All Roads Lead to Rome

The Fed came out with their new ‘dot plot’ this week and based on the results, you’d think the economy is just rolling along. But initial unemployment claims were telling another story as initial claims hit 242,000last week, well above the 225,000 estimate, and is now trending upward once again. The chart below is the 4 week moving average of initial unemployment claims. The last time this happened, most of the Street, including us, were expecting a recession. The current trend isn’t strong yet, but other labor data is looking weaker as well. Might the second time be the charm?

In an unexpected twist, the week’s inflation data came in lower than had been expected, which was a welcome shift after some disappointing data for April. If you thought that weaker labor data and lower inflation should argue for the Fed to be moving closer to an interest rate cut, we agree, but the Fed doesn’t. The new median estimate from the Fed was reduced from 3 rate cuts this year (an estimate made two months ago), to one. Go figure.

For the time being, bad economic news (weaker labor market) is good market news (rate cuts could be coming faster) and the market continued its rally, albeit with a bit less enthusiasm. Although the index is up, it is once again due to the performance of the large technology companies. Market breadth is miserable as shown below, courtesy ZeroHedge. While the S&P 500 Index has ramped up, the number of stocks above their 200 day moving average has weakened (red line).

But weak market breadth is not particularly illogical. If you are concerned about a growth scare, where do you hide? In secular growth stocks that are insulated from the economic cycle. In other words, the large cap tech companies.

On the other hand, if the economy continues to roll along, and AI increases productivity and earnings growth, where is the strongest growth likely to be? The large cap tech companies! For now, whatever your stock market question, all roads lead to large cap tech.

But understand that nothing lasts forever. While 100% of the focus is currently on AI and what it can do, or will be able to do, there will come a time when the big tech companies, that is, the big AI companies, will have to produce a return on their massive investment. That is when the winners begin to separate from the losers, but for now, all roads lead to Rome.


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By: Adam