Tech and AI continue to push markets higher

October 20, 2024

INSIGHT WEEKLY: October 20, 2024

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🌐 Markets overview

Major market indexes:

The S&P500 and the Dow made new records again this week. The S&P500 has now chalked up 50 record daily highs this year.

Why the increases this week? Hedge funds have been buying tech stocks at the fastest rate in five months. Also equity funds have had large inflows, mainly due to bank earnings and expectations of rate cuts.

With more rate cuts expected, we see the following flows out of cash:

Cash → Stocks (lower returns with cash funds, continuing increases in tech and AI stocks)

Cash → Bonds (lower returns with cash funds, opportunities to lock into bond yields before yields decrease, and potential price gains when rates fall)

Cash → Gold (increasing gold price as shown in the chart below with gold becoming of interest as a store of value)

Markets v all-time high:

S&P 500:

There is no sign of this bull market ending any time soon. With 50 all-time highs this year and continuing interest in tech and AI stocks, there are more buyers than sellers.

Magnificent 7:

Major Semiconductor stocks:

ASML falls after warning of lower orders. ASML is not a chip manufacturer but a manufacturer of lithographic equipment, systems and software used for the manufacture of chips.

TSMC is a major chip manufacturer. The stock price increased on a strong outlook.

Nvidia continues to gain. Analysts are expecting the potential for the stock to rise further as demand is expected to continue with further LLM’s (Large Language Models) being developed.

US smaller cap companies (Russell 2000):

The Federal Reserve has started to cut interest rates, which is good for smaller companies that have most of their debt as floating rates. Earnings are expected to be good as the economy recovers on a soft landing trajectory.

Gold has become of increasing interest to investors as a store of value.

 

🇺🇸 US economy

Recession risks are receding! So say the economists at Goldman Sachs. They estimate the recession risk to be 15% in the next 12 months. There are further encouraging signs such as the narrowing of credit spreads (spread between government-issued debt and corporate issued debt).

Unemployment has fallen and it is below the threshold for the “Sahm Rule”. The Sahm Rule is that if the three-month average US unemployment rate increases by 0.5% or more from its low over the last 12 months, there will likely be a recession.

Retail sales grew by 0.4% in September, up from August's modest 0.1% increase, slightly exceeding the forecasted 0.3% rise. This growth in consumer spending was widespread, with 10 of the 13 retail categories showing gains. Notably, retail sales excluding categories such as auto dealerships, building materials, food services, and gas stations rose by 0.7%, marking the fastest growth rate in three months. This broad-based consumer spending boost is a positive indicator for third-quarter economic growth.

Industrial production dipped by 0.3% in September, following a 0.3% rise in August, with the prior month’s growth revised down from an earlier estimate of 0.8%. The Federal Reserve attributed this decline to the impacts of Hurricanes Francene and Helene, as well as a Boeing aircraft machinist strike, which disrupted manufacturing output.

Jobless claims fell unexpectedly in the second week of October, despite an earlier spike in filings due to Hurricane Helene's impact across Southeastern states. For the week ending October 12, new unemployment benefit applications dropped by 19,000 to 241,000, defying expectations. However, the number of individuals continuing to receive unemployment benefits for more than one week rose by 9,000 to 1.867 million, slightly below the forecasted 1.876 million.

Interest rates:

The next Federal Reserve meeting on interest rates is scheduled for November 6-7.

S&P500 is +0.9% in the week and +23% year to date.

🇬🇧 UK economy

Inflation dips below target! Inflation slowed more than expected in September, with the consumer price index rising 1.7% year-on-year, the lowest rate since April 2021 and below the forecasted 1.9%. A key driver behind this deceleration was a sharp decline in transportation costs, particularly air fares and motor fuel prices. This slowdown in inflation, alongside weaker wage growth, gives the Bank of England (BoE) more room to consider lowering borrowing costs.

Services inflation, closely monitored by the BoE, also dropped to a two-year low of 4.9%, contributing further to the easing price pressures. These developments could influence the BoE's monetary policy decisions as the central bank balances inflation control with supporting economic growth.

A cut next month?

Wage growth has shown signs of easing, a key factor in helping to control inflation. Data from the three months through August indicated that regular pay, excluding bonuses, rose by 4.9% year-over-year, down from 5.1% in the prior period and marking the slowest rate of growth in over two years. This suggests a potential reduction in wage pressure, which has been a key driver of persistently high underlying inflation.

Additionally, there are signs of a softening labor market. Tax records revealed a decline in payroll employment and job openings in July and August, pointing to a potential loosening of labor market conditions as wage growth slows.

Interest rates:

The next Bank of England meeting on interest rates is scheduled for November 7.

FTSE100 is +1.3% this week and +8.1% in the year to date.

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🇯🇵 Japan economy

Inflation as measured by core consumer price index (CPI) eased in September, largely due to the reinstatement of electricity and gas subsidies. Core CPI excludes fresh food but includes oil products, increased by 2.4% year-on-year, down from 2.8% in August.

Exports fell by 1.7% in September, marking the first decline in 10 months. This decrease was primarily driven by weakened demand from China.

Imports grew by 2.1%, a rise attributed partly to the depreciation of the yen, which inflated import values. The combined impact of falling exports and rising imports underscores ongoing challenges in Japan's trade balance.

Nikkei 225 returns to its 1989 high.

Nikkei 225 Index is -1.6% in the week and +16% in the year to date.

See previous spotlight on Japan.

🌐 Artificial Intelligence

This cover has been designed using assets from Freepik.com

OpenAI is to undergo further changes as it restructures its equity. Microsoft could gain significant equity in OpenAI once the latter transitions to a for-profit company, marking a pivotal moment in their partnership. Both companies have hired investment banks to negotiate the terms of Microsoft's stake, which could be substantial given its nearly $14 billion investment in OpenAI.

The deal's complexity extends beyond financials, as Microsoft and OpenAI also need to determine how much equity will go to OpenAI’s CEO Sam Altman and its employees. Additionally, they need to clarify the governance rights Microsoft will hold in the new structure. When OpenAI transitions to a public-benefit corporation, it will maintain a nonprofit element that retains equity in the restructured entity, creating a unique corporate structure.

Open AI’s ChatGPT is the most popular AI tool in the market.

UK announces new data infrastructure investment. Four major U.S. firms, CloudHQ, ServiceNow, CyrusOne, and CoreWeave, announced plans to invest a combined £6.3 billion in the UK's data infrastructure.

CloudHQ is building a £1.9 billion data center in Oxfordshire, while ServiceNow plans a £1.15 billion investment in AI development and workforce expansion. CyrusOne will invest £2.5 billion, and CoreWeave will inject an additional £750 million into the UK market.

These investments, alongside recent commitments from Blackstone and Amazon Web Services, is intended to position the UK as a leading destination for data infrastructure and AI development.

Additionally, the UK government has prioritized data centers by designating them as Critical National Infrastructure, reinforcing the country’s attractiveness for tech investments and supporting next-gen AI technologies.

See previous spotlight on AI chips 

🌐 Crypto Corner

Tracking Bitcoin price (up to October 18):

Bitcoin breaks out with a 9% gain in the week. Mainly due to the upcoming elections and economic news.

Tracking Eth price (up to October 18):

Ether follows Bitcoin with 8% gain.

See the previous spotlight on Bitcoin halving

🏅5️⃣ Billionaire Leaderboard

Mostly driven by stock market performance :

Change in week :

  1. Elon Musk (Tesla, SpaceX) $247bn  ⬆️ $2bn 

  2. Larry Ellison (Oracle)  $211bn ⬇️ $1bn

  3. Jeff Bezos (Amazon) $206bn no change

  4. Mark Zuckerberg  (Facebook/Meta) $199bn ⬇️ $5bn

  5. Bernard Arnault and family (LVMH) $172bn ⬇️ $10bn. LVMH stock was down 2% in the week.

SPOTLIGHTS

Links to earlier spotlights :

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Stay tuned for more insights and updates each week.