Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

March 21, 2024

Woodstock of AI

A Massive event kicked off at the SAP Center, the home of the National Hockey League’s San Jose Sharks, on Monday. It is the annual GPU Technology Conference (GTC), hosted by Nvidia. The show ends today. What has made this year’s GTC the most hyped technology event of the year is Nvidia’s CEO, Jensen Huang, gave the the keynote address. Additional enormous interest was created by the promise that Huang would also reveal more about the future of Nvidia’s AI technology. An estimated 11,000 paid attendees packed the arena. Aware that he has taken on the image of a crowd thrilling rockstar, Huang opened by saying, “I hope you realize this is not a concert”. He then reminded the audience that they were there for a tech-heavy presentation/developers conference. Click here to listen.

The event, officially known as GTC, short for GPU Technology Conference. The name is a reference to Nvidia’s graphics-processing unit chips that have become the computational workhorses of the generative AI boom, doing the complex math needed to fuel language bots like OpenAI’s ChatGPT. As noted, AI is what made this year’s conference a must-attend-event. It gave tech industry luminaries, developers, researchers, and business strategists an opportunity to connect with peers and industry experts to explore the latest technologies that are transforming every industry, from accelerated computing to generative AI and beyond. With AI at the heart of the event, this year’s GTC offered over 900 inspiring sessions, more than 300 exhibits, and over 20 technical workshops covering generative AI. Add to that the huge attendance and you get the Woodstock AI.

Though with less fanfare, but no less insightful, today Microsoft hosts its Surface and Windows AI event. This is a digital only event. Microsoft’s webpage invites all to, “Tune in here for the latest in scaling AI in your environment with Copilot, Windows, and Surface.” While not dubbed anything creative like “Woodstock AI”, this event will be splashy. It is expected that Microsoft will launch its first laptops in the era of the AI PC. The laptops will be marketed as AI PCs because they feature hardware to better support new generative AI tools and features. What chips will power these new, advanced machines? Will it be Nvidia’s? Intel’s? The run to win the AI race is on! Such a great time to be an investor.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“I came through and I shall return.”

~~ General Douglas MacArthur, 1942

What Happened On This Day March 21, 1980 – US boycott of Moscow Olympics announced by President Jimmy Carter.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Market in Confirmed Uptrend. Since November 1 the market has been in a confirmed uptrend. The market’s technical’s and fundamental’s remain solid and support the market’s extended Confirmed Uptrend. The market is now up 13 out of the last 15 weeks.

Here are key market levels as of Monday, March 18:

Recapping Last Week

U.S. equities ended the week lower as investors contemplated the ramifications of February’s higher-than-expected inflation reports. The S&P500 index fell marginally, while the Nasdaq Composite lost 0.7% and the Russell 2000 slid more than 2%. Only four of 11 S&P500 sectors were positive, but strong gains in energy and basic materials highlighted the inflationary environment. Crude oil prices jumped 4% as supply projections tightened, while copper futures surged nearly 6% after Chinese producers agreed to cut production. Bitcoin pulled back slightly into the weekend after reaching another record high near $73,800. U.S. Treasury yields were sharply higher following the CPI and PPI reports, with the 10-year note settling near this year’s highs at 4.3%. Consumer prices increased 0.4% month-over-month (MoM) and 3.2% year-over-year (YoY) in February, largely due to higher energy costs. Wholesale inflation jumped 0.6% MoM as goods prices saw the biggest increase since August 2023, while gasoline jumped 6.8%. The probability of a rate cut in June sank to around 55%, down from more than 80% one month ago, according to fed funds futures. Next week the Federal Reserve will provide updated projections on interest rates, and while major changes are not expected, it’s possible the inflation news will lead to a more hawkish statement. In other economic news, U.S. retail sales rebounded in February but came in below estimates, suggesting that early 2024 consumer spending growth continues slowing. Consumer sentiment held steady in early March while inflation expectations were unchanged. U.S. industrial production rose 0.1% in February, recovering from the prior month’s weather-related weakness. However, manufacturing activity in New York state slumped as new orders plunged, according to the March survey.

Internationally, some of Japan’s largest companies agreed to the biggest pay increases for factory workers in 25 years, setting the stage for the Bank of Japan to potentially end its policy of negative interest rates as soon as next week. Japanese producer prices grew more than expected in February, furthering expectations for a rate hike. In China, authorities warned that struggling real estate developers won’t be receiving bailouts from the government. Jobs data in the UK revealed a moderate growth trend, with unemployment at the lowest level since the mid-1970s. Slowing wage growth and improving GDP have fueled speculation that the Bank of England could cut rates sooner than expected. Finally, European industrial production fell sharply in January, distorted by figures from Ireland but nonetheless indicative of a continued Eurozone manufacturing slump.

Current View

So far, stocks have continued to rally this morning with major indexes all posting gains on the stock market today. Enthusiasm apparently has spilled over from the final day of the Federal Reserve meeting and Fed Chair Jerome Powell’s comments yesterday. Now the market will watch for moves from Microsoft as it hosts its artificial intelligence event today. As noted above, this event follows Nvidia’s GTC that ends with a going away gala later today.

As expected, the Fed left their key interest rate unchanged and Chief Powell indicated three quarter-point rate cuts in 2024. However, he didn’t give details on when they would start. The odds according to the CME FedWatch survey currently sits at 63.5% for a quarter-point cut at the June 12 meeting. With the current federal funds rate at current 5.25%-5.5%, three cuts would drop the current federal funds rate of 5.25%-5.5% to between 4.5% and 4.75% at the end of 2024. The Fed remains steadfast in getting to the 2% inflation level, but says it will take time. Be watchful today as financial markets often have a second-day reaction to Fed meetings that can cause the stock market to reverse course.

Today the major U.S stock indexes are looking to celebrate an anniversary. With the Covid-19 Pandemic in the rearview mirror, the indexes have come a long way. This Saturday, March 23, marks the four-year anniversary of the pandemic low for the major indexes. The Dow has climbed 113% since the March 23, 2020 low, while the S&P 500 surged 134%. The Nasdaq rallied 139% over the same time frame, according to Dow Jones Market Data.

A common question lately is, “How serious is the Fed about its 2% target?” The Summary of Economic Projections (SEP) suggests that the Fed is willing to risk cutting rates before inflation is close to target and while GDP growth is above-trend. The SEP also showed headline PCE inflation steady vs. the December projections at 2.4%. But the Fed also boosted its economic growth forecast in 2024 to 2.1% from 1.4%, and the unemployment rate hitting 4.0%, not 4.1%. So, the stock market may be rising in anticipation of a decent economy and moderate inflation, the so-called “Goldilocks scenario.” So, 3 could be the magic number for both the Federal Reserve and the stock market, with respect to interest rate cuts. As of yesterday, the CME FedWatch survey settled on a 76.6% probability that the Fed will cut the fed funds rate by a minimum 25 basis points at the upcoming June 12 meeting. Currently, the Fed is holding this rate within a range of 5.25% to 5.5%, the highest level in more than two decades. Just a day earlier, the chances of this happening stood at just 59.1%. However, for perspective, a month ago this figure stood near 78%.

• Industry Group Strength:  BULLISH. As of yesterday, 136 out the 197 groups I monitor are up year-to-date. 61 are down.
• New Highs vs. New Lows: BULLISH.  In yesterday’s session, there were 448 new 52-week highs and 71 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.98%. The 10-year Treasury now 4.28%.
• Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is now 13. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BEARISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 76, the Fear & Greed Index is still near 77 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 60.3%. This is up from 54.3% a month ago. The bear sentiment is now 14.7%, down from 17.1% a month ago. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.  Note how close market sentiment is near the 5-year bullish high and near the 5-year bearish low…

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.45.  The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

U.S. LEI Rises: The leading indicators for the economy rose in February for the first time in two years in another sign the U.S. is likely to keep growing and avoid a recession. The index of leading economic indicators crept up 0.1% last month, the Conference Board said Thursday. It’s the first increase since February 2022. The leading index is a gauge designed to show whether the economy is getting better or worse. Economists polled by the Wall Street Journal had forecast a 0.1% decline in February. he economy is expanding at an above-average speed despite sharply higher interest rates and there’s little sign of a pending recession.

Philly Fed’s Factory Gauge in Expansion Territory: The Philadelphia Fed said Thursday its gauge of regional business activity stayed in expansion territory in March, slipping only slightly to 3.2 from 5.2 in the prior month. Any reading above zero indicates improving conditions. This is the first time the index saw two months of expansion since April and May 2022. Economists are getting a sense that manufacturing momentum is increasing, but the road is expected to remain bumpy.

Initial Jobless Claims Fall Slightly: The number of Americans who applied for unemployment benefits last week fell slightly to 210,000 and continued to show a surprisingly low level of layoffs in the economy. New jobless claims have ranged from 194,000 to 225,000 per week in the first three and a half months of 2024, which is extremely low from a historical perspective. The U.S. labor market shows little sign of stress despite sharply higher interest rates.

Home Builder Confidence Soars: Builder confidence rose for the fourth month in row in March, as buyer demand remained strong. A low level of resale home listings and expectations of a drop in mortgage rates in the back half of this year are expected to boost demand further for newly built homes, builders indicated. The U.S. housing market is heating up for the spring home-buying season, and builders are poised to be the biggest winners.

Industrial Production Inches Higher: Industrial production rose 0.1% in February, the Federal Reserve reported last Friday. Production has been weak for the third straight month. Economists were hoping for a rate cut from the Federal Reserve to boost business investment.

U.S. Retail Rises: U.S. retail sales rose a seasonally adjusted 0.6% in February compared with a month earlier, the Commerce Department said last Thursday. The monthly report on how consumers are spending or pulling back is viewed as a harbinger for the state of the U.S. economy. Americans are close to spending down their pandemic-buffered savings and are feeling stretched by inflation, which has impacted the prices of everyday essentials from groceries to rent. February spending shows the consumer is still robust but not as strong as economists were hoping.

PPI Spikes: The biggest increase in wholesale costs since last summer is the latest in a string of readings that suggest inflation might not slow quickly toward the Federal Reserve’s 2% goal. The producer-price index jumped 0.6% in February, the government said last Thursday. The increase matched the largest gain since last August. The gauge measures what businesses pay other businesses for their supplies. Inflation tends to bubble up at the wholesale level before spilling over to consumers. If energy, food and trade margins are omitted, the so-called core rate of wholesale inflation rose a still-sharp 0.4%. The uptick in wholesale and consumer prices in February shows that the battle to bring down inflation is far from over.

U.S. Deficit Continues to Swell: The U.S. federal budget deficit widened to $296 billion in January, up from $262 billion in the same month last year, the Treasury Department said last Tuesday. For the first five months of the fiscal year, the deficit widened to $828 billion, up from $723 billion over the same period last year. Outlays increased for defense spending and to refill the Strategic Petroleum Reserve, according to the Congressional Budget Office. In the short-term, the Congressional Budget Office projected a roughly $1.5 trillion deficit this fiscal year that ends on Sept. 30, down from the $1.7 trillion deficit last year. Over the longer run, economists are growing concerned about the size of the deficit. Next year, the $2 billion in tax cuts backed by President Donald Trump in 2017 are set to expire. Whether to renew those cuts will be a main focus of political debate.

CPI Creeps Up Again: Consumer prices matched the biggest increase in February in five months, leaving the yearly rate of inflation above 3% a week before the Federal Reserve meets again to consider when to cut interest rates. The rate of increase in the last 12 months in the CPI, the nation’s most best-known price gauge, edged up to 3.2% from 3.1%. Senior Fed officials have said they want more convincing proof inflation is slowing toward their 2% annual target before they start to cut interest rates. The February report didn’t provide it.

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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