February’s overarching market message: There’s a new sheriff in town, and his name is not Reggie Hammond or Jerome Powell – it is Nvidia. “New” may be arguable to some, after all, NVDA was one of the Magnificent 7 that accounted for all the equity market gains over the first 10 months of last year. So far this year, however, it is the More Magnificent One – and that is new. See chart 2 and note that 3 of the 7 Mags are down so far this year, 3 others offset those losses, and what’s left is Nvidia (META is no slouch, but NVDA is almost twice META’s market cap – twice the influence).
What might history say about NVDA’s record-breaking reporting day in February? The explosive rally to new all-time highs that day in the S&P 500 (SPX) and NASDAQ Comp (NDX) represented behavior that we have not seen for a long time. Not since the peak of the dot-com bubble. One of the most notable features of the stock market rally since the start of last year has been the relative narrowness of the participation. It is no secret that the top end of the market is driving most of the index-level gains. We’ve been comparing the equal weighted to cap weighted S&P’s since Q2 of last year. And yet, it has been a remarkably persistent trend. Another reason NVDA day (the trading day after they reported) compares favorably to the dot-com era: Since the inception of the S&P 500 equal weighted index, it has gained over 1% on a day when the cap-weighted gained twice that only 14 times. The most recent was NVDA day. 10 of the other 13 observations came in 1999 or 2000. Yet another interesting feature of NVDA day; it was the first time that the SPX had rallied at least 2% to close at an all-time high since March of 2000. The same is true for NDX using a 3% rally criterion. I believe the better takeaway than the “Oh, this happened in 1929 and again in 2000 – it’s all over!” fear mongering, is that these volatility extremes tend to cluster. They are not one and done’s, at least not historically. It would be abnormal for the market to roll over just when one of these explosive highs is registered. Even if we are reliving the 1999-2000 top, history suggests that we are much closer to the beginning of that topping process, than the end.
What does the past two months of market behavior do to my concerns for a recession beginning in the second half of this year accompanied by lower market yields? At a minimum, it pushes all that out on a timeline to early 2025, if at all. Over at NDR (Ned Davis Research), their macroeconomic team sees no recession this year. They freely admit that short to intermediate (weeks/months) term sentiment and longer-term valuations are consistent with modest consolidations (pullbacks), but that none of their longer-term cyclical/macro sentiment indicators are showing signs consistent with a major market peak. At BCA Research (the old Bank Credit Analyst out of Montreal), perhaps the least bullish on 2024 of the independent research firms 2 months ago, they still believe the recession can be delayed but not denied (translation: not this year, maybe next).
If a recession does materialize in 2025, markets won’t begin to discount it until the second half of this year anyway. So for now, at least, it is onward and upward, with perhaps the usual modest pullbacks along the way.
Be well,
Mike
Sources: Addepar, BCA Research, Bloomberg, Dorsey Wright & Associates, Ned Davis Research
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