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August 21, 2023 – There are two big events to focus on this week, Nvidia’s earnings report Wednesday after the close, and Jerome Powell’s speech Friday at Jackson Hole. Either could be market moving at a time when there is a dearth of corporate or economic news. China also bears watching as property developers and lenders face increasing stress.

//  by Tower Bridge Advisors

Stocks rallied a bit on Friday breaking last week’s losing streak. It wasn’t a rally with lots of conviction, but it did take some of the edge off of a sour mood. Bonds participated as well, as yields backed off from recent peaks, but rates are back up this morning as are oil prices.

Investors will focus on two key events this week, Nvidia’s earnings report Wednesday after markets close, and Jerome Powell’s speech at Jackson Hole on Friday. If there has been one earnings report that shaped the way markets have behaved this year, it was Nvidia’s last earnings report in May. Generative artificial intelligence (AI) had become a speculative topic earlier, sparked by interest in ChatGPT. But the ability to write school term papers wasn’t going to be enough to get businesses engaged to invest in the technology. Nvidia’s earnings report immediately changed everyone’s view. In its February report, the company had noted headwinds from declining interest from crypto mining and video game producers. But by May, demand for AI applications overwhelmed everything else. That’s actually an understatement. Demand escalated so rapidly surprising even Nvidia’s management that it set off one of the most violent segment rallies in memory. Anything that touched AI literally took off. While the August correction slowed momentum a bit, all eyes will be on Nvidia’s report Wednesday. Obviously, expectations are much higher this time around. How much of the AI surge is hype and how much is real will be the focus.

The reality is probably a lot of both. Properly used, artificial intelligence requires an application to sift through an immense amount of data, and do so in milliseconds. It requires precisely the high-speed graphics processors that Nvidia makes. While many companies are actively investing in AI applications, how many are ready to engage incorporating AI into core software offerings? How often do you call, get a robot who asks you questions, and then suffer through the back-and-forth nonsensical Q&A while yelling “agent” or “representative” into the phone? AI will help. Or, suppose you are a lawyer who needs to document precedent for a big case. Decades ago, you sent an associate to the law library. More recently, it was a Lexus/Nexus search. But with AI you can dig deeper beyond simply listing cases that are relevant. You can get to the right precedents so much faster and tighten an argument so much better. AI can even help to generate the software code that will improve AI’s outcomes. But the key question is how fast is this all evolving? Wednesday will give us some direction. If the hype is overblown, the reaction will be immediate. But if the surge continues, only limited by Nvidia’s capacity to produce chips, it will be extended.

The other big event this week will be Powell’s speech Friday. It will set direction for Fed policy for the coming months. Before the next FOMC meeting, there will be several new data reports that will add to the mix. Powell, as always it seems, has a fine line to draw. Recent inflation data suggests significant cooling, especially in regards to goods and commodities, with oil prices being the only significant outlier. Wage inflation, while cooling a bit, still remains too high to believe inflation is headed for the Fed’s 2% target anytime soon. That doesn’t mean the Fed has to keep raising rates at every meeting. In fact, most believe it will pause again in September. It can afford to. In addition, there have been signs of increasing financial stress that bear watching. Loan defaults are rising but are not yet at alarming levels. Banks are tightening lending standards in part as a result of the bank failures earlier this year, and in part due to regulatory pressure. Money supply continues to shrink as the Fed keeps a focus on reducing the size of its balance sheet. Higher interest rates slow the growth in mortgage applications and consumer spending. It’s hard to keep building one’s credit card balances when interest rates are over 20%.

Late August is peak vacation time as well as a period with little economic data to provide market direction. Thus, it can be a volatile time. September, seasonally, is the toughest time for markets. Right now, despite all the interest rate increases the Fed has implemented to date, the economy keeps chugging along at a 2%+ growth rate. Reduced savings rates and higher debt service costs suggest that can’t go on forever, but there are few signs so far that the consumer is slowing down. The government might shut down at the end of September but that is a Congressional battle that no one is going to pay much attention to until a week or so before the deadline.

Thus, the two events noted in today’s letter will take on outsized importance this week. The third item to watch is any significant change to 10-year Treasury interest rates. They have risen sharply in recent weeks, putting pressure on stock prices. Where they head over the next few weeks is beyond my pay grade. If Powell’s speech Friday is more dovish or hawkish than expected, it could be a big swing factor. He will do his best not to change outlooks too much.

Without much in the way of earnings or economics reports beyond those already noted, we are in for a few weeks where stories that don’t make headlines suddenly leap to the front page. One place to watch is China. Property developer and lender problems are escalating, a function of weak demand, too much debt, and too much supply. Contagion is starting to escalate the problem although it is mostly contained within China. Nonetheless, China is the world’s second largest economy. When it sneezes the risk of catching a cold increases everywhere.

Today, singer Kacey Musgraves is 35. Google co-founder Sergei Brin turns 50. Sex and the City actress Kim Cattrall is 67.

James M. Meyer, CFA 610-260-2220

Additional information is available upon request.

Tower Bridge Advisors manages over $1.7 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « August 18, 2023 – Markets are starting to face the sober facts. Deficits, high interest rates, and surging Federal spending all matter. Most of all the cost of money matters. It affects what you pay in rent, what you pay for your credit card balances, and how much spending the government can support given its surging deficits. The rising costs to service debt inhibit central bank efforts to reduce inflation.
Next Post: August 23, 2023 – Bad news from prominent retailers sent stocks lower yesterday. While the Atlanta Fed’s GDP model still points to 5% growth in the third quarter, the message from retailers is one of caution heading into the fall season. We have seen the economy move from goods to services over the past year, but yesterday’s weak reports are a stark reminder that higher interest rates and tighter monetary conditions have an impact, but with a time lag. »

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  • September 22, 2023 – Stocks fell sharply, continuing a negative reaction to the outcome of Wednesday’s FOMC meeting. While rates remained unchanged, the committee expressed a bias toward increasing rates again at the next meeting that ends November 1. In addition, the dot-plot of projections from Committee participants suggested only one (net) rate cut between now and the end of 2024. While short-term rates barely budged, yields on 10-year Treasuries rose by about 15 basis points, suggesting tougher economic conditions ahead, higher rates for longer and, by extension, lower P/E ratios. Lower P/Es mean lower stock prices.
  • September 20, 2023 – Today concludes the 2-day FOMC meeting. No change in rates is expected but investors will parse every detail of the post-meeting releases as well as comments from Fed Chair Jerome Powell. Recent data suggests both inflation and the economy are slowing. The ideal soft landing is still within reach, but it is also quite possible that the economy might slip into recession over the next few months.
  • September 18, 2023 – Markets are directionless, torn between better economic activity and an increase in storm clouds from labor unrest to China. What is crucial is the future trend for interest rates. Investors will parse this week’s FOMC meeting for clues, but probably won’t get a much clearer picture for their efforts.
  • September 15, 2023 – Auto workers are out on strike. So far, markets don’t care. They probably won’t care overall, unless the strike becomes extended. Elsewhere the public offering of ARM Holdings signals a healthier IPO market. Instacart is likely next. Traders are waking up from the late summer doldrums, but valuations, high bond yields and rising oil prices probably suggest more sideways churning ahead.
  • September 13, 2023 – Today’s focus will be on the August CPI report. The headline number will be disturbing thanks to higher oil prices, but core inflation is likely to stay muted. Bond yields have been creeping higher and are back at the top end of recent trading ranges. Any breakout to higher yields would be disturbing to equity markets.
  • September 11, 2023 – Spectrum and Disney are locked in a battle over how TV content is delivered to the home. Both want a bigger economic piece of the pie. The battle reminds us of the strike by actors and screenwriters. All are fighting for a bigger piece of a smaller pie. These battles are part of a process, one where the consumer will be the winner in the end. But before the wars end, there will be lots of carnage as economic reality sorts out those parts of the puzzle that cannot survive.
  • September 8, 2023 – The reported impending ban on the use of iPhones in Chinese government offices sent Apple’s shares reeling and infected the entire tech sector, sending stocks lower this week. While China’s government hasn’t officially commented, this news is yet another sign of the deterioration of economic cooperation between the U.S. and China. Economically, that can’t be a good sign.
  • September 6, 2023 – Stock prices remain slaves to interest rates. A spike in rates the past two days has put downward pressure on stock prices once again. Higher oil prices add further pressure. With little economic or corporate news coming that should change sentiment, the key data in the weeks ahead will focus on the pace of decline in inflation readings.
  • September 1, 2023 – We all hear about the lag effects of higher rates. That lag varies from sector to sector. When rates first started to rise, it affected home buyers immediately. But for those who financed or refinanced debt in 2020 or 2021, the impact was delayed. For some, that cheap debt is starting to come due. Over the next couple of years, debt service is going to become a bigger and bigger cost of doing business.
  • August 30, 2023 – At a time on the calendar when there is a dearth of economic and corporate data, traders look to the bond market for direction. Yesterday, yields on the10-year Treasury fell by almost 2% and stocks staged a solid rally. Trying to guess day-to-day moves in the bond market is pure folly, and thus trying to guess the stock market’s next move is equally foolhardy. Friday’s employment report could be market moving.

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