Macrosynthesis
TLDR
- Inflation cools; Fed likely to cut rates .25 percent this week
- Nvidia CEO's bullishness causes tech rally
- The S&P 500 is extremely overvalued, according to one key indicator
- U.S. government shutdown looms a possibility over budget battle
- Another possible pandemic? Bird flu takes flight in humans
- The Trump trade gets trumped
- Adobe falls, Oracle shines
- What happens when a stock gets removed from the S&P 500?
Inflation Cools But Proves Persistent. Fed Likely to Cut .25 Percent This Week
August’s consumer price index showed that inflation is cooling off, but the relentless climb in housing prices might keep the Federal Reserve from slashing interest rates more aggressively next week. Now, traders are betting on a smaller quarter-point rate cut over a more significant half-point cut. The CPI increased 2.5% compared to last year, slowing down from July’s pace and marking the slowest increase since early 2021. However, core inflation—which leaves out the more unpredictable food and energy costs—increased by 0.3% from July, slightly more than expected.
Nvidia CEO Sparks a Tech Rally
Nvidia sparked a tech-stock rally after CEO Jensen Huang highlighted “incredible” demand for the company’s chips during a Goldman Sachs event on Wednesday. While such optimism isn’t new, investors seemed particularly energized by his assertion that every dollar spent on Nvidia infrastructure could generate $5 in cloud-computing revenue, reaffirming confidence in the AI trend.
Recent Rally Places Market at Extreme Risk of Being Overvalued
The Shiller PE ratio has been historically associated with predicting overvalued markets that may lead to future corrections or crashes. The Shiller PE - shown in the graph above - reached extremely high levels (above 44 in the year 2000), well above its long-term average of around 16-17. This suggested that the market was highly overvalued. The high ratio was a signal of the impending dot-com bubble burst, which resulted in a major stock market crash from 2000 to 2002. Before the 2008 financial crisis, the Shiller PE ratio rose to levels above 27, indicating significant overvaluation compared to historical norms. This preceded the severe market decline of 2008-2009, when the S&P 500 lost about 50% of its value. In recent years, particularly leading up to 2020, the Shiller PE ratio again reached elevated levels above 30. While not immediately predictive of the COVID-19 crash, it did signal that markets were trading at relatively high valuations, making them more susceptible to sharp downturns when unexpected shocks (like the pandemic) occurred.
The Shiller PE ratio is not a precise timing tool. High valuations can persist for extended periods before a correction happens, so it is more of a warning signal than an immediate predictor. Structural changes in the economy (such as the dominance of tech stocks) can affect its accuracy. Still, looking at a 10-year historical view, it's clear the market's valuation is above or approaching previous highs that preceded market corrections. Is this why Warren Buffet just went to 30% cash? Probably. And it's advisable to do the same while the market is still in a bull run.
Government Shutdown? Congress Deadlocked Over Government Funding Bill
House Speaker Mike Johnson canceled a vote on a temporary government funding bill after facing pushback from Republicans. The bill aimed to extend funding through March 28, preventing a government shutdown, but was criticized for not including spending cuts and for a proposal requiring proof of U.S. citizenship to vote, which Democrats argue is unnecessary. Former President Trump urged Republicans to reject the bill without stronger "election security" measures. With Republicans holding a slim majority and internal disagreements brewing, Johnson is working on building support. Meanwhile, the bill is unlikely to pass the Democrat-led Senate, where leaders are calling for a bipartisan solution that avoids controversial measures.
Another Pandemic? Bird Flu Morphs to Infect 13 Humans
A newly confirmed human bird flu case in Missouri highlights a potential rising threat to humans amidst an outbreak that has infected 13 workers and dairy cattle across 14 U.S. states. Bird flu, or avian influenza, primarily impacts birds but can occasionally jump to humans, especially through exposure to the virus via the eyes, nose, mouth, or inhalation. The H5 strain, which is widespread among wild birds, has recently caused outbreaks in poultry and dairy cows, leading to 14 reported human cases in the U.S., particularly among workers. To combat this, Moderna is developing a bird flu vaccine using mRNA technology, similar to its COVID-19 shots, with $176 million in funding from the U.S. government. Moderna is also running a phase 1/2 trial to test the safety of this investigational vaccine, which targets H5 and H7 avian flu strains. GSK has an approved H5N1 vaccine based on dead strains already. The US Department of Health and Human Services also said the agency was also negotiating with Pfizer (PFE) for an mRNA vaccine against H5N1, according to Reuters.
How Deadly is Bird Flu to Humans? What is Bird Flu?
Bird flu, also known as avian influenza, is a contagious disease that primarily affects birds, but can also rarely affect humans. Symptoms in humans include fever, muscle aches, sore throat, shortness of breath, runny nose, headache, pneumonia, encephalitis, and diarrhea. Symptoms can appear between 1 and 10 days after exposure. The virus can infect the lungs, trachea, brain, and intestines, and may also spread to other organs. Mortality rates depend on the strain, with some strains having a 27% death rate among people sick enough to seek medical help, though this excludes those with minimal symptoms.
Tech Stocks Outperform Other Sectors Last Week
The S&P 500 sectors saw varied performance, with Information Technology leading the gains at 7.3%, despite Apple losing a 13B euro tax battle. Consumer Discretionary stocks rose 6.1%. Telecom and Industrials also performed strongly, rising by 4.3% and 3.7%, respectively. Real Estate and Utilities both gained 3.4%, while Materials were up by 3.2%. Consumer Staples, Healthcare, and Financials saw more modest increases of 1.1%, 1.4%, and 0.5%, respectively. Energy was the only sector to decline, down by 0.7%.
Stock Reactions to Harris-Trump Debate Show Perceptions of Who Won
Reactions to the Trump-Harris debate were mixed and polarized along political lines. Supporters of Donald Trump praised his aggressive style and direct attacks, viewing them as influential in energizing his base and challenging Kamala Harris. On the other hand, Harris’s supporters commended her composure and passion for hot issues like abortion, seeing her performance demonstrated leadership and poise. Critics of both candidates, however, felt the debate lacked substantive policy discussions and was marked by one-sided fact-checking and heated exchanges, leading to concerns about the quality of the moderators. After the debate, in a nod to a likely Harris victory, solar stocks skyrocketed in price while the "Trump trade" sold off, with DJT, GEO, and oil drillers stocks decreasing rapidly in value.
The Week Ahead
In the U.S., attention will center on the Federal Reserve's interest rate decision and the FOMC's economic projections, alongside data on retail sales, industrial production, housing, and existing home sales. In the U.K., key updates include inflation, the Bank of England's rate decision, retail sales, and consumer confidence. Meanwhile, the Bank of Japan will announce its monetary policy decision after releasing inflation data.
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Crude Oil
+2.28% (1W Chg)
-10.89% (1M Chg)
Silver
+2.65% (1D Chg)
+10% (1W Chg)
Gold
+3.77% (1W Chg)
+35.10% (YoY Chg)
Cocoa
+8.31% (1W Chg)
-13.27% (1M Chg)
Company News
LevelFields AI Alert Highlights This Week
NKGen Biotech, Inc. (NKGN), due to developments related to Alzheimer's trials, experienced a price jump of +13.96%. Calavo Growers, Inc. (CVGW) saw an increase of +10.92% following a dividend increase. InMode Ltd. (INMD) also had a stock buyback, resulting in a +8.83% increase. Espey Mfg. & Electronics Corp. (ESP), with its dividend increase, rose by +7.09%, while Redwood Trust, Inc. (RWT) saw a price gain of +5.00% following its dividend increase. Finally, Teekay Corporation (TK) experienced a +4.94% increase after a stock buyback.
Boeing Strike, Nvidia's Bullish, Buffet Sells More and Other Assorted Events
Boeing (BA) faced labor unrest as workers pushed back against contract terms in a strike. Norfolk Southern (NSC) dismissed its CEO following revelations of a relationship with the company’s legal chief. Nvidia's (NVDA) CEO is optimistic about a $1 trillion opportunity in accelerated computing. Meanwhile, Berkshire Hathaway (BRK.B) continues to reduce its holdings in Bank of America (BAC). BurgerFi International (BFI) has filed for Chapter 11 bankruptcy protection, in a hat tip to Shake Shack's dominance.
Adobe Dissapoints on A.I Tool Growth
Adobe shares dropped the most in six months after issuing a weaker-than-expected sales outlook, disappointing investors eager for its AI tools to generate revenue. While Adobe reported an 11% revenue increase in Q3, its fiscal Q4 sales guidance fell short of Wall Street estimates. Investors are concerned about the slower-than-anticipated monetization of AI innovations like Firefly, despite strong performance in Adobe's document-processing software. The stock has declined about 11% this year.
Oracle Sees Fortune in the Future, Raises Guidance
Oracle shares surged after the company raised its fiscal 2026 revenue forecast to at least $66 billion, exceeding analysts' estimates of $64.5 billion. The company also projects over $104 billion in revenue by fiscal 2029, with 20% annual growth in earnings per share. Oracle's cloud infrastructure revenue grew 45% last quarter, outperforming competitors like Amazon and Google. The company plans to double capital expenditures in fiscal 2025 as it expands its cloud and AI services, with a focus on migrating on-premise database customers to the cloud.
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DISH Fell -12% When Booted from S&P 500
Shares of satellite TV operator, Dish Networks, was removed from the S&P 500 in June last year. Within two weeks of the announcement, the stock was down -12% and continued to fall for months that followed.
Why Do Stocks Fall When Removed from the S&P 500?
The S&P 500 is an index of 500 stocks created by S&P Global Intelligence (SPGI). ETFs that seek to mimic the performance of the S&P 500, such as SPY and VOO, buy and sell equities to keep their composition the same as the S&P 500 index. This allows us to buy the ETFs that effectively track the benchmark. When a stock gets added to the S&P 500 index, ETFs that track the index have to buy the stock. The reverse is also true. When a stock is removed from the index, fund managers of SPY, VOO, and other ETFs have to sell millions of shares of the stock that got kicked out of the S&P 500.
How To Use AI to Trade Stocks Removed from the S&P 500?
The best way to trade bearish AI stock alerts is by buying stock option puts on the stock. It's important to understand that there are two key dates for S&P 500 composition changes: 1) the date of the announced change, and 2) the date the change occurs (when shares are physically sold). Both events can move the share price, but the date the shares are traded will have a more technical reason for the effect.
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