While February had a few pause days, overall, the markets were very good. The Nasdaq Composite led the march higher in February, gaining 6.1% and finishing the month at its first record close since November 2021. Meanwhile, the Dow Jones Industrial Average and S&P 500 both hit a series of all-time highs throughout the month, climbing 2.2% and 5.2%, respectively.
Overwhelmingly our conversations with clients start with “What is driving this crazy market?”. The short answer is earnings. Companies that meet their earnings guidance, or more importantly the street’s expectations of guidance are being rewarded with significant gains in stock price while companies that disappoint the street are being punished significantly. Two prime examples of this are Nvidia and Tesla. Tesla disappointed the street, and the stock is down from $255 on January 1st to $201 today. On the other hand, Nvidia keeps meeting or slightly exceeding the street’s expectations and the stock has moved up from $488 to $794 after rising over 200% in 2023.
The other factor driving markets is the Fed, or more accurately, the expectations of what the Fed will do with interest rates. The year started with markets pricing in as many as 8 rate cuts in 2024, which we find to be unrealistic expectations. However, as economic indicators keep supporting the Fed’s stance that there is more work to be done, the markets have come to grips with the idea that the Fed may only lower rates 3 or 4 times. So long as the Fed indicates that interest rates aren’t going any higher, and perhaps lower in the second half of the year, the market is okay with that ideal. Last month we wrote that we believe there will be a decline in the money supply, and we still believe Milton Friedman had it right. A decline in money will lead to recession, and then a decline in inflation. If we are correct, the expectations of the Fed to hold or lower rates will eventually prove correct.
Perhaps the greatest impact on earnings, which impacts the markets, is the ramp-up of Artificial Intelligence (AI). While I am not a tech expert, I have found AI fascinating. Companies that have complicated supply chain issues are using AI to manage inventories through their supply chain and their customer’s supply chain as well. Companies can control ordering, manufacturing, and delivery much more efficiently which leads to less inventory on hand but avoiding shortages. My experiment with Ai happened recently when I was at the ranch. As I drank my morning coffee, I simply asked Google’s Gemini what the most recent annual sales and earnings were for Valero. I then followed up with a few questions about their return on invested capital and other things us investment folks like to know. By the time I finished my coffee, I knew more about Valero than I would have if I had searched and read 3 or 4 analyst reports, which would have taken a lot longer than a cup of coffee. My next ask of Gemini was how to prime a water well pump. You see, we had to replace the pump the day before and were going to start it up that day. In the blink of an eye, Gemini gave me accurate step-by-step instructions. How do I know? Well, let’s just say I’ve had a water well pump experience. My point is, AI is learning and getting smarter every day which will make people smarter and more efficient which will lead to better outcomes and better earnings.
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