The Week in the Markets
This hasn’t been the best week for the main indices, which, after the boost from Trump’s election victory, are nearly back to square one. In fact, the first three days were positive (including a CPI figure in line with expectations, which didn’t prompt a market reaction), but Powell’s Thursday speech significantly tempered sentiment with the message that “the economy is not sending any signals that we need to be in a hurry to lower rates.”
The hardest hit were the small caps, which are the most sensitive to shifts in sentiment regarding interest rates, as we’ve seen over the past two years. However, the Nasdaq dropped more than 3%, with declines across all the Mag7 stocks (including Tesla, which ended the week flat but at one point had fallen 15% from its peak earlier in the week. This drop was first triggered by the news that Musk would join the government’s efficiency department, and then by the end of the $7,500 subsidies for electric vehicle purchases).
By sector, the major gainers were financials, benefiting from the idea of “higher rates for longer,” and energy shares, which continued to gain from hopes of deregulation and merger approvals. On the flip side, the healthcare sector was heavily impacted by the nomination of Kennedy to head the Health Department, given his critical stance on the pharmaceutical industry (and his upcoming oversight of Medicare, Medicaid, and other programs that account for 25% of government spending).
The highlight of the week has been Bitcoin, which, at the time of writing, is up 20% and is on track to once again be the best-performing major asset in the market this year. Also noteworthy is the continued strength of the dollar, which has pushed the euro down to 1.05 and wreaked havoc on emerging market currencies. Similarly, European TTF gas prices are hitting new yearly highs amid renewed fears of Russian supply cuts.
Finally, the U.S. 10-year yield has risen sharply, nearing 4.5%, following the CPI data (with areas like shelter and rent not moderating as much as expected) and Powell’s aforementioned comments (image below). Meanwhile, the VIX rebounded from its dramatic drop earlier in the week (from 23 to 14).
Highlights of the week
CPI
The October CPI data came in largely as expected, with a monthly increase of 0.2% and an annual rate of 2.58%, marking the first increase in seven months due to base effects from 2023. Core inflation (excluding food and energy) rose 0.3% MoM, with an annual rate of 3.3%, also in line with expectations. Housing contributed significantly, accounting for over 65% of the annual increase in core inflation. Other notable monthly increases included used cars (2.7%), airfares (3.2%), and healthcare (0.3%).
The key issue remains elevated services inflation (excluding housing), which rose 0.3% in October but remains at 4.6% YoY. While falling goods prices and energy deflation are aiding the broader inflation trend toward the target, a resurgence in these areas could reverse progress.
Retail Sales
U.S. retail sales rose 0.4% in October 2024, beating market expectations of 0.3%, following an upwardly revised 0.8% increase in September. Notable gains came from electronics stores (+2.3%), auto dealers (+1.9%), and food services (+0.7%), while declines were seen in miscellaneous retailers (-1.6%), furniture stores (-1.3%), and sporting goods (-1.1%).
Core retail sales (excluding autos and gasoline) rose only 0.1%, below expectations of 0.3%.
Interest rates
Despite Powell’s remarks, the market is pricing in a rate cut at the final meeting of the year. What has changed significantly in recent weeks, and even more so recently, are expectations for rates at the end of 2025, with only two additional rate cuts now anticipated for the entirety of 2025.
Bitcoin ETF Inflows
Bitcoin shattered its previous all-time highs this week, nearing $94,000. As observed, ETF inflows have played a significant role in this surge, and we genuinely expect the trend to continue. It was one of our major bets for the year, and it is meeting expectations.
Some interesting Data about markets this week & YTD
Earning Season
Several companies in our coverage universe are reporting this week, including Solaria – which we have been actively discussing for the past 10 days – Tamburí Investment Partners (updated thesis three weeks ago), Jack in the Box, and Renold.
However, the most significant event of the week, and the entire earnings season, comes this Wednesday after the market close with NVIDIA’s results, which, as has been the case for almost a decade of quarters, will, in our opinion, determine the market’s short-term trajectory. Attached is a chart showing the performance of the so-called “Magnificent 7” YTD, where it is clear that there is one true Magnificent holding up the markets this year, along with two supporting players.
