Shredding the Half-Pipe
As the Winter Olympics continue in Milan and Cortina, Italy, one thing is noteworthy. While a number of events involve going downhill at great speed, several medals have been won by merely staying on course. Sometimes just finishing the race, even backwards, can advance an Olympic contender to the next level of competition. There are differing levels of risk and rewards in each sport, however. Greater risk-taking can help you to achieve a better score, such as in free-style skiing or half-pipe snowboarding. But not all risks have an equal payoff, such as a backflip in figure skating which garners no additional points. Getting a running start, staying on course, keeping an eye on risk, and making adjustments along the way are just as important in an investment strategy.
For athletes at the Winter Olympics, a podium finish can mean more than glory and a medal. In some countries, it also comes with large six-figure payouts. While the International Olympic Committee does not award any prize money, many governments and national Olympic bodies offer cash bonuses. Kazakhstan, for example, offers $250K for a gold medal, and the country actually won its first ever this year, in figure skating. By comparison, the U.S. offers only $38K for a gold medal, New Zealand just $3K, but Singapore offers a hefty $792K. Norway, which boasts the most medals in Winter Games history, does not award any cash bonuses for podium finishes. Obviously, the incentives to win are more than monetary.
Incentives are helping high-end homebuilder Toll Brothers#, which reported earnings last night above expectations. Home deliveries were about 5% lower than the prior year quarter in a sluggish housing market, although home prices were about 5% above the prior year. Housing starts out this morning came in above expectations at 1.4 million for December. The average contract interest rate for 30-year fixed-rate mortgages hovers around 6.2%, and applications for a mortgage to purchase a home were 8% higher than the same week one year ago. Also, durable goods orders reported this morning also came in ahead of expectations. S&P 500 futures are indicated higher this morning.
Getting Big Air
The fastest speeds reached at the winter Olympics are in the luge and alpine skiing events, accelerating up to 90 mph. Curling can generate the gold, but speeds are close to 5mph. Precision and strategy are more important than velocity. Right now, some equity market sectors are running full steam while others are generating slower, curling-like movements. A few areas of the market have been taking the downhill slalom, such as AI-related technology, software, and bitcoin-tethered companies. Software stocks may be down 22% so far this year as a group, but a number of technology hardware stocks have gained significantly and consumer, industrial and energy sectors have rallied solidly.
Year to date, the S&P 500 is about flat while the equal weighted index has gained big air, posting a 5% return so far. The S&P 500 is dominated by larger capitalization technology companies that have mostly lagged this year while the tech-heavy Nasdaq index is now down about 2.9% this year. Meanwhile, the 10-year treasury yield has been trending lower toward 4.0-4.1% as U.S. Treasury demand has remained strong due to lower inflation expectations and safe-haven buying.
Checking the Wind Direction
In the long downhill ski jump, a headwind or tailwind can impact results significantly. Uncertainty in AI-related technology is creating both a tailwind for some companies and a headwind for others. The AI narrative has shifted toward punishing companies moving from an asset-light business to an asset-heavy model which requires significant cash flow spending. AI and data center hardware demand is still strong, but component constraints could impact margins for some. Many semiconductor companies are exhibiting strong growth with leverage to AI applications, and have outperformed after reporting earnings recently. Meanwhile, AI disruption is threatening areas such as insurance brokers, financial firms, commercial real estate brokers and logistics firms. AI is increasingly viewed as a significant white-collar job threat, but also a potentially deflationary and productivity-enhancing force. AI will certainly impact businesses differently, depending upon how it is used a tool.
Labor market stabilization has been a positive theme as nonfarm payrolls increased 130K in January, while the unemployment rate ticked down to 4.3%. Tariff relief could be in the cards as some levies on steel and aluminum may be scaled back as part of broader affordability push. Right now, it may seem like skiing uphill, as is required in the sport of ski mountaineering. Upbeat macro and market takeaways have been noted by financial companies recently, including resilient consumer spending, strong momentum in commercial and industrial lending, and continued optimism around capital markets activity. We will need to see favorable fundamental conditions aided by solid fiscal and monetary policy in order to make this a bronze or silver level year after three years of solidly golden market returns.
Vanna White turns 69 today, Dr. Dre 61, John Travolta 72, Molly Ringwald 58, and Yoko Ono 93.
Christopher Crooks, CFA®, CFP® 610-260-2219