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Dude, Where’s My Cuts?

Dude, Where’s My Cuts?

Posted February 23, 2024
Steve Sosnick
Interactive Brokers

Who’s nostalgic for the halcyon days when we expected six rate cuts this year?  I’ll assert that Mr. Market isn’t, since we’ve managed to rally consistently even as hopes for the timing and number of cuts dissipated.  I had the privilege of discussing this topic during a television interview earlier this week (from this video’s 16:40 mark), and I though it would be useful to expand my thoughts in writing.

Considering that one of the key elements that ignited the current rally was a hope that the Federal Reserve would aggressively cut rates, it is counterintuitive to see stocks rallying even as those hopes diminish.  We wrote in December that there appeared to be a conundrum in the market’s expectations.  Earnings expectations were based upon a decent economy, but expectations for rate cuts priced in economic weakness alongside a victory over inflation. 

The markets always seemed to be well ahead of the Federal Reserve regarding cuts.  Ahead of the December FOMC meeting, when the Summary of Economic Projections, or “dot plot” indicated that the group’s median estimate was for three 25 basis point cuts this year, futures were already pricing in between four and five.  After the meeting, traders seemed to think, “Great, we hear what you’re saying about three cuts, which is terrific, so we’ll anticipate six.” 

On the day after that meeting there was an 89% probability of a rate cut in March.  That’s currently 2%.  Two full cuts, plus a 77% chance for a third were priced in for June.  We now see an 84% chance for cuts to begin in June.  The six cuts that were priced in for 2024 are now three.  Generally solid economic reports and somewhat disappointing inflationary data have led to those diminished assumptions.  

A steady stream of rhetoric from Fed talking heads also provided a dose of cold water.  Those began shortly after the December meeting – something we noted on December 20th – but investors only began to listen in earnest somewhat recently.

So why the muted reaction to the changes.  Solid earnings and economic reports have played a role, but neither have been overwhelmingly positive.  Except of course for a few exceptions – and one highly notable one.

Yes, Nvidia (NVDA) and other key large-cap technology stocks are driving the bus.  It’s hard to imagine them having a larger role on the market psyche than the Fed, but it seems to be the case.  NVDA has managed a truly remarkable streak of beating consensus estimates, raising guidance, and then beating the raised guidance.  That’s essentially impossible to fight, and it’s clear that traders have no stomach for attempting to fight it.  In the graph at the bottom, note the relationship between the S&P 500 (SPX) and NVDA over the past 20 days, during which NVDA is up over 30%.

It’s NVDA’s market, and we’re all living in it.  Rate cuts are taking a back seat to AI-based enthusiasm, and the earnings gusher that at least some stocks are offering.

20-Day Chart, NVDA (white) vs. SPX (yellow) 

20-Day Chart, NVDA (white) vs. SPX (yellow) 

Source: Bloomberg

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2 thoughts on “Dude, Where’s My Cuts?”

  • There were more option strikes added to NVDA today, going up to $1560 (!!!)
    As if often the case, whenever new higher strike options are added, a strong burst higher after the open that day is
    almost a certainty. That is usually the case with NVDA on Fridays anyway, it almost always spikes higher at some point in the first 30 minutes of trading. Today, it did not last, as the stock plummeted almost $50 intraday from the high to the low. Maybe the $2 Trillion mark provided enough of a reason for some people to take profits.
    Now as far as the options strike of $1560, that would imply a market cap of almost $4 Trillion. I think if they put up strikes for $3000, there are people who would buy them.
    As far as the correlation with the broader market, let’s remember it’s just one stock. Tesla’s collapse of more than 50 percent from its all time high did not do any lasting damage. I’m not predicting that NVDA is going to collapse.
    Today looked like a short term blowoff top though, I could see a volatile trading range for a while.

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