Jason's World

Houthi rebels aboard the Japanese Galaxy Leader ship. Seizures like this have disrupted global trade, creating more potential shocks for the economy. (Source: WSJ)

All appears to be faring extremely well six weeks into the new year, with the Dow, S&P and the Nasdaq at 52-week highs, with the Dow and S&P at all-time highs while the Nasdaq is within striking distance of its all-time highs. The tech rally has continued to hum along, with Facebook reporting a decisive earnings beat alongside a dividend announcement that allowed it to create $200 billion in market value in a single day, more than the entire market cap of Disney. Nvidia has more than doubled its value since the beginning of the AI rally in late May last year, and has recently exceeded the 700 level. Houthi rebels aboard the Japanese Galaxy Leader ship. Seizures like this have disrupted global trade, creating more potential shocks for the economy.
All appears to be faring extremely well six weeks into the new year, with the Dow, S&P and the Nasdaq at 52-week highs, with the Dow and S&P at all-time highs while the Nasdaq is within striking distance of its all-time highs. The tech rally has continued to hum along, with Facebook reporting a decisive earnings beat alongside a dividend announcement that allowed it to create $200 billion in market value in a single day, more than the entire market cap of Disney. Nvidia has more than doubled its value since the beginning of the AI rally in late May last year, and has recently exceeded the 700 level. 

The economy appears to be continuing to hum along as job growth not only exceeded economists’ forecasts, but also nearly doubled them. Revisions also added an extra 126,000 jobs, and the unemployment rate held steady. Wages increased 4.5% year over year, well above the previous PCE report’s gauge of inflation at 2.6%. These reports show strong evidence of broad-based growth where ordinary Americans’ incomes are keeping up with inflation, a far cry from the situation just a year ago when recession predictions were widespread. The continued strength in growth alleviates previous concerns about the impact of a lack of sufficient savings on future consumer spending.

The economy is also expected to be boosted further by planned interest rate cuts in 2024, however the expected rate of reduction in interest rates has been greatly reduced compared to last year, from a projected six cuts in mid-2023 to a projection of only three cuts now. 

But more and more potential shocks have been manifesting themselves since the beginning of this month. While they may be back of mind now, they can disrupt what appears to be an almost euphoric sentiment on Wall Street. Most investors appear to have illusions about the current situation, owing mostly to tech’s growth, but we live in a tumultuous world-and it wouldn’t take much to throw markets into chaos given the high levels that stocks seem to be hitting day after day.

There is the possibility that continued strong economic growth might continue to temper the pace of rate cuts. While most investors would be attuned to the strength of the economy right now, hints from the Fed at a further delay of rate cuts would throw a wrench into the positive market sentiment. This possibility is further enhanced by the fact that the previous inflation report came in higher than expected, although core PCE numbers continue to decline. More insight into the possibility of a significant decline in rate cut expectations can be expected next week with the new CPI report.

There are a multitude of conflicts in the Middle East and Asia that have only shown signs of getting hotter. In Asia, tensions show signs of rising after the election of an anti-Chinese president Lai Ching-te of the DPP. Just yesterday, Taiwan has reported sights of multiple spy balloons originating from China, the second day in a row in which it has reported spy balloons flying across the Taiwan Strait. Most foreign policy analysts expect China to take military action against Taiwan over the next few years. Such moves would be catastrophic for the tech industry, particularly the high-flying Magnificent Seven as Taiwan’s status as a chip hub make it a core pillar of the American tech industry.

In the Middle East, Houthi rebels supporting Hamas are disrupting the flow of global trade by targeting cargo ships. As a result, ships now have to travel through the southern tip of Africa rather than through the Red Sea-a trip that would take 8 to 10 days longer. This is reminiscent of the supply chain issues that plagued world trade in 2021 and 2022-embodied by the blockage of the Suez Canal in early 2021.

With tech in particular soaring to exorbitant levels, it would be wise to take some profits now, because while some people might have flashbacks about the happy times of 100 years ago, we’re pretty far from it if you think about what’s happening in the world today.