Conflict, higher yields, and flailing momentum in tech heighten market risk
The above risks can be a lethal brew for investors. And yet, markets barely budged by the end of the week. Quarterly earnings expectations are buoying the averages, with 23% earnings growth expected to vindicate the bulls.
Markets have moved beyond Trump’s War despite this week's conflict. They are focusing instead on the upcoming inflation data, the start of quarterly earnings next week, and another Fed meeting. In the meantime, technology still struggles.
Volatile moves have sent the Nasdaq and the semiconductor index plummeting only to see them spike higher on a day-by-day basis. Traders call it a calm session if these stocks close with less than a 1% move each day. Last month’s mega IPO is a case in point.
Readers recall all the hype over the SpaceX IPO. Priced at $135/share, opened at $150 and skyrocketed to $212. Friday it traded at $147-$148. Not pretty, if you chased it. Today, we have another one.
This time, it’s the listing of a South Korean memory chip leader, SK Hynix (SKHYV). It is the largest American Depository Receipt (ADR) offering ever ($26.5 billion) and one of the largest equity offerings in history. It is the global leader in High-Bandwidth Memory (HBM). Why is their product so important? Because without HBM, there would be no AI.
At $149 per ADR, it will be equal to 1/10th of a South Korean share. With a market value of more than $1 trillion, it is the second-most valuable company in South Korea. The media claims the offering is seven times oversubscribed (versus SpaceX’s five times). And like SpaceX before them, chasers ‘gotta get some.’
No, never mind that the memory stock has garnered a sevenfold increase in its stock price over the past year. If it performs the way Elon Musk’s SpaceX ( ‘to the moon and beyond’) did, we could see another price spike before traders cash in. At around midday, the ADR was up $17% from its listing price. And while the financial media focuses on this offering, it wasn’t the only event of the week.
The president and his forever war kept investors on their toes. He now says the ceasefire that never was is over, but the talks will continue. How bombing more Iranian military targets is going to do anything to change the status quo is beyond me. As this week’s NATO conference has shown, despite Trump’s bravado, most nations still need to flatter, or at least humor him, if they want to remain under the U.S. military umbrella. Strategically, they need to maintain that relationship, at least in the short term.
Fortunately, the markets have moved on. The rotational trends in the markets have helped keep the main averages steady most of the time, despite Trump’s social media posts and comments. The oil price has risen slightly (over $71.80/bbl.) from $67.00, but the technical trend still points to further downside.
Bond yields have risen to the top of their range with the U.S. Ten-year Treasury bond hitting a high of 4.57% this week. As you might imagine, Trump’s military strikes and the subsequent short-term rise in oil prices immediately had traders rushing for the exits in some areas and chasing stocks on what had been the ‘war trade’.
Here’s how it works. The narrative is quite simple, really: missiles fly, oil prices spike, inflation expectations rise, and so the story changes to the Fed having to raise rates. That’s it in a nutshell. The opposite occurs whenever the narrative shifts toward peace, the opening of the Straits of Hormuz, etc.
Next week will be critical for the bulls. We get another Consumer Price Index reading. The Street is expecting cooler inflation numbers for June. I agree. I expect weaker numbers in July as well. That should be good for the markets.
Stock prices have already been bid up in anticipation of good earnings. If management's ‘beat’ and talk up future guidance on sales and earnings, then all is well with the world. The rally continues as the indexes grind higher. We all know what happens if companies fail to live up to expectations. We may see investors become a little more selective. The AI trade may shift from buying ‘everything AI-related’ to buying stocks worth holding, rather than those that are not.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. None of his commentary is or should be considered investment advice. Direct your inquiries to his website at www.schmicksretiredinvestor.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.