Forward Note: 2024/06/09
How tall can grow these trees?
Last week was odd; this week was decisive. Spurred by another rally in the semiconductor sector, the main US indices reached new all-time highs as NVDA surpassed Apple to become a $3 trillion stock.
Although we failed to keep the highs on Friday after the NFP, the SP500 closed up 1.25%, while the Nasdaq was up 2.7%. The VIX, after hovering in the highest percentiles of the past six months, is now decisively back in the 12 handles.
As all eyes turn to the end of Q2 and the beginning of summer, it becomes more apparent that investors have dodged all the potential hiccups and traps we were supposed to see in the "Spring of All Dangers."
Nothing substantial caught investors' attention long enough to start the promised prolonged drawdown in stocks, and it is getting hard to believe that we won’t finish Q2 at another all-time high or close to it, allowing market participants a pre-victory lap at the halfway point of the year. If you are a vol seller, remember that in these super-low volatility regimes, the pain in US equities is on the upside, and risk reversals (where you sell puts and buy calls) are more than ever your friends.
There are still a few weeks to go in the quarter, starting with another FOMC meeting on Wednesday, only preceded by inflation data. This could be a wild one. However, hold on to your excitement: it is also commonly accepted that the rates will stay unchanged for at least three months, particularly after Friday’s job report.
Despite the global unemployment rate of 4.0%, the US economy added another 275k jobs in May, well above analysts’ expectations. Combined with the core inflation data from last week, it is becoming evident that the economic situation in the leading economy has stabilized and reached a status quo where unemployment is low, and inflation is lower despite still being above the Fed's 2% target.
Even if the GDP shows signs of deceleration, it is a resounding success for the Fed, whose dual mandate of maximal employment and low inflation is reached. They even managed to keep the rate higher for a little longer and maintain the optionality of a rate cut when a real slowdown materializes.
Of course, this has to be tempered by two elements. The first is that the unwinding of the balance sheet has decreased, as announced by the Chairman in the last meeting in early May. This is yet another propeller for stocks, and the most cynical will speak of a new disguised form of QE. That can’t be true, considering the Fed is still buying back about $40 billion in monthly bonds and mechanically removing market liquidity. The second technical point, though, is quite substantial—the fiscal policies are particularly accommodative, creating a positive tailwind for companies in the US.
While the IMF warned Western economies about managing their debt better, it is hard to imagine that something important will happen four months away from the election of 2024. What will happen after that? Will we continue this lenient approach towards government printing money indefinitely as if there were no tomorrow, or will investors become more cautious? Add to that a bit of geopolitical tension, and you have a solid contender for a blockbuster in 2025: suppose China keeps selling more US bonds as retaliation against American hegemony; that would certainly make waves everywhere.
But this is so far in time and so hypothetical that it’s pointless, at least for traders: trade the regime you are in; you’ll be busy enough with whatever tomorrow brings to be concerned about what the future may look like.
And for once, we will allow ourselves a strong personal view: in an interconnected world where every interest is linked, who really has much to gain by seeing a catastrophe unfold? Have we all forgotten how a container blocking the Suez Canal disrupted supply worldwide chains for an extra few months? We don’t believe (yet) that in the heat of the moment, someone will knowingly press the red button and create an ocean of red candles on the charts of millions of traders across the globe. Like most crises in modern economic times, it is much more likely that the next crisis is brewing right now, just before our eyes, and we have no idea what it is.
In hindsight, it will be obvious, and everyone will shake their heads, thinking, “How could these peeps be so dumb back in the day? And remember that Sharpe Two lad who thought stuff would go up indefinitely? What a clown.”
In the meantime, ignorance is bliss, so let’s raise our glasses to an uneventful summer and another record year at the end of 2024.
In Other News
What will it take for the regulators and the exchange to delist GME? It is becoming harder and harder to justify how the stock can still be around after what has happened this week. We’ve learned that the Roaring Kitty hands may be much bigger than we thought, and the company lost 40% on Friday after some “disappointing” earnings. We struggle to see how being freely quoted helps GME investors get a fair evaluation of the company and how it helps the company access liquid markets and maintain its objective of stable growth and development over the years. Isn’t that what the stock market is supposed to be? First, a place for economic purposes before being a casino for degenerates (retail AND hedge fund managers) across the globe? It was fascinating in 2021; it is becoming tragic to watch—time for someone to end that nonsense. SEC, the world is watching (and laughing at you right now).
Thank you for staying with us until the end. As usual, here are a couple of interesting reads from last week:
What does it take for a company to get delisted? Mostly not being compliant anymore with the exchange rules. A rule the NYSE considers is to delist a company that changes its primary business purpose automatically.
This week saw multiple election results globally—India, Mexico, and South Africa. For a complete rundown, you can read the piece from
and get a feel for the market reactions in these markets.
That is it for us this week. We wish you a fantastic week ahead and a happy FOMC day.
Ksander
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Clean rundown!