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Brian Pietrangelo:
Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to help you understand the mysteries of the markets and investing. Today is Friday, February 23rd, 2024. I'm Brian Pietrangelo, and welcome to the podcast. With me, I would like to introduce our panel of investing experts here to provide their insights on this week's market activity and more. Georgia Mateyo, chief investment officer, Steve Hoedt, head of equities, and Rajeev Sharma, head of fixed income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors each week. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic news, we've got three updates for you in the shortened week due to President's Day on this past Monday. First up, the conference board's measure of leading economic indicators show that there was a decline of 0.4% for January. However, it was the first time in the past two years that six out of 10 or the vast majority of the 10 indicators were providing a positive contribution, so there might be a little bit of turnaround in their overall signal. Second, during the middle of the week, the Federal Reserve came out with their meeting minutes from the FOMC meeting back on January 31st. All indicators were consistent with what they said at the live press conference, but at the end of the day, they're still calling for, again, lesser than more interest rate cuts in 2024. We'll get Rajeev's take on that later on in the podcast.
And finally, the initial weekly unemployment claims came in at 201,000 for the week ending February 17th, which were down 12,000 from the prior week's reading, again, showing that resilience that we've talked about consistently in the overall employment market. Lastly, I think the big news for the week happened to be a bunch of tech earnings, in particular, one company which we'll get Steve's read on early in the podcast. And the basic question comes down to is this an old-fashioned tech rally just like the 1990s or there is something different going on here in that fact that we're in the 2024 era? Steve, what are your thoughts?
Stephen Hoedt:
Well, Brian, it was a heck of a week this week for technology. And you're right that there are some echoes of that internet bubble from 1999 to 2001, but it's also very clear that this is not the same thing. NVIDIA is the key mover this time. NVIDIA is the semiconductor company that is responsible for this whole AI boom. And what they do is they used to, they grew up basically being what's called a GPU producer, which is graphics chips. So, if you think about stuff that when you put your video on your screen, the stuff that makes your video on your computer screen go faster, were originally chips from NVIDIA. And what they did a number of years ago is they changed their business and started to find multiple uses for these high-powered chips. At first, they were powering Bitcoin mining rigs and things like this, but very soon, we saw them branch into this artificial intelligence area, and things have never been the same since.
And this quarter, we saw them now for the fourth quarter in a row, have a material beat and raise. And when you look at it, you've got to look at it and come to the conclusion that NVIDIA at this point, looks like they're going to be the dominant AI architecture/ecosystem in technology as we undergo this major shift toward parallel processing computing. When you take a step back and look at how the technology market has historically evolved, every one of these eras that we go through in technology seems to be dominated by one major vertically-integrated chip/hardware/software company. Think IBM mainframes in the '70s and '80s, Apple in the smartphone market. And now, you look at NVIDIA, and you listen to the commentary that they're saying on their conference call last Wednesday evening regarding the use of these GPUs for AI inference and training.
It really does strongly suggest that NVIDIA is becoming the architecture of choice for this new world that's emerging. And in fact, they're going so far as to talk about this being a new industry that they're creating in front of our eyes. They literally use those words on the conference call. So, no great surprise to see the market react strongly and have this stock be what powered technology stocks higher toward the end of the week and sent the market out on a new all-time high last night. Clearly, we've got some positive tailwinds there. When you think about some of those echoes that I talked about, you can't help but draw comparisons between what's going on with NVIDIA today and what happened with Cisco in the 2000s. Cisco was a great company. They still exist today. They sell boxes that power the backbone of the internet and enable us to be able to have high-speed connections today.
But if you think back to '99 to 2001, that stock still today, trades at about 50% of the price that it was back then. So, you can have great companies that do great things, but they end up not being great stocks because of the price that you have to pay to get in. The stock has gone parabolic, NVIDIA has. One of the lessons I learned back in the day back being the tech stock analyst back then was that you treat parabolas very, very lightly. So, we could see the company grow into the valuation that it's at now. That's exactly what's been happening over the last two or three quarters, but I think that what we need to see is what else? We need to see this broaden out to other stocks because right now, the AI boom really seems to be concentrated in one name, NVIDIA, and it's dragging the market higher, and that isn't all that healthy. We want to see this market rally broaden out to other names as we head into the middle of the year.
George Mateyo:
Steve, I'm just struck by some of the numbers about this company that we call NVIDIA here. The company now is closing on $2 trillion of market cap. That's not any company. That's the size of a country for gosh sakes. $2 trillion is a lot of money. And I think a year ago, it was about a quarter of that size, but you pointed out, rightly so, that the fundamentals have allowed us to feel a little bit better about maybe the move or maybe justify at least the move in stock price, right? The earnings of that company, I was looking up over a year ago, they're up three times in the last year. Profits are up to like eight times. Cisco is a good analogy, and I know there are people that are making that comparison with NVIDIA today of Cisco from 25 years ago.
But I remember that back 25 years ago, there was a lot of over buying, if you will, of some of the boxes you talked about. Every telecom company that was in existence then, even if they could actually afford it or not, they were buying all kinds of Cisco gear, and boxes, and things like that. Do we worry about the same overbuilding with respect to NVIDIA? Are we worried about maybe at some point, an inventory overhang? That would be the death knell for a company like this, I would think, that the cyclicality would catch up to that. Is that a risk at all?
Stephen Hoedt:
So, semiconductors are notoriously cyclical, George, but what it seems like that we're in the midst of here is a secular birth of an industry, for lack of a better way to put it. And right now, we're in the nascent adoption curve of AI. And if you look historically with technology, when you get into one of these adoption curves, the consensus consistently underestimates the amount of growth in the order of magnitude that typically happens on the upside.
And that's what we've been seeing with this consistent beat and raise out of NVIDIA for the last four quarters. And in fact, if you look at the forward earnings multiple that the stock is trading at today, it's actually cheaper today than it was last June because the numbers have been coming in so strong. I do question how many quarters in a row you can string together like this before you end up disappointing, but it's very clear that the idea that this is not the same as what we were looking at Cisco rings true to me. I feel like this is a paradigm that I don't know in the tech space, that we've quite seen anything like it.
George Mateyo:
It's interesting. Maybe shifting gears a little bit, Rajeev, it's interesting to me to see a company, a single company dominate so much airtime and attention amongst the investor community so much that this one company dwarfs, it overshadows what's happening with central banks, right? We were talking about the Fed forever for the last year and a half or so, and now, the Fed was out pretty boldly this week, and there were a couple of people saying some things, and some reports out about prior minutes, and yet, all that got dismissed when this one company took over. But maybe you could catch a up, Rajeev, with what the Fed's thinking, what the Fed's doing these days and how they're thinking about NVIDIA or how they're thinking about inflation perhaps maybe, more importantly?
Rajeev Sharma:
No, it's a great question, George, and it's really interesting to see that as well because the Fed was front and center as we started the year off, and the NVIDIA news that came out really did dwarf a lot of the news that was coming out of central banks, not just the Fed but also the ECB this week. But you'll notice that the dislocation between the equity market and the bond market has gotten even wider now. Bonds have struggled really as we get into deep into February. And what's really happened and why they've been struggling is because the Fed narrative is resonating with bond investors that, hey, maybe we're not going to get rate cuts as soon as we thought we were. Maybe we're not going to get those seven rate cuts this year. Those probabilities and expectations have diminished, and with that diminishing of those probabilities, we've seen rates move higher.
And I think it's very interesting to see how, as Steve mentioned, NVIDIA is dragging along the entire market. The bond market, meanwhile, is languishing right now, and compare it to how we ended the year last year with November and December being so strong, and then, we start this year off with some of those expectations starting to move lower. Now, we did have the release of the FOMC minutes this week from the January FOMC meeting. Those minutes, if you read through them, it really points to most Fed members highlighting the risks of moving too quickly on rate cuts. The messaging was extremely clear in these minutes that it's very important for the Fed to move carefully, assess incoming data, and then, judge whether inflation is really moving down sustainably. And I think that was a key word that I took out of those minutes, sustainably moving down to 2%.
There was not much in the minutes that would support rate cuts coming sooner than expected. And the impact of the market has continued to move higher in rates across the yield curve. There's been a continued decline in market probabilities of early rate cuts. Where we stand right now is all eyes were on March when we started the year off, that maybe we'll get rate cuts in March. The probability of a rate cut in March is now 5%, so it's pretty much off the table. Even May and June, rate cut probabilities have come down quite a bit. And right now, the market is really now pointing towards rate cuts in June or July.
With how we started the year, and we had all these Fed narrative, we had the Fed coming out and talking about exactly what the expectations of the market should be that we're in no rush to cut rates. We had that to start the year off. Then, we had the hot CPI print that came out where it showed that inflation actually moved higher than expectations. And then, we moved down our rate cut expectations from the market. So, when I mentioned we started the year off with seven rate cuts as a probability for the market, we're now down to about three or four rate cuts this year. And this is completely in line with the Fed narrative. So, it's quite a move from where we started the year off. Now, the Fed has little reason to cut rates sooner rather than later. They have time. They take cover in the data. I think this is a market where we're going to be looking at data. The Fed's going to be looking at data. They're going to be really looking at that inflation reports that come out to see that disinflation is actually a trend that's sustainable.
We also have Fed speak this week, which got dwarfed in the news as well. We had Fed Governor Waller last night come out with a speech, and the speech was titled, What's the Rush? He basically concluded the speech with the conclusion that recent data on inflation means that the Fed should be patient, careful, methodical and deliberative. So, if you look at those words, none of them are pointing towards early rate cuts. There's really pointing towards a Fed that's ready to wait and see and keep rates higher rather than lower for now. Nobody in the Fed or the market really was looking for a policy mistake to happen here. So, there is no rush by the Fed right now.
Other Fed members that came out this week, Phil Jefferson came out, he talked about rate cuts are coming this year, but later this year. So, every single member that we're hearing from is really sticking to the narrative that we can take time and we can be patient. The market right now, is anticipating 80 basis points of rate cuts for 2024, and that's not too far from where the Fed was talking about with their summary economic projections of 75 basis points of rate cuts in 2024. So, things are aligning right now, and we continue to look at data to see if that continues.
George Mateyo:
Hey, Rajeev, a quick question for you. We've been arguing, I think for much of this year, that any talk around, I think at the beginning of the year there were seven or so cuts that were getting priced in, and we thought that was too many too soon. And now that the market is coming back to where the Fed is and maybe where we were as well, do you think that there's a chance the Fed might actually take a rate cut away from us? They're going to come up with their projections, what, in about a month or so or update their projections, I should say, in a month or so? Do you think there's a chance that they might actually walk one of those cuts back?
Rajeev Sharma:
That would be a very interesting move by the Fed. I think right now, the Feds probably, all the narrative you're seeing is that they're still pointing to those three rate cuts. Many Fed members have talked about 75 basis points as being the magical number there as rate cuts for this year. If they did take one off, and I would say that it would have to happen if we had another inflation print that was hotter than expected, then you could see that happen. And I think the market reaction, that'd be very swift. I think we'd see rates move higher.
Right now, if you look at the 10-year treasury note, the resistance point was a 4.3% on the 10-year yield. We passed through that yesterday. It got to 4.32. We did not see buyers step in. The point that you're making, George, that maybe the summary of economic projections that we see next month, that it's not a given that it's going to be three rate cuts or four rate cuts. It may stay status quo at three, but if they do turn that down to two, I think the market is not ready to jump in where we are right now with rates. So, we're going to have to keep an eye on that.
Brian Pietrangelo:
So, George, let's finish with you in terms of how this information regarding the Fed and the market rally really converts into our thoughts on portfolio positioning.
George Mateyo:
Yeah, sure, Brian. I think it does suggest that our overall neutral stance is appropriate, although some could probably point at the fact that if we just listened to Steve and bought one stock, we'd probably be better off. But I think that loses maybe the idea, anyway, that you want to be diversified. So, it's great to have one company like NVIDIA doing so well, but I think at some point, we don't know when there could be a tipping point, and there is a volatility component with that too that you have to be mindful as well. Our approach to staying diversified, I think makes a lot of sense in this market. I agree with Steve that I think it would be nice to see the market broaden out a bit further. That's been our thesis for quite some time. That hasn't happened so much this year. The market's still somewhat narrow. But we are seeing pockets of that on certain days and I think that's going to be the case as well.
And then, I think quality is going to be the enduring theme of ours as well, both with respect to how we manage portfolios with the exposure to equities, and also, exposure towards fixed income. Quality is one thing that actually has done quite well this year. And I think that's going to be continued. That'll be a continued theme of ours going forward also. I think it's the idea of maintaining a diversified approach, maintaining emphasis towards quality, and the overall backdrop I think is pretty favorable for now. You mentioned jobless claims are low. We saw actually corporate bond spreads narrow a bit further this week. Home prices actually are on the rise again, and inflation's cooling, so the backdrop is pretty supportive for general risk appetite, but I think you just want to be diversified and really embrace this theme that you talked about, which is human ingenuity. So, we'd stay along innovation as well.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Steve, and Rajeev, we appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So, reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success.
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