index levels are still below 70, the short-term S&P 500 oscillator is flashing overbought. Other indicators, such as the Citibank Panic/Euphoria model and the Fear & Greed Index, indicate headiness in the market.
This comes just as investors will parse November economic data that will help determine if the Fed will deliver another rate cut on December 18. Comments yesterday from Federal Reserve Governor Christopher Waller captured that rather well. While Waller said he is currently leaning toward another rate cut in the next few weeks, he admitted that position could change depending "on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation."
While the October PCE Price Index data joined other October inflation data in showing inflation remained sticky, yesterday the November Prices component in ISM’s November Manufacturing PMI tumbled to one of its lowest levels in the past year. A positive development, but we’ve seen fluctuations like this in past inflation data. Meanwhile, November new order activity in the manufacturing sector hit its highest level since March, while employment in the sector performed better than it has in the last several months.
Inputting those figures into the Atlanta Fed’s GDPNow forecast kicked out a 3.2% figure for the current quarter. While the market will look at comments from Fed Governor Adriana Kugler and Chicago Fed President Austan Goolsbee today, tomorrow’s November Service PMI data from ISM mixed with the ADP’s November Employment Change Report will be the next Fed rate cut puzzle pieces we get. If they confirm or build on the strength found in the latest GPDNow figures, the market will need to question the odds of a Fed December rate cut.
That brings us back to our comments above about the market being frothy. We’ve discussed many times over the last several quarters how it doesn’t take much to knock the market off its high horse at times like these. Once again what’s good news for the economy is likely bad news for rate cuts. Should the upcoming data shift rate cut expectations to no-go from go, ripple effects are likely to be seen in more interest rate-sensitive parts of the economy, the dollar, and Treasury yields.
In terms of our AI and Digital Infrastructure models, after tonight’s market close, we have quarterly results from Salesforce (CRM) and Marvell (MRVL). We’ll also be eyeing results from Okta (OKTA) for our Data Privacy & Digital Identity model.
Model Musings
Aging of the Population
“Medicaid is the nation’s publicly financed health and long-term care program for low-income people. It was originally established to provide benefits to those receiving cash assistance or “welfare.” In the case of older Americans, that source of cash benefits was — and remains — the Supplemental Security Income (SSI) program. Over the years, however, Congress and the states have expanded Medicaid to reach a broad array of uninsured Americans living near or below the poverty level. Read more here
“The typical American retires far earlier than he or she expects to, and it's often not by choice, according to new research from the Transamerica Center for Retirement Studies. The median retirement age in the U.S. is 62, with nearly six in 10 retirees telling the research firm that they stepped back from the workforce earlier than they had planned. Almost half of those people said the reason came down to health issues, such as physical limitations or disability. Losing a job or an organizational change at their employer were among the other reasons people stopped working before they planned to retire.” Read more here
Artificial Intelligence, Digital Lifestyle
“The artificial intelligence boom is reshaping Black Friday, too. U.S. e-commerce sales on the unofficial shopping holiday hit a record this year, with online spending hitting $10.8 billion, up 10.2% from 2023, according to Adobe Analytics. Generative AI chatbots played a starring role in the retail bonanza, driving an 1,800% surge in retail site traffic compared to 2023, Adobe said. These tools, which mimic human conversations to help shoppers find deals, compare products, and check out faster, became essential for bargain hunters navigating this year’s online frenzy.” Read more here
Cash-Strapped Consumer
“Deal-hunting during the event is now a mostly online pursuit. Seventy-two percent of shoppers made their purchases via the internet this year. Most in-store shopping supplemented consumers’ online spending. Economic motivations for the best deals drive Black Friday shopping, yet most consumers focus on discretionary spending, with 59% purchasing ‘nice-to-have’ items for others, 53% purchasing those items for themselves and 14% indulging in experiences like trips or massages. Additionally, data revealed that Black Friday shoppers using buy now, pay later (BNPL) spent more on average than others using credit or debit cards.” Read more here
“Nearly half of Americans at least somewhat agree with the statement, “I am living paycheck to paycheck,” as of the third quarter of 2024. The share shrank slightly between the second and third quarters of this year, but in 2022, less than 40% of Americans felt this way, Bank of America reports.” Read more here
Digital Lifestyle
“Black Friday shoppers spent a record $10.8 billion this year, primarily via online purchases. A report Monday (Dec. 2) from NPR — citing data from Adobe Analytics — notes that this figure is 10% higher than last year’s total, and double the amount of spending from 2017. Between 10 a.m. and 2 p.m. Friday, online shoppers spent $11.3 million per minute, Adobe said… The report also cited data from Salesforce showing that 69% of Black Friday purchases came from mobile devices, up 1% from last year’s figures.” Read more here
EV Transition
“Monthly electric vehicle deliveries at XPeng, Nio, and Li Auto set a record in November. Things are looking even better for December. EV demand isn’t an issue in China. Pricing, however, continues to be a struggle…Combined, the three Chinese EV makers sold 100,210 vehicles in November. That’s a monthly record. December guidance implies about 131,000 cars sold, another record.” Read more here
Luxury Buying Boom
“Japan is still the land of rising fortunes for luxury-goods companies, even as trendsetters elsewhere have pulled back on purchases of expensive designer goods. Analysts say the outlook for Japanese domestic demand is as promising as it has been in years, due to gains in real wages and a strong stock market, which have encouraged spending.” Read more here
Nuclear Energy & Uranium
“Big tech firms including Amazon.com and Alphabet have recently made splashy investments in new kinds of small nuclear plants to power their AI data centers. The announcements have sent the stocks of startup nuclear developers Oklo and NuScale Power up 120% and 750%, respectively, this year. Now, there’s another set of buyers warming to the idea of putting lots of small nuclear reactors all over the country—state governments. New York, Texas, Virginia, Washington and Tennessee have lately started to join the bandwagon.” Read more here
“The stars are aligning for a nuclear power revival in the U.S. The government is funneling billions of dollars into the industry, tech luminaries like Bill Gates and OpenAI’s Sam Altman are backing new companies, and public support for nuclear power is firmly on the rise.” Read more here
“Apollo Global Management Inc. sees an “industrial renaissance” emerging as part of an energy transition investment opportunity worth $50 trillion over the coming decades, according to Leslie Mapondera, a partner at the private capital firm. “Just in Europe there’s probably $1.8 trillion to be spent” between 2025 and 2030, Mapondera, the company’s co-head of European credit, said at the Bloomberg Intelligence credit market outlook conference in London on Thursday.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumer - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Digital Lifestyle - The companies behind our increasingly connected lives.
Digital Payments - This model focuses on companies benefitting from the accelerating structural adoption of digital payments and financial technology (FinTech).
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed above.